Test Bank Chapter 12
Chapter 12—Price and Output Determination: Oligopoly
MULTIPLE CHOICE
1. “Conscious parallelism of action” among oligopolistic firms is an example of ____.
a.
intense rivalry
b.
a formal collusive agreement
c.
informal, or tacit, cooperation
d.
a cartel
e.
none of the above
2. The kinked demand curve model was developed to help explain:
a.
fluctuations of prices in pure competition
b.
rigidities observed in prices in oligopolistic industries
c.
fluctuations observed in prices in oligopolistic industries
d.
all of the above
e.
none of the above
3. An oligopoly is characterized by:
a.
a relatively small number of firms
b.
either differentiated or undifferentiated products
c.
actions of any individual firm will affect sales of other firms in the industry
d.
a and b
e.
a, b, and c
4. Which of the following is an example of an oligopolistic market structure?
a.
public utilities
b.
air transport industry
c.
liquor retailers
d.
wheat farmers
e.
none of the above
5. In the Cournot duopoly model, each of the two firms, in determining its profit-maximizing price-
output level, assumes that the other firm’s ____ will not change.
a.
price
b.
output
c.
marketing strategy
d.
inventory
e.
none of the above
6. If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level
such that the ____ of all firms is identical.
a.
average total cost
b.
average profit
c.
marginal profit
d.
marginal cost
e.
marginal revenue
7. In the absence of any legally binding enforcement mechanism, individual cartel producers may find it
advantageous to cheat on the agreements and engage in secret price concessions.
a.
true
b.
false
8. A(n) ____ is characterized by a relatively small number of firms producing a product.
a.
monopoly
b.
syndicate
c.
cooperative
d.
oligopoly
e.
none of the above
9. The distinctive characteristic of an oligopolistic market structure is that there are recognizable
interdependencies among the decisions of the firms.
a.
true
b.
false
10. Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include ____.
a.
number and size distribution of sellers
b.
size and frequency of orders
c.
product heterogeneity
d.
a and b only
e.
a, b, and c
11. Effective oligopolistic collusion is more likely to occur when customer orders are small, frequent, and
received on a regular basis as compared with large orders that are received infrequently at irregular
intervals.
a.
true
b.
false
12. Effective collusion generally is more difficult as the number of oligopolistic firms involved increases.
a.
true
b.
false
13. The largest problem faced in cartel pricing agreements such as OPEC is:
a.
detecting violations of quota barriers by cartel participants
b.
arriving at a profit maximizing price
c.
attracting participants in the cartel
d.
none of the above
14. Some market conditions make cartels MORE likely to succeed in collusion. Which of the following
will make collusion more successful?
a. The products are heterogeneous
b. The orders are small and frequent
c. The firms are all about the same size
d. Costs differ across the firms
e. Firms are geographically widely scattered
15. Even ideal cartels tend to be unstable because
a. firms typically prefer competition to collusion as competition, because it leads to more profits.
b. collusion leads to lowest possible overall profits in the industry.
c. oligopolistic managers are extremely risk loving.
d. firms can benefit by secretly selling more than they promised the other firms
e. all of the above
16. Suppose that in a perfectly competitive industry the equilibrium industry quantity is 10,000 units.
Suppose that the monopoly output is 5,000. For a 2-firm Cournot Oligopoly (N =2) known as a duo-
poly, what is a likely Cournot QUANTITY for the industry?
a. 3,000 units
b. 5,000 units
c. 6,667 units
d. 10,000 units
e. 15,000 units
17. A cartel is a situation where firms in the industry
a. have an agreement to restrict output.
b. agree to produce identical products.
c. obey the rules of dominant firm price leadership.
d. experience the pain of a kinked demand curve.
e. have a barometric price leader
18. In a kinked demand market, whenever one firm decides to lower its price,
a. other firms will automatically follow.
b. none of the other firms will follow.
c. one half of the firms follow and one half of the firms don’t follow the price cut.
d. other firms all decide to exit the industry
e. all of the other firms raise their prices.
19. The existence of a kinked demand curve under oligopoly conditions may result in
a. volatile prices
b. competitive pricing.
c. prices above the monopoly price.
d. an increase in the coefficient of variation of prices.
e. price rigidity
20. Barometric price leadership exists when
a. one firm in the industry initiates a price change and the others follow it as a signal of changes in
cost or demand in the industry.
b. one firm imposes its best price on the rest of the industry.
c. all firms agree to change prices simultaneously.
d. one company forms a price umbrella for all others.
e. the firms are all colluding.
21. Some industries that have rigid prices. In those industries, we tend to
a. find that output is also rigid over the business cycle
b. find that output varies greatly over the business cycle
c. find the employment in these industries is quite stable over the business cycle
d. find that the rate of return is negative in boom times
e. all of the above.
PROBLEMS
1. Two companies (A and B) are duopolists that produce identical products. Demand for the products is
given by the following demand function:
P = 10,000 − QA − QB
where QA and QB are the quantities sold by the respective firms and P is the selling price.
Total cost functions for the two companies are:
TCA = 500,000 + 200QA + .5QA2
TCB = 200,000 + 400QB + QB2
Test Bank Chapter 12
Assume that the two firms act independently as in the Cournot model (that is, each firm assumes that
the other firm’s output will not change). Determine the long-run equilibrium output and selling price
for each firm.
2. Two companies (A and B) are duopolists that produce identical products. Demand for the products is
given by the following demand function:
P = 10,000 − QA − QB
where QA and QB are the quantities sold by the respective firms and P is the selling price.
Total cost functions for the two companies are:
TCA = 500,000 + 200QA + .5QA2
TCB = 200,000 + 400QB + QB2
Assume that the firms form a cartel to maximize total industry profits (sum of Firm A and Firm B
profits). Determine the optimum output and selling price for each firm.
3. The Winston Tobacco Company feels that it is faced with the following segmented demand function
for its cigarettes:
where Q is the number of cartons sold and P is the price per carton.
Why is such a segmented demand function likely to exist? What type of industry
structure is indicated by this relationship?
Determine Winston’s marginal revenue function.
Given that Winston’s total cost function (including a “normal” return to the owners) is
TC1 = 80 + 2.6Q + .05Q2
determine Winston’s profit maximizing price and output level.
Given that Winston’s total cost function increases to
TC2 = 90 + 3.4Q + .05Q2
what is their profit maximizing price and output level?
competitors will follow. Since price reductions will be matched by competitors, Winston
will have no incentive to lower prices. Industry structure is oligopolistic.