Deck 9: Basic Oligopoly Models

Question 1

Tom and Jack are the only two local gas stations. Although they have different constant marginal costs, they both survive continued competition. Tom and Jack do NOT constitute a:

A) Sweezy oligopoly.
B) Cournot oligopoly.
C) Stackelberg oligopoly.
D) Bertrand oligopoly.

Answer 1

D

Question 2

Which of the following is a profit-maximizing condition for a Cournot oligopolist?

A) MR = MC.
B) Q₁ = Q₂ = ... = Q_n.
C) P = MR.
D) All of the statements associated with this question are correct.

Answer 2

A

Question 3

If firms compete in a Cournot fashion, then each firm views the:

A) output of rivals as given.
B) prices of rivals as given.
C) profits of rivals as given.
D) All of the statements associated with this question are correct.

Answer 3

A

Question 4

The Bertrand model of oligopoly reveals that:

A) capacity constraints are not important in determining market performance.
B) perfectly competitive prices can arise in markets with only a few firms.
C) changes in marginal cost do not affect prices.
D) All of the statements associated with this question are true.

Question 5

A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $20. What will the new price be should the three firms coexist after the entry?

A) $25
B) $20
C) $15
D) None of the answers is correct.

Question 6

The Cournot theory of oligopoly assumes rivals will:

A) keep their output constant.
B) increase their output whenever a firm increases its output.
C) decrease output whenever a firm increases its output.
D) follow the learning curve.

Question 7

Which of the following are quantity-setting oligopoly models?

A) Stackelberg.
B) Cournot.
C) Bertrand.
D) Stackelberg and Cournot.

Question 8

Which of the following are price-setting oligopoly models?

A) Stackelberg.
B) Cournot.
C) Bertrand.
D) Cournot and Stackelberg.

Question 9

Which of the following is NOT a feature of Sweezy oligopoly?

A) There are few firms in the market serving many consumers.
B) The firms produce homogeneous products.
C) Each firm believes that rivals will cut their prices in response to a price reduction, but will not raise their prices in response to a price increase.
D) Barriers to entry exist.

Question 10

"An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it is." This statement is:

A) true.
B) false.
C) true of homogeneous product industries.
D) None of the answers is correct.

Question 11

Both firms in a Cournot duopoly would enjoy higher profits if:

A) the firms simultaneously reduced output below the Nash equilibrium level.
B) each firm simultaneously increased output above the Nash equilibrium level.
C) one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output.
D) the firms simultaneously reduced output below the Nash equilibrium level and one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output.

Question 12

A slight increase in the marginal cost of a firm definitely leads to a reduction in its output if the firm competes in the:

A) Sweezy fashion.
B) Cournot fashion.
C) Bertrand fashion.
D) Cournot fashion and Bertrand fashion.

Question 13

Two firms compete in a Stackelberg fashion. If firm 2 is the leader, then:

A) firm 1 views the output of firm 2 as given.
B) firm 2 views the output of firm 1 as given.
C) Both firm 1 views the output of firm 2 as given and firm 2 views the output of firm 1 as given are correct.
D) None of the answers is correct.

Question 14

An oligopolist faces a demand curve that is steeper at higher prices than at lower prices. Which of the following is most likely?

A) The firm competes with others in the Cournot fashion.
B) Other firms match price increases but do not match price reductions.
C) Other firms match price reductions but do not match price changes.
D) The firm competes with others in the Bertrand fashion.

Question 15

Firm A has a higher marginal cost than firm

A) Q_A < Q_B
B) Profit_A < Profit_B
B) They compete in a homogeneous product Cournot duopoly. Which of the following results will NOT occur?
C) Revenue of firm A < Revenue of firm B
D) Price_A < Price_B

Question 16

A market is NOT contestable if:

A) all producers have access to the same technology.
B) consumers respond quickly to a price change.
C) existing firms cannot respond quickly to entry by lowering their price.
D) there are sunk costs.

Question 17

When firm 1 enjoys a first-mover advantage in a Stackelberg duopoly, it will produce:

A) more output and charge a lower price than firm 2.
B) more output and charge the same price as firm 2.
C) less output and charge the same price as firm 2.
D) less output and charge a higher price than firm 2.

Question 18

With linear demand and constant marginal cost, a Stackelberg leader's profits are ___________ the follower.

A) less than
B) equal to
C) greater than
D) either less than or greater than

Question 19

Which of the following is true?

