Deck 11: Oligopoly

Question 1

An industry's market structure refers to

A)The number and size of the firms in the industry.
B)How much firms spend on advertising.
C)What types of products are produced in that industry.
D)Whether the market is a product market or a resource market.

Answer 1

A

Question 2

The soft drink market is dominated by Coke, Pepsi, and very few other firms.The firms often start price wars.The market can best be classified as

A)Perfect competition.
B)Monopolistic competition.
C)Oligopoly.
D)Monopoly.

Answer 2

C

Question 3

Which market structure is characterized by a few interdependent firms?

A)Monopoly.
B)Perfect competition.
C)Monopolist competition.
D)Oligopoly.

Answer 3

D

Question 4

The degree of market power exercised by a firm is related to all but

A)The number and proximity of competing firms.
B)The price elasticity of demand for the firm's product.
C)Its ability to influence the market price of its output.
D)The age of the industry.

Question 5

It is easiest for new firms to enter a

A)Perfectly competitive market.
B)Duopoly market.
C)Oligopoly market.
D)Monopoly market.

Question 6

A contestable market is

A)A perfectly competitive market.
B)An imperfectly competitive situation that is subject to entry.
C)An imperfectly competitive situation with high barriers to entry.
D)A market with only one producer.

Question 7

The correct ranking of degree of market power (from highest to lowest) is

A)Monopoly, monopolistic competition, perfect competition, oligopoly.
B)Monopoly, monopolistic competition, oligopoly, perfect competition.
C)Monopoly, oligopoly, monopolistic competition, perfect competition.
D)Oligopoly, monopoly, monopolistic competition, perfect competition.

Question 8

If an oligopoly market is contestable and new firms enter, the

A)Market power of the former oligopolists will be reduced.
B)Number of firms in the industry will decrease.
C)Former oligopolists will raise their prices.
D)Profitability of the industry will increase.

Question 9

When firms are interdependent,

A)One firm can ignore other companies in the market when making decisions.
B)The profit of one firm depends on how its rivals respond to its strategic decisions.
C)They can act independently of one another.
D)Then the market is perfectly competitive.

Question 10

Which of the following market structures is characterized by the absence of market power?

A)Monopolistic competition.
B)Oligopoly.
C)Monopoly.
D)Perfect competition.

Question 11

Which of the following may characterize a monopoly?

A)Substantial market power.
B)Low barriers to entry.
C)Many firms.
D)Differentiated product.

Question 12

There are many corn farmers, each of whom produces the same product.The corn market can best be classified as

A)Monopolistic competition.
B)Perfect competition.
C)Oligopoly.
D)Monopoly.

Question 13

It is most difficult for new firms to enter

A)A perfectly competitive market.
B)An oligopolistic market.
C)A monopolistically competitive market.
D)A perfectly contestable market.

Question 14

Which of the following may not characterize an oligopoly?

A)A few firms.
B)Substantial market power.
C)High barriers to entry.
D)Many firms.

Question 15

Which of the following is not a determinant of market power?

A)Number of producers.
B)Availability of substitutes.
C)Barriers to entry.
D)Age of the industry.

Question 16

In which of the following market structures are entry barriers the highest?

A)Perfect competition.
B)Monopolistic competition.
C)Oligopoly.
D)Monopoly.

Question 17

Which of the following may not characterize an oligopoly?

A)A few firms.
B)No market power.
C)High barriers to entry.
D)Substantial control over price.

Question 18

Market power is the ability of a firm to

A)Advertise.
B)Act as a price taker.
C)Control the price and quantity supplied.
D)Increase the number of substitute goods.

Question 19

The number of firms in an oligopoly must be

A)Four.
B)Large enough so that firms cannot coordinate.
C)Small enough so that one firm's decisions have a significant impact on the decisions of the other firms in the industry.
D)Small enough so that revenues are large enough to support advertising expenditures.

Question 20

The only market structure in which there is significant interdependence among firms with regard to their pricing and output decisions is

A)Monopolistic competition.
B)Monopoly.
C)Oligopoly.
D)Perfect competition.

Question 21

Which of the following industries is likely to have the highest concentration ratio?

A)Corn production.
B)Clothing manufacturing.
C)Video game systems.
D)College education.

