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Chapter 10 Oligopoly
MULTIPLE CHOICE
1. If duopolists engage in price competition, the result is:
a.
always zero profits
b.
always zero profits unless the firms produce differentiated products
c.
always zero profits unless the two goods are perfect substitutes
d.
always zero profits unless the two firms collude
e.
never zero profits
2. Duopolists A and B face the following demand curves: QA = 100 − 2PA + 5PB and QB = 120
− 3PB + 4PA. If both firms have zero marginal cost, what are the profit-maximizing prices
and quantities?
a.
PA = 300, QA = 600, PB = 220, QB = 660
b.
PA = 200, QA = 400, PB = 200, QB = 400
c.
PA = 200, QA = 700, PB = 200, QB = 320
d.
PA = 300, QA = 750, PB = 250, QB = 570
e.
PA = 300, QA = 1250, PB = 350, QB = 270
3. Duopolists A and B face the following demand curves: QA = 100 − 2PA + 2PB and QB = 100
− 2PB + 2PA. If both firms have zero marginal cost, what are the profit-maximizing prices
and quantities?
a.
PA = 100, QA = 60, PB = 80, QB = 140
b.
PA = 25, QA = 100, PB = 25, QB = 100
c.
PA = 50, QA = 80, PB = 40, QB = 120
d.
PA = 50, QA = 100, PB = 50, QB = 100
e.
PA = 60, QA = 60, PB = 40, QB = 140
4. A market where there are only a few sellers is known as:
a.
perfectly competitive
b.
monopolistically competitive
c.
oligopolistic
d.
monopolistic
e.
cartelized
5. In the model of oligopoly, there:
a.
are many firms producing differentiated products
b.
is one firm producing undifferentiated products
c.
are a few firms producing differentiated or undifferentiated products
d.
are many firms producing undifferentiated products
e.
is one firm producing a highly differentiated product
6. Duopolists A and B face the following demand curves: QA = 120 − 2PA + PB and QB = 120 −
2PB + PA. If both firms have zero marginal cost and they form a cartel, what is the
profit-maximizing price and quantity?
a.
P = 30, Q = 180
b.
P = 40, Q = 160
c.
P = 60, Q = 120
d.
P = 80, Q = 80
e.
P = 75, Q = 90
7. Duopolists A and B face the following demand curves: QA = 150 − 5PA + 4PB and QB = 150
− 5PB + 4PA. If both firms have zero marginal cost and they form a cartel, what is the
profit-maximizing price and quantity?
a.
P = 25, Q = 250
b.
P = 40, Q = 100
c.
P = 60, Q = 120
d.
P = 80, Q = 80
e.
P = 75, Q = 150
8. In the United States most cartels were declared illegal by the:
a.
Sherman Antitrust Act
b.
Interstate Commerce Commission
c.
Supreme Court
d.
Constitution
e.
Declaration of Independence
9. Two firms (A and B) have marginal costs MCA and MCB, marginal revenues MRA and MRB,
and market marginal revenue MR. If both firms produce as a cartel, they should produce so
that:
a.
MCA = MCB = MR
b.
MCA = MRA and MCB = MCB
c.
MCA + MCB = MR
d.
MCA + MCB = MRA + MRB, not necessarily MCA = MRA
e.
MCA = MCB = MRA + MRB
10. If a cartel is working properly, its firms will likely be producing where (MCi is each firm i’s
marginal cost, MR is market marginal revenue, and P is price):
a.
MCi = MR
b.
MCi > MR
c.
MCi < MR
d.
P = MR
e.
P < MR
11. While a cartel is holding together, its individual members’ demand curves are likely to be:
a.
significantly elastic
b.
significantly inelastic
c.
close to unitary in elasticity
d.
kinked
e.
upward-sloping
12. The OPEC oil cartel lost its market power and world oil prices fell in the 1980s because:
a.
OPEC expanded its membership to include all international producers of oil
b.
world consumers boycotted OPEC oil
c.
a limit pricing strategy was pursued by some members of the cartel
d.
members began to cheat on cartel agreements
e.
the United States refused to buy oil from OPEC
13. Oligopoly is a market structure that necessarily has:
a.
cartels
b.
a large number of firms with homogeneous products
c.
a large number of firms with slightly different products
d.
a small number of firms but more than one
e.
only one firm
14. Oligopoly is the only market structure in which one finds:
a.
barriers to entry
b.
competing brand names
c.
minimum average total cost pricing
d.
advertising
e.
firm interdependence
15. Cartels can only exist:
a.
in oligopoly markets
b.
when products are homogeneous
c.
when products are not homogeneous
d.
in countries where they are legal
e.
when demand curves are perfectly inelastic
16. If Gulfstream and Bombardier, both producers of upscale jet airplanes, were to collude
rather than compete, consumers could expect:
a.
higher prices and lower quantities offered for sale
b.
lower prices and lower quantities offered for sale
c.
higher prices and higher quantities offered for sale
d.
each firm to cheat on the cartel agreement
e.
one firm to emerge as the price leader in the oligopoly
17. When an economist says an oligopoly has a “small” number of firms, the economist means:
a.
exactly 1
b.
exactly 2, 3, or 4
c.
few enough to allow for interdependence
d.
few enough to allow for perfectly inelastic demand curves
e.
few enough to allow for four stages of industry development
18. What is the advantage to a particular firm of cheating on an otherwise effective cartel?
a.