A) In Bertrand oligopoly each firm believes that its rivals will hold their output constant if it changes its output.
B) In Cournot oligopoly firms produce an identical product at a constant marginal cost and engage in price competition.
C) In oligopoly a change in marginal cost never has an effect on output or price.
D) None of the answers is correct.

Question 20

In a Sweezy Oligopoly, a decrease in a firm's marginal cost generally leads to:

A) reduced output and a higher price.
B) increased output and a lower price.
C) higher output and a higher price.
D) None of the answers is correct.

Question 21

With a linear inverse demand function and the same constant marginal costs for both firms in a homogeneous product Stackelberg duopoly, which of the following will result?

A) Profits of leader > Profits of follower.
B) Q_L = 2Q_F.
C) P_L > P_F.
D) Profits of leader > Profits of follower and Q_L = 2Q_F.

Question 22

Collusion in oligopoly is difficult to achieve because:

A) it is prohibited by law.
B) every firm has an incentive to cheat given that others follow the agreement.
C) firms usually take care of consumers' interests as a decision priority.
D) it is prohibited by law and every firm has an incentive to cheat given that others follow the agreement.

Question 23

A firm's isoprofit curve is defined as the combinations of outputs produced by:

A) a firm that earns it the same level of profits.
B) all firms that yield the firm the same level of profit.
C) all firms that make total industry profits constant.
D) None of the answers is correct.

Question 24

Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. Given that firm 2 commits to this collusive output, it pays firm 1 to:

A) cheat by producing a higher level of output.
B) cheat by producing a lower level of output.
C) cheat by raising prices.
D) None of the answers is correct.

Question 25

Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 - 2Q. The cost function for each firm is C(Q) = 4Q. Each firm earns equilibrium profits of:

A) $1,024.
B) $2,048.
C) $4,096.
D) $512.

Question 26

Which of the following statements is NOT a condition for a Stackelberg oligopoly?

A) The market is contestable.
B) Barriers to entry exist.
C) A single firm (the leader) selects an output before all other firms choose their outputs.
D) The firms produce either differentiated or homogeneous products.

Question 27

Which of the following is NOT a type of market structure?

A) Monopolistic competition
B) Perfect competition
C) Monopolistic oligopoly
D) Monopoly

Question 28

From a consumer's point of view, which type of oligopoly is most desirable?

A) Sweezy
B) Cournot
C) Stackelberg
D) Bertrand

Question 29

Ed just finished an empirical study of oligopoly. He found the following result: "In the examined industry, a firm's demand curve is such that other firms match price increases but do not match price reductions." What kind of oligopoly is the examined industry?

A) Sweezy model
B) Cournot model
C) Stackelberg model
D) None of the answers is correct.

Question 30

Since the end of the war in the Persian Gulf, the world price of oil has fallen. But in some areas, consumers have seen little relief at the pump. This phenomenon can be explained by the theory of:

A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.

Question 31

Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 - 3Q. The cost function for each firm is C(Q) = 4Q. The outputs of the two firms are:

A) Q_L = 16; Q_F = 8.
B) Q_L = 24; Q_F = 12.
C) Q_L = 12; Q_F = 8.
D) Q_L = 20; Q_F = 15.

Question 32

MCI announced a price discount plan for small firms. Their stock immediately fell in price. This shows that:

A) MCI is probably competing in a Bertrand oligopolistic industry.
B) stockholders are sometimes not rational.
C) there is increased demand for MCI's stock.
D) AT&T sold out its stock of MCI just after the announcement.

Question 33

An oligopolist has a marginal revenue curve that jumps down at 500 units of output. What kind of oligopoly does the firm most likely belong to?

A) Sweezy
B) Cournot
C) Stackelberg
D) Bertrand

Question 34

The market demand in a Bertrand duopoly is P = 10 - 3Q, and the marginal costs are $1. Fixed costs are zero for both firms. Which of the following statement(s) is/are true?

A) P = $1.
B) Profits of firm 1 = profits of firm 2.
C) Producer's surplus of firm 1 = producer's surplus of firm 2.
D) All of the statements associated with this question are correct.

Question 35

Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 - 2Q. The cost function for each firm is C(Q) = 4Q. In equilibrium, the deadweight loss is:

A) $128.
B) $256.
C) $384.
D) $512.

Question 36

The spirit of equating marginal cost with marginal revenue is NOT held by:

A) perfectly competitive firms.
B) oligopolistic firms.
C) perfectly competitive firms and oligopolistic firms.
D) None of the answers is correct.

