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CHAPTER 9
OLIGOPOLY
The following table shows the four topic sections of this chapter and the associated study
guide problems that pertain to each topic section.
Section Topic
1 Oligopoly
Problems M1-M7, S1-S3, L1-L3.
2 Quantity Competition
Problems M8-M13, S4-S5, L4-L5.
3 Price Competition
Problems M14-M18, S6-S9, L6-L7.
4 Other Dimensions of Competition
Problems M19-M20, L8-L9.
Multiple Choice
M1 In an oligopolistic market,
a. The profits of the leading firms are interdependent.
b. A few firms sell to a few large buyers.
c. Numerous firms compete for a market of fixed size.
d. A few large firms dominate the market.
e. Answers a and d are both correct.
M2 In a particular market, price exceeds average cost over an extended interval of time. This
suggests that the market
a. Has few barriers to entry.
b. Has numerous small competitors.
c. Is an oligopoly.
d. Is characterized by monopolistic competition.
e. Is perfectly competitive.
M3 As usually defined, market power is the ability of a firm to
a. Increase significantly its market share.
b. Innovate faster than its rivals.
c. Raise price significantly above the competitive level.
d. Enjoy economies of scale in production.
e. Answers a, b, and c are all correct.
Managerial Economics Study Guide
M4 An industry with a four-firm concentration ratio of 40% or less is
a. A tight oligopoly.
b. A loose oligopoly.
c. A newly evolving industry.
d. Effectively competitive.
e. Answers c and d are both correct.
M5 Five firms, each with a 20% market share, supply a market. The Herfindahl-Hirschman
Index is
a. 2,000.
b. 20%.
c. 100%.
d. A value between 1,000 and 10,000.
e. There is not enough information to answer.
M6 By acquiring smaller rivals, Airline A now controls over 90 percent of all flights to and
from its major hub airport. Following these mergers, the airline’s average ticket prices
increased (though air travel prices were generally falling in comparable markets). This
result suggests the market for air travel to and from A’s hub
a. Is monopolistically competitive.
b. Has been monopolized.
c. Has become more competitive due to oligopolistic rivalries.
d. Exhibits few barriers to entry.
e. Suffers from decreasing returns to scale.
M7 Statistical studies confirm that
a. Greater market concentration is associated with higher prices.
b. Lower market concentration is associated with higher prices
c. There is no association between market concentration and prices.
d. Industry profits are inversely related to market concentration.
e. Greater market concentration is associated with increasing average cost.
M8 Price leadership assumes that
a. Firms struggle to assume the lead in setting price.
b. One firm is able to set price for the entire industry.
c. The lowest-cost firm establishes the market price.
d. Several firms agree explicitly to set price at the monopoly level.
e. No firm can control the market; the “invisible hand” leads to an efficient price.
M9 A price leader’s net demand curve
a. Is total market demand minus the supply of smaller rival suppliers.
b. Is more inelastic than total market demand.
c. Becomes more elastic as the number of rival suppliers increases.
d. Presumes that rival suppliers set prices independently.
e. Answers a and c are both correct.
Oligopoly Chapter 9
M10 In the Cournot model of oligopoly, firms
a. Seek to gain market share, while not competing on price.
b. Seek to gain a price advantage, frequently leading to price wars.
c. Face kinked demand curves and rarely alter their prices.
d. Sell differentiated products, so price competition is blunted.
e. Answers a and d are both correct.
M11 To maximize profit, an oligopolist will produce a level of output
a. Consistent with the principle of cost minimization.
b. At a price that is equal to MC.
c. Where MR = MC.
d. At a price that is equal to MR.
e. Where LAC = LMC.
M12 In general, as the number of firms in an oligopoly industry increases, each firm
a. Increases its level of output.
b. Sees its economic profit decrease.
c. Raises its price but sells less output.
d. Reduces its level of output.