The industry can then act like a monopoly.
b.
It decreases risk.
c.
It enhances credibility.
d.
It always pays in the short run and may pay in the long run.
e.
It always pays in the long run and may pay in the short run.
19. A cartel is:
a.
the name for firms in any oligopoly market
b.
a collusive organization
c.
an oligopolist that competes with other oligopolists
d.
a group of firms using price leadership
e.
a group of firms using preemptive strategies
20. Profit-maximizing cartels choose price equal to:
a.
marginal cost
b.
average total cost of the last unit
c.
marginal revenue
d.
the monopolistically competitive price
e.
the monopoly price
21. Profit-maximizing cartels allocate sales according to:
a.
precartel sales
b.
potential to cheat on the cartel
c.
geographic location
d.
quantities where all firms’ marginal revenues are equal
e.
quantities where all firms’ marginal costs are equal
22. Whopper Stoppers Inc. chooses a price for its sink stoppers, and other firms always charge
the same price. Whopper Stoppers Inc. is:
a.
colluding
b.
losing money in the long run
c.
threatening competitors
d.
a price leader
e.
preempting the competitors
23. Two local ready-mix cement manufacturers, Here and There, have combined demand given
by Q = 105 − P. Their total costs are given by TCHere = 5QHere + 0.5Q2Here and TCThere =
5QThere + 0.5Q2Here. If they successfully collude, their total output will be:
a.
10 units
b.
20 units
c.
40 units
d.
50 units
e.
66.67 units
24. Two local ready-mix cement manufacturers, Here and There, have combined demand given
by Q = 105 − P. Their total costs are given by TCHere = 5QHere + 0.5Q2Here and TCThere =
5QThere + 0.5Q2Here. If they successfully collude, their maximum joint profits will be:
a.
$500
b.
$1,000
c.
$1,600
d.
$2,000
e.
$2,500
25. Two local ready-mix cement manufacturers, Here and There, have combined demand given
by Q = 105 − P. Their total costs are given by TCHere = 5QHere + 0.5Q2Here and TCThere =
5QThere + 0.5Q2Here. If they cannot successfully collude and instead produce where the
market price equals marginal cost, their total output will be:
a.
50
b.
60
c.
66.67
d.
75
e.
85
26. Two local ready-mix cement manufacturers, Here and There, have combined demand given
by Q = 105 − P. Their total costs are given by TCHere = 5QHere + 0.5Q2Here and TCThere =
5QThere + 0.5Q2Here. If they cannot successfully collude and instead produce where the
market price equals marginal cost, each firm’s profits will be:
a.
$111.11
b.
$222.22
c.
$333.33
d.
$444.44
e.
$555.55
27. Two ready-to-eat breakfast cereal manufacturers, Lots of Sugar and Buckets of Goo, face
combined demand for their products given by Q = 75 − P. Their total costs are given by
TCLots of Sugar = 0.1Q2Lots of Sugar and TCBuckets of Goo = 5QBuckets of Goo. If they successfully
collude, their total profits will be:
a.
$1,287.50
b.
$1,250.00
c.
$125.00
d.
$62.50
e.
$287.50
28. Two ready-to-eat breakfast cereal manufacturers, Lots of Sugar and Buckets of Goo, face
combined demand for their products given by Q = 75 − P. Their total costs are given by
TCLots of Sugar = 0.1Q2Lots of Sugar and TCBuckets of Goo = 5QBuckets of Goo. If they cannot successfully
collude and so produce where marginal cost equals price, their total profits will be:
a.
$1,287.50
b.
$1,250.00
c.
$125.00
d.
$62.50
e.
$287.50
29. Two ready-to-eat breakfast cereal manufacturers, Lots of Sugar and Buckets of Goo, face
combined demand for their products given by Q = 75 − P. Their total costs are given by
TCLots of Sugar = 0.1Q2Lots of Sugar and TCBuckets of Goo = 5QBuckets of Goo. If they successfully
collude, their total output will be:
a.
10 units
b.
25 units
c.
35 units
d.
45 units
e.
70 units
30. Two ready-to-eat breakfast cereal manufacturers, Lots of Sugar and Buckets of Goo, face
combined demand for their products given by Q = 75 − P. Their total costs are given by
TCLots of Sugar = 0.1Q2Lots of Sugar and TCBuckets of Goo = 5QBuckets of Goo. If they cannot successfully
collude and so produce where marginal cost equals price, their total output will be:
a.
10 units
b.
25 units
c.
35 units
d.
45 units
e.