Question 37

Which of the following is true?

A) If there are only two firms in a market, prices must be above marginal cost.
B) If there is only one firm in a market, prices must be above marginal cost.
C) Both if there are only two firms in a market, prices must be above marginal cost and if there is only one firm in a market, prices must be above marginal cost are correct.
D) None of the answers is correct.

Question 38

Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 - 3Q. The cost function for each firm is C(Q) = 4Q. The profits of the two firms are:

A) π_L = $384; π_F = $192.
B) π_L = $192; π_F = $91.
C) π_L = $56; π_F = -$28.
D) π_L = $56; π_F = $28.

Question 39

There are many different models of oligopoly because:

A) beliefs play an important role in oligopolistic competition.
B) firms do not maximize profits in oligopolistic competition.
C) oligopoly is the most complicated type of market structure.
D) beliefs play an important role in oligopolistic competition and oligopoly is the most complicated type of market structure.

Question 40

If firms are in Cournot equilibrium:

A) each firm could increase profits by unilaterally increasing output.
B) each firm could increase profits by unilaterally decreasing output.
C) firms could increase profits by jointly increasing output.
D) firms could increase profits by jointly reducing output.

Question 41

"An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it is." This statement is true of:

A) Bertrand and Cournot oligopolies.
B) Cournot and Stackelberg oligopolies.
C) Bertrand and Stackelberg oligopolies.
D) None of the answers is correct.

Question 42

Which of the following is true of a perfectly contestable market?

A) P = MC
B) P > MC
C) P < ATC
D) P > MC and P < ATC

Question 43

A duopoly in which both firms have a Lerner index of monopoly power equal to 0 is probably a:

A) Sweezy oligopoly.
B) Cournot oligopoly.
C) Stackelberg oligopoly.
D) Bertrand oligopoly.

Question 44

The Sweezy model of oligopoly reveals that:

A) capacity constraints are not important in determining market performance.
B) perfectly competitive prices can arise in markets with only a few firms.
C) changes in marginal cost may not affect prices.
D) All of the statements associated with this question are correct.

Question 45

Which would you expect to make the highest profits, other things equal?

A) Bertrand oligopolist
B) Cournot oligopolist
C) Stackelberg leader
D) Stackelberg follower

Question 46

Firm 1 and firm 2 compete as a Cournot oligopoly. There is an increase in marginal cost for firm 1. Which of the following is NOT true?

A) Firm 1 will produce less.
B) Firm 2 will produce more.
C) Both firm 1's and firm 2's reaction functions are shifted.
D) Profits of firm 1 will decrease.

Question 47

The producer's surplus of all firms in an oligopoly is usually the least in the case of a:

A) Sweezy oligopoly.
B) Cournot oligopoly.
C) Stackelberg oligopoly.
D) Bertrand oligopoly.

Question 48

When firm 1 acts as a Stackelberg leader:

A) Firm 2 produces the monopoly output.
B) Firm 1's profit is less than its profit if they compete in a Cournot fashion.
C) Firm 2 will earn more than if they compete in a Cournot fashion.
D) None of the answers is correct.

Question 49

Which of the following is true?

A) In Bertrand oligopoly each firm reacts optimally to price changes.
B) In Cournot oligopoly firms engage in quantity competition.
C) In Sweezy oligopoly a change in marginal cost may not have an effect on output or price.
D) All of the statements associated with this question are correct.

Question 50

Which firm would you expect to make the lowest profits, other things equal?

A) Bertrand oligopolist
B) Cournot oligopolist
C) Sweezy oligopolist
D) Stackelberg leader

Question 51

In the presence of large sunk costs, which of the following market structures generally leads to the highest price?

A) Stackelberg
B) Cournot
C) Bertrand
D) Monopoly

Question 52

The Bertrand theory of oligopoly assumes:

A) firms set prices.
B) rivals will increase their output whenever a firm increases its output.
C) rivals will decrease output whenever a firm decreases its output.
D) rivals will follow the learning curve.

Question 53

Both firms in a Cournot duopoly would experience lower profits if:

A) there was an increase in marginal production costs.
B) each firm simultaneously increased output above the Nash equilibrium level.
C) one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output.
D) there was an increase in marginal production costs and one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output.

Question 54

In a Cournot oligopoly, a decrease in a firm's marginal cost leads to:

A) reduced output and a higher price.
B) reduced output and a lower price.
C) higher output and a higher price.
D) higher output and a lower price.

