17.6 Integrative Questions
1) A characteristic common in both oligopoly and monopolistic competition is:
A) a small number of firms compete in the market.
B) natural or legal barriers prevent the entry of new firms into the market.
C) each firm faces a downward-sloping demand curve.
D) the firms in the market are interdependent.
E) each firm has a large share of the market.
2) If the HHI for an industry equals 3,200,
A) firms in the industry must enter a cartel in order to earn an economic profit.
B) firms in the industry are most likely to earn zero economic profit.
C) the industry is probably an oligopoly.
D) firms in the industry are likely to act independently of each other.
E) the industry is almost surely monopolistic competition.
3) Which of the following are characteristics of an oligopoly?
i) The HHI for an oligopoly is between 100 and 1800.
ii) There are a few firms that compete.
iii) The firms can increase their profit by forming a cartel.
A) i and ii
B) i and iii
C) ii and iii
D) i, ii, and iii
E) i only.
4) When a market has barriers to entry,
A) then in the long run it is possible for the firms to incur economic losses.
B) then in the long run the only possible outcome for the firms is zero economic profit.
C) then in the long run it might be possible for the firms to make economic profits.
D) oligopolies cannot be created.
E) the HHI almost always falls below 1,000.
5) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in
the market have the same ATC curve, then ________ limit the market to 3 firms.
A) economies of scale
B) a “tit for tat” strategy
C) collusion
D) a Nash equilibrium
E) legal requirements
6) The figure above shows the market demand curve and the ATC curve for a firm. Each firm in
the market has the same ATC curve. If the firms in the industry agree to form a cartel, the firms
in the industry earn an economic profit if there are ________ firms, each producing ________
units per hour.
A) 3; 4,000
B) 4; 3,000
C) 2; 6,000
D) 2; 4,000
E) 2; 12,000
7) If a legal oligopoly exists,
A) the firms always engage in a “tit for tat” strategy.
B) there is the possibility that the market is large enough for more firms.
C) the firms never collude.
D) monopoly profits cannot be earned.
E) the firms may legally merge and become a monopoly.
8) A cartel is
A) another name for a firm in an oligopoly.
B) a collusive agreement among a number of firms.
C) a government body that regulates an industry.
D) an antitrust law.
E) a type of regulation that focuses on quantities rather than price.
9) Firms operating in an oligopoly
A) always compete on price.
B) always compete on price, product quality and marketing.
C) can earn monopoly profits but there is no assurance that they will do so.
D) usually achieve the competitive outcome.
E) always earn monopoly profits.
10) The range of output for a duopoly ranges between the
A) perfectly competitive outcome and the monopolistically competitive outcome.
B) efficient scale and the perfectly competitive outcome.
C) minimum of ATC and the efficient scale.
D) monopoly outcome and the perfectly competitive outcome.
E) short-run perfectly competitive outcome and the long-run perfectly competitive outcome.
11) What is the conclusion in the prisoners’ dilemma?
A) Firms should not enter a legal duopoly.
B) Two prisoners acting in their own best interest harm their joint interest.
C) There is no Nash equilibrium available to the prisoners.
D) Prisoners do not act interdependently.
E) Duopolies almost always reach their best outcome.
12) Which of the following can be games played by firms in an oligopoly?
i. choosing how much to spend on advertising
ii. choosing how much to spend on R&D
iii. choosing to enter a legal duopoly
A) i and ii
B) i and iii
C) ii and iii
D) ii only
E) iii only
13) Tying arrangements are
A) illegal if they substantially lessen competition.
B) used by regulators to force a monopoly to produce an efficient amount of production.
C) used by regulators to force a monopoly to charge an efficient price.
D) illegal according to the Sherman Act.
E) necessary in order for a firm to price discriminate.
14) Resale price maintenance is a form of
A) regulation.
B) marginal cost pricing.
C) average cost pricing.
D) agreeing about the price that will be charged.
E) setting the price cap under price cap regulation.
15) If a firm engages in predatory pricing, it
A) is following marginal cost pricing.
B) is following average cost pricing.
C) sets a low price to drive rivals out of business.
D) has been regulated using a price cap.
E) is guilty of price fixing.
16) Because it was found guilty of violating the Sherman Act, Microsoft will be subject to
A) rate of return regulation.
B) marginal cost pricing.
C) price cap regulation.
D) predatory pricing.
E) None of the above answers is correct.
17) When the Federal Trade Commission decides whether to allow firms in an industry to merge,
it uses the ________ to guide its decision.
A) social interest theory
B) HHI
C) capture theory
D) Sherman Act
E) predatory pricing theory
17.7 Essay: What Is Oligopoly?
1) Describe the characteristics of an oligopoly.
2) “Because firms in an oligopoly are so large, they do not need to consider each other’s actions.”
Is the previous statement correct or incorrect? Explain your answer.
3) What market structures other than oligopoly have the characteristic of one firm’s actions
affecting the actions of its competitors? Explain your answer.
4) What is a cartel?
5) Explain what a cartel is and the difficulties faced in maintaining a cartel.
6) Why are cartels among firms usually kept secret?
7) What is the legal status of a cartel among firms in the United States?
17.8 Essay: The Oligopolist’s Dilemma
1) “If firms in an oligopoly operate as a monopoly, the industry produces the most output and if
they operate as perfect competitors, the industry produces the least output.” Is the previous
statement correct or incorrect? Why?
2) What is the best outcome for society: When firms in an oligopoly operate as a monopoly or
when they act as perfect competitors? Briefly explain your answer.
3) In the Boeing/Airbus oligopoly example discussed in the text, why did Boeing and Airbus
have an incentive to produce more planes than the monopoly outcome?
4) The above figure shows the market for the three moving companies in a small nation. If the
movers act as perfect competitors, what is the price per mile and the number of miles per year? If
the movers collude and act as a single monopoly, what is the price per mile and the number of
lines per year?
5) The figure above shows a the market demand curve for a market with three firms. It also
shows a firm’s marginal cost curve. In this oligopoly, what is the range of output and prices?
Why does this range of outcomes exist?
6) The table above has the market demand schedule in an industry that has two firms in it. The
marginal cost of this product is zero because these two firms have exclusive ownership of the
resource and it does not cost any additional amount to produce additional units.
a. If the firms cooperate with each other so that they operate as a monopoly, what price will
they charge and what (total) output will they produce?
b. If the firms cannot cooperate but instead behave as perfect competitors, what will be the price
and the (total) output they produce?
17.9 Essay: Game Theory
1) What three characteristics do all games have in common?
2) What is a Nash equilibrium? Is this equilibrium the best outcome for the players? Give an
example.
3) “A Nash equilibrium occurs when both parties to a game end up worse off as a result of the
decisions that are made.” Is the previous definition of a Nash equilibrium correct or incorrect?