Question 22

Suppose the larger firm of a duopoly has sales of $400 million and the smaller firm has sales of $100 million.The market share of the larger firm is

A)80 percent.
B)40 percent.
C)20 percent.
D)10 percent.

Question 23

The goal of a company in an oligopoly industry is to

A)Increase market share and profits.
B)Obtain the highest price possible.
C)Always follow rivals if they raise price.
D)Be the market leader in innovation.

Question 24

Which of the following industries has the highest concentration ratio?

A)Satellite radio.
B)Cameras.
C)Detergents.
D)Beer.

Question 25

Market share can be computed by dividing

A)The amount that a buyer buys by the total amount that is produced in the market.
B)Profit by total cost.
C)The amount sold by a single firm by the total sold in the market.
D)Price by average total cost.

Question 26

The concentration ratio measures the

A)Number of plants owned by an oligopoly.
B)Percentage of total profits made by a firm in a specific market.
C)Proportion of total output produced by the four largest producers in a specific market.
D)Relative size of a firm compared to other industries.

Question 27

Suppose there are only three firms in a market.The largest firm has sales of $500 million, the second-largest has sales of $300 million, and the smallest has sales of $200 million.The market share of the largest firm is

A)50 percent.
B)100 percent.
C)60 percent.
D)40 percent.

Question 28

Each of the following is a determinant of market power but which is the critical determinant of market power?

A)The number of producers.
B)The size of each firm.
C)The extent of barriers to entry.
D)The availability of substitute goods.

Question 29

Product differentiation

A)Involves charging different prices to different customers.
B)Is commonly practiced in perfect competition and monopoly markets.
C)Involves advertising unique product features.
D)Is a rarely successful advertising campaign.

Question 30

When a business advertises that its product has unique features that make it superior to other similar products, it is engaging in

A)Price competition.
B)Predatory pricing.
C)Product differentiation.
D)Contestable market advertising.

Question 31

If a firm in an oligopoly expands its market share at prevailing prices, its competitors

A)Lose market share.
B)Increase their market share.
C)Ignore the expansion.
D)Increase their profits.

Question 32

Market share is the percentage of total

A)Market output produced by the largest firm in an industry.
B)Market output produced by a single firm.
C)Market output produced by the four largest firms in an industry.
D)Industry profit earned by a single firm.

Question 33

Which of the following industries has the highest concentration ratio?

A)Wheat production.
B)Sugar production.
C)Used car sales.
D)Soft drinks.

Question 34

Concentration ratios tend to overstate the power of some corporations to influence economic outcomes because they measure output

A)For single firms rather than markets.
B)For the whole United States, which is too large a geographic market for some firms or industries.
C)Only for domestic production when the true market boundaries are international for some markets.
D)Over many industries rather than a single market.

Question 35

If oligopolists start cutting prices to capture a larger market share, the result will be a

A)Movement up the market demand curve.
B)Movement down the market demand curve.
C)Leftward shift of the market demand curve.
D)Rightward shift of the market demand curve.

Question 36

If oligopolists start cutting prices to capture a larger market share, the result will be

A)Lower prices, decreased output, and larger profits.
B)Higher prices, increased output, and larger profits.
C)Lower prices, increased output, and larger profits.
D)Lower prices, increased output, and smaller profits.

Question 37

Suppose the larger firm of a duopoly has sales of $900 million and the smaller firm has sales of $100 million.The market share of the larger firm is

A)90 percent.
B)80 percent.
C)10 percent.
D)20 percent.

Question 38

A nationwide concentration ratio is likely to understate market power when

A)Firms sell nationally.
B)The true markets are local and small.
C)There is extensive foreign competition.
D)A market is perfectly contestable.

Question 39

To keep a market from being contested, firms might

A)Increase their concentration ratio.
B)Practice price discrimination.
C)Match price reductions by rivals.
D)Seek to obtain a monopoly franchise from the government.

Question 40

The concentration ratio for an oligopoly is

A)Under 40 percent.
B)Over 60 percent.
C)90 percent.
D)100 percent.

Question 41

What is the most likely response by rivals when an oligopolist cuts its price to increase its sales?

A)Raise their prices.
B)Ignore the change.
C)Cut their prices.
D)Reduce their costs.

Question 42

Which one of the following is not a danger of experimenting with pricing for an oligopoly?