Question 55

The inverse demand in a Cournot duopoly is P = a - b(Q₁ + Q₂), and costs are C₁(Q₁) = c₁Q₁ and C₂(Q₂) = c₂Q₂. The government has imposed a per-unit tax of $t on each unit sold by each firm. The equilibrium output of each firm is the same as a situation where each firm's:

A) demand increases by t.
B) demand decreases by t.
C) marginal cost increases by t.
D) marginal cost decreases by t.

Question 56

The inverse demand in a Cournot duopoly is P = a - b(Q₁ + Q₂), and costs are C₁(Q₁) = c₁Q₁ and C₂(Q₂) = c₂Q₂. The government has imposed a per-unit tax of $t on each unit sold by each firm. The tax revenue is:

A) t times the total output of the two firms should there be no sales tax.
B) less than t times the total output of the two firms should there be no sales tax.
C) greater than t times the total output of the two firms should there be no sales tax.
D) None of the answers is correct.

Question 57

Which of the following is NOT a quantity-setting oligopoly model?

A) Stackelberg
B) Cournot
C) Bertrand
D) All of the choices are quantity-setting models.

Question 58

Two firms produce different goods. Firm 1 has a positive-sloped reaction function. This can be explained best by:

A) homogeneous product Cournot oligopoly.
B) homogeneous product Bertrand oligopoly.
C) heterogeneous product Bertrand oligopoly.
D) None of the answers is correct.

Question 59

A new firm enters a market which is initially serviced by a Cournot duopoly charging a price of $20. What will the new market price be should the three firms coexist after the entry?

A) $20
B) Below $20
C) Above $20
D) None of the answers is correct.

Question 60

Which of the following is a feature of a contestable market?

A) There are several firms in the market serving many consumers.
B) There is a single firm in the market serving many consumers.
C) The market price is equal to marginal cost.
D) There is a single firm in the market serving many consumers and the market price is equal to marginal cost.

Question 61

Sue and Jane own two local gas stations. They have identical constant marginal costs, but earn zero economic profits. Sue and Jane constitute:

A) a Sweezy oligopoly.
B) a Cournot oligopoly.
C) a Bertrand oligopoly.
D) None of the answers is correct.

Question 62

Two firms compete as a Stackelberg duopoly. The inverse market demand they face is P = 62 - 4.5Q. The cost function for each firm is C(Q) = 8Q. The outputs of the two firms are:

A) Q_L = 48; Q_F = 24.
B) Q_L = 35; Q_F = 6.
C) Q_L = 6; Q_F = 3.
D) None of the answers is correct.

Question 63

Which of the following is true?

A) In Bertrand oligopoly markets, each firm believes that its rivals will hold their output constant if it changes its output.
B) In Cournot oligopoly markets, firms produce an identical product at a constant marginal cost and engage in price competition.
C) In Sweezy oligopoly markets, each firm believes rivals will cut their prices in response to a price reduction, but will not raise prices in response to price increases.
D) In oligopoly markets, a change in marginal cost never has an effect on output or price.

Question 64

Consider a Cournot duopoly with the following inverse demand function: P = 100 - 2Q₁ - 2Q₂. The firms' marginal costs are identical and are given by MC_i(Q_i) = 2Q_i. Based on this information, firm 1 and 2's marginal revenue functions are:

A) MR₁(Q₁,Q₂) = 100 - 2Q₁ - Q₂ and MR₂(Q₁,Q₂) = 100 - Q₁ - 2Q₂.
B) MR₁(Q₁,Q₂) = 100 - 4Q₁ - 2Q₂ and MR₂(Q₁,Q₂) = 100 - 2Q₁ - 4Q₂.
C) MR₁(Q₁,Q₂) = 100 - 2Q₁ - 4Q₂ and MR₂(Q₁,Q₂) = 100 - 4Q₁ - 2Q₂.
D) MR₁(Q₁,Q₂) = 24.5 - 0.5Q₂ and MR₂(Q₁,Q₂) = 24.5 - 0.5Q₁.

Question 65

A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $30. Assuming that the new firm is equally as efficient as the incumbent firms, what will the new price be should the three firms coexist after the entry?

A) Above $30
B) Below $30
C) Equal to $30
D) Unable to tell given the information provided.

Question 66

Which of the following is NOT a feature of Sweezy oligopoly?