70 units
31. The price leadership strategy is most appropriate when a market is:
a.
perfectly competitive
b.
monopolistic
c.
monopolistic competitive
d.
oligopolistic
e.
any of the above
32. With the price leadership strategy:
a.
the many small firms set the market price, and the large firm must follow their
behavior
b.
the large firm sets the market price, and the many small firms must follow its
behavior
c.
firms collude to determine optimal price and output for the industry
d.
firms determine price and output independent of one another
e.
firms are not profit maximizers
33. Glyde Air Fresheners is the dominant firm in the solid room aromatizer industry, which has
a total market demand given by Q = 80 − 2P. Glyde has competition from a fringe of four
small firms that produce where their individual marginal costs equal the market price. The
fringe firms each have total costs given by TCi = 10Qi + 2Q2i. If Glyde’s total costs are
given by TCG = 100 + 6QG, what price should Glyde establish for air fresheners?
a.
$10
b.
$12
c.
$14
d.
$16
e.
$18
34. Glyde Air Fresheners is the dominant firm in the solid room aromatizer industry, which has
a total market demand given by Q = 80 − 2P. Glyde has competition from a fringe of four
small firms that produce where their individual marginal costs equal the market price. The
fringe firms each have total costs given by TCi = 10Qi + 2Q2i. If Glyde’s total costs are given
by TCG = 100 + 6QG, what is Glyde’s maximum profit?
a.
$148
b.
$184
c.
$240
d.
$332
e.
$362
35. Glyde Air Fresheners is the dominant firm in the solid room aromatizer industry, which has
a total market demand given by Q = 80 − 2P. Glyde has competition from a fringe of four
small firms that produce where their individual marginal costs equal the market price. The
fringe firms each have total costs given by TCi = 10Qi + 2Q2i. If Glyde’s total costs are given
by TCG = 100 + 6QG, what are the total profits of the fringe firms?
a.
$32
b.
$64
c.
$96
d.
$128
e.
$160
36. An oligopolist that faces a kinked demand curve is charging price P = 6. Demand for an
increase in price is Q = 280 − 40P and demand for a decrease in price is Q = 100 − 10P.
Over what range of marginal cost would the optimal price remain unchanged?
a.
between 3 and 5
b.
between 2 and 5
c.
between 1 and 4
d.
between 2 and 4
e.
between 3 and 4
Please use the diagram below to answer the following questions.
37. The optimal output and price for the cartel shown in the diagram is:
a.
Q = 200 and P = $80
b.
Q = 260 and P = $60
c.
Q = 250 and P = $80
d.
Q = 500 and P = $75
e.
none of the above
38. If the cartel described by the diagram is broken up and forced into a perfectly competitive
market situation, the optimal output and price will be:
a.
Q = 200 and P = $80
b.
Q = 260 and P = $60
c.
Q = 250 and P = $80
d.
Q = 250 and P = $75
e.
Q = 500 and P = $60
39. If the market described in the diagram is dominated by a cartel, the loss in total surplus
relative to perfectly competitive market conditions will be:
a.
$500
b.
$1,000
c.
$2,000
d.
$3,000
e.
$4,000
40. Duopolists who compete on the basis of price will:
a.
end up with price equal to marginal cost
b.
charge a price greater than marginal cost
c.
charge a price less than marginal cost
d.
price discriminate
e.
charge a price equal to marginal revenue
Please use the following information to answer the following questions. Suppose duopolists
in the market for spring water share a market demand curve given by P = 50 − 0.02Q, where
P is the price per gallon and Q is thousands of gallons of water per day. The marginal cost
of producing water is near zero for both firms.
41. If firm A produces zero, firm B’s best response is producing:
a.
0 gallons of water per day
b.
48 gallons of water per day
c.
833 gallons of water per day
d.
1,250 gallons of water per day
e.
2,500 gallons of water per day
42. Optimal output for Cournot duopolists moving simultaneously is:
a.
0 gallons of water per day per firm
b.
625 gallons of water per day per firm
c.
833 gallons of water per day per firm
d.
1,250 gallons of water per day per firm
e.
2,500 gallons of water per day per firm
43. If one firm acts as a first mover, the second firm will produce:
a.
0 gallons of water per day per firm
b.
625 gallons of water per day
c.
833 gallons of water per day
d.
1,250 gallons of water per day
e.
2,500 gallons of water per day
44. The kinked demand model assumes firms will:
a.
ignore the price increases of rivals
b.
follow the price decreases of rivals
c.
ignore all price changes of rivals
d.
follow all price changes of rivals
e.
a and b
45. Sticky prices are an outcome of the kinked demand model because:
a.
firms in an oligopoly will collude to hold prices fixed
b.
marginal costs are constant in oligopolistic industries
c.
marginal costs can vary to some extent but firms will have no incentive to change
their prices in oligopolistic industries
d.
demand is perfectly elastic in oligopolistic industries
e.
firms will set price equal to marginal cost in oligopolistic industries