A)Retaliation.
B)Firms matching price reductions.
C)The uncertainty of competitor response.
D)Product differentiation.

Question 43

The study of how decisions are made when strategic interaction between firms exists is known as

A)Game theory.
B)Contestable market theory.
C)Market power theory.
D)Predatory pricing theory.

Question 44

Game theory is

A)The study of price-fixing and collusion.
B)The study of how decisions are made when interdependence exists between firms.
C)An explanation of how oligopolists become monopolists.
D)Practiced by perfectly competitive firms.

Question 45

Given the payoff matrix in Table 25.1, if the probability of rivals reducing their price even though you don't is 10 percent, what is the expected payoff for Company ABC not cutting prices?

A)$0.
B)$5.
C)-$500.
D)-$5,000.

Question 46

The goal of an oligopoly is to maximize

A)Market share to achieve long-run economic profit.
B)Short-run profit to achieve long-run maximum revenue.
C)Short-run profit to achieve long-run market share.
D)Profit in the short run and to minimize cost in the long run.

Question 47

Oligopolists have a mutual interest in coordinating production decisions in order to maximize joint

A)Costs.
B)Profits.
C)Revenues.
D)Market share.

Question 48

If an oligopolist is going to change its price or output, its initial concern is

A)The response of its competitors.
B)A change in its cost structure.
C)The concentration ratio.
D)The response of the Federal Trade Commission.

Question 49

If a firm is producing at the kink in its demand curve and it decides to decrease its price, according to the kinked demand model

A)It will gain market share.
B)It will lose market share to the firms that do not follow the price decrease.
C)Its market share will not be affected.
D)It will lose market share, but its profits will decrease.

Question 50

The kinked demand curve explains

A)The consequences of the interdependent behavior of oligopolists.
B)Why oligopolists are more sensitive to cost changes than are competitive markets.
C)Price-fixing along the elastic part of the demand curve and predatory pricing on the inelastic portion.
D)How an oligopoly can achieve monopoly profits.

Question 51

A kinked demand curve indicates that rival oligopolists match all

A)Increased advertising.
B)Advertising reductions.
C)Price increases.
D)Price reductions.

Question 52

If rival oligopolists completely ignore Mitchell's Tool Company's price changes, then Mitchell's Tool Company's

A)Demand curve will not have a kink.
B)Most profitable strategy will be to raise its price.
C)Demand curve will be less elastic than if rivals matched price changes.
D)Demand and marginal revenue curves will be the same.

Question 53

If a firm is producing at the kink in its demand curve and it decides to increase its price, according to the kinked demand model

A)It will gain market share.
B)It will lose market share to the firms that do not follow the price increase.
C)Its market share will not be affected.
D)It will not gain market share but will definitely increase profits.

Question 54

RC Cola lost market share in the 1980s due to

A)Its decision not to advertise.
B)Consumers not liking the taste of its colas.
C)Wasting precious resources on advertising.
D)Its lack of shelf space at supermarkets.

Question 55

The demand curve will be kinked if rival oligopolists

A)Match price increases but not price reductions.
B)Match price reductions but not price increases.
C)Match both price increase and price reductions.
D)Do not match price changes at all.

Question 56

The kinked demand curve explains the observation that in oligopoly markets

A)Rivals match price increases.
B)Rivals do not match price reductions.
C)Prices may not change even in the face of cost increases.
D)Practice product differentiation.

Question 57

Which of the following is true about the kink in the demand curve?

A)It is the result of different rival responses to price increases and reductions.
B)It leads to an explanation of price flexibility.
C)It occurs because rivals do not respond to price reductions.
D)It occurs because rivals match price increases.

Question 58

If a market changes from oligopoly to perfect competition, then as a result

A)Output should increase in the long run.
B)Fewer resources will be allocated to the market.
C)Profitability should rise in the long run.
D)Prices should rise in the long run.

Question 59

Given the payoff matrix in Table 25.1, if the probability of rivals matching a price reduction is 99 percent, what is the expected payoff for a price cut by Company ABC?

A)$0.
B)$5.
C)-$500.
D)-$5,000.

Question 60

A payoff matrix shows

A)The profits or losses that result from strategic decisions of one firm and another firm.
B)The payoffs of one firm always choosing to price low.
C)What companies will do no matter what the other firm does.
D)The losses from strategic decisions of two countries.