A) There are a few firms in the market serving many consumers.
B) The firms produce differentiated products.
C) Each firm believes that rivals will cut their prices in response to a price reduction, but will not raise their prices in response to a price increase.
D) Free entry and exit occurs in the market.

Question 67

The market demand in a Bertrand duopoly is P = 15 - 4Q, and the marginal costs are $3. Fixed costs are zero for both firms. Which of the following statement(s) is/are true?

A) P = $3
B) P = $10
C) P = $15
D) None of the answers is correct.

Question 68

Firm A has a higher marginal cost than firm

A) Q_A > Q_B
B) Profit_A < Profit_B
B) They compete in a homogeneous product Cournot duopoly. Which of the following results will NOT occur?
C) Revenue of firm A < Revenue of firm B
D) Price_A = Price_B

Question 69

The Cournot theory of oligopoly is based on the assumption that each firm believes that rivals will:

A) keep their output constant if it changes its output.
B) increase their output whenever it increases its output.
C) decrease their output whenever it increases its output.
D) randomly change output whenever it changes its output.

Question 70

Consider a Cournot duopoly with the following inverse demand function: P = 100 - 2Q₁ - 2Q₂. The firms' marginal costs are identical and are given by MC_i = 2. Based on this information, consumer surplus in this market is:

A) $16.33.
B) $32.67.
C) $1,067.11.
D) $2,134.22.

Question 71

An important condition for a contestable market is:

A) all producers have different technologies.
B) there are high transaction costs.
C) existing firms cannot respond quickly to entry by lowering their price.
D) there are sunk costs.

Question 72

Consider a Cournot duopoly with the following inverse demand function: P = 100 - 2Q₁ - 2Q₂. The firms' marginal costs are identical and are given by MC_i(Q_i) = 2Q_i. Based on this information, firm 1 and 2's reaction functions are:

A) r₁(Q₂) = 24.5 - 0.5Q₁ and r₂(Q₁) = 24.5 - 0.5Q₂.
B) r₁(Q₂) = 24.5 - 0.5Q₂ and r₂(Q₁) = 24.5 - 0.5Q₁.
C) Q₁ = 49 - 0.5Q₂ and Q₂ = 49 - 0.5Q₁.
D) Q₁ = 49 - 0.25Q₂ and Q₂ = 49 - 0.25Q₁.

Question 73

If firms are in Cournot equilibrium, they could increase profits by:

A) jointly increasing output.
B) jointly reducing output.
C) unilaterally increasing prices.
D) unilaterally reducing prices.

Question 74

The profits of the leader in a Stackelberg duopoly:

A) are greater than those of the follower.
B) equal those of the follower.
C) are less than those of the follower.
D) are greater than those of a Sweezy oligopolist.

Question 75

One of the characteristics of a contestable market is that:

A) all firms have different productive technology.
B) consumers react quickly to a price change.
C) existing firms respond quickly to entry by lowering their price.
D) there are sunk costs.

Question 76

There are many different models of oligopoly because:

A) beliefs are not incorporated in oligopolistic competition.
B) firms do not maximize profits in oligopolistic competition.
C) oligopoly is the most complicated type of market structure.
D) beliefs are not incorporated in oligopolistic competition and oligopoly is the most complicated type of market structure.

Question 77

Which of the following is/are NOT price-setting oligopoly models?

A) Stackelberg.
B) Cournot.
C) Bertrand.
D) Stackelberg and Cournot.

Question 78

The profits of the follower in a Stackelberg duopoly:

A) are greater than those of the leader.
B) equal those of the leader.
C) are less than those of the leader.
D) All the statements associated with this question are correct.

Question 79

Two identical firms compete as a Cournot duopoly. The inverse market demand they face is P = 80 - 4Q. The cost function for each firm is C(Q) = 8Q. The price charged in this market will be:

A) $12.
B) $32.
C) $48.
D) $56.

Question 80

Consider a Stackelberg duopoly with the following inverse demand function: P = 100 - 2Q₁ - 2Q₂. The firms' marginal costs are identical and are given by MC_i = 2. Based on this information, the Stackelberg leader's marginal revenue function is:

A) MR(Q_L) = 50 - 2Q_L + c₁/2.
B) MR(Q_L) = 50 - 2Q_L + c₂/2.
C) MR(Q_F) = 100 - 2Q_F + c₁/2.
D) MR(Q_F) = 100 - Q_F + c₂/2.