Question 61

General Electric and Westinghouse were convicted of

A)Price-fixing.
B)Marginal cost pricing.
C)Price leadership.
D)Allocation of market shares.

Question 62

The potential for maximizing total industry profits is greater in oligopolies than in perfect competition because

A)There are fewer firms and each is dependent on the actions of rivals.
B)Firms in an oligopoly are more profitable.
C)There are independent firms in an oligopoly.
D)Perfectly competitive firms can easily cooperate to restrict supply.

Question 63

Price leadership is a method by which oligopolies can

A)Increase prices without explicit price-fixing.
B)Illegally raise prices.
C)Maintain the "kink" in their demand curves.
D)Encourage competition.

Question 64

The pricing strategy in which one firm is allowed by its rivals to establish the market price for all firms in the market is called

A)Overt collusion.
B)Price leadership.
C)Pattern pricing.
D)Price-fixing.

Question 65

The pricing strategy in which there is an explicit agreement among producers regarding price is called

A)Price discrimination.
B)Price-fixing.
C)Price leadership.
D)Marginal cost pricing.

Question 66

Temporary price reductions intended to drive out competition are referred to as

A)Predatory pricing.
B)Price-fixing.
C)Price leadership.
D)Retaliation.

Question 67

Price leadership

A)Typically results in greater instability in oligopolistic markets.
B)Results in a more competitive market.
C)Is common in perfectly competitive markets.
D)Permits oligopolistic firms in a given market to coordinate marketwide price changes.

Question 68

A cartel is

A)A type of market structure.
B)Not illegal in the United States.
C)An organization intended to increase competition in an industry.
D)A public agreement between firms or countries to restrict production and raise prices.

Question 69

Price leadership

A)Results in inflexible prices.
B)Accounts for kinked oligopoly behavior.
C)Helps achieve monopoly profit for the market.
D)Results in predatory pricing.

Question 70

Oligopolists will maximize total profits for all of the firms in the market at the rate of output where

A)TR = TC for the total market.
B)MR = MC for the marginal firm.
C)AR = AC for each firm.
D)MR = MC for the market.

Question 71

A firm cannot maintain above-normal profits over the long run

A)Without the existence of a cartel.
B)Unless barriers to entry exist.
C)Unless predatory pricing occurs.
D)Without retaliation occurring.

Question 72

Sky-High Skywriters temporarily reduces its price when a new firm called The Sky's the Limit Skywriting enters the industry.Sky-High Skywriters is practicing

A)Retaliation.
B)Price leadership.
C)Predatory pricing.
D)Cartel pricing.

Question 73

In an effort to maximize profits, oligopolists could participate in all of the following but

A)Price leadership.
B)Price-fixing.
C)Cartels.
D)Self-destructive behavior.

Question 74

Sky-High Skywriters raises its price, and the other four firms in the industry raise their prices in response.Coordination in this industry is accomplished by

A)Predatory pricing.
B)Price leadership.
C)Price-fixing.
D)Retaliation.

Question 75

For an oligopoly, a few firms cannot dominate in the long run unless

A)A cartel is formed.
B)A firm has a high concentration ratio.
C)Barriers to entry exist.
D)The market is contestable.

Question 76

The pricing strategy in which one firm is allowed to establish the market price for all firms in the market is called

A)Price discrimination.
B)Price leadership.
C)The profit-maximizing rule.
D)Marginal cost pricing.

Question 77

Which of the following does not function as a barrier to entry into an oligopoly market?

A)Patents.
B)The expense involved in nonprice competition.
C)Control of distribution outlets.
D)Predatory pricing.

Question 78

Borden, Inc., which sold milk to Texas Tech University, public schools, and hospitals, paid $8 million in fines for

A)Price-fixing.
B)Marginal cost pricing.
C)Price leadership.
D)Allocation of market shares.

Question 79

Open and explicit agreements concerning pricing and output shares transform an oligopoly into a

A)Monopoly.
B)Cartel.
C)Differentiated oligopoly.
D)Perfectly competitive firm.

Question 80

Oligopolists have an incentive to coordinate price because with coordination

A)The demand for each firm's product is kinked.
B)Each firm faces a perfectly inelastic demand for its product.
C)The market demand curve is perfectly inelastic.
D)Each firm faces a relatively inelastic demand for its product.