Oligopoly
Multiple Choice – Section 00: Introduction
1. Which of the following statements about oligopolies is not correct?
a. An oligopolistic market has only a few sellers.
b. The actions of any one seller can have a large impact on the profits of all other sellers.
c. Oligopolistic firms are interdependent in a way that competitive firms are not.
d. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed
their marginal revenues.
2. In the language of game theory, a situation in which each person must consider how others might
respond to his or her own actions is called a
a. quantifiable situation.
b. cooperative situation.
c. strategic situation.
d. tactical situation.
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3. In general, game theory is the study of
a. how people behave in strategic situations.
b. how people behave when the possible actions of other people are irrelevant.
c. oligopolistic markets.
d. all types of markets, including competitive markets, monopolistic markets, and oligopolistic
markets.
4. Which of the following statements is correct?
a. Strategic situations are more likely to arise when the number of decision-makers is very large
rather than very small.
b. Strategic situations are more likely to arise in monopolistically competitive markets than in
oligopolistic markets.
c. Game theory is useful in understanding certain business decisions, but it is not really applicable to
ordinary games such as chess or tic-tac-toe.
d. Game theory is not necessary for understanding competitive or monopoly markets.
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5. In which of the following markets are strategic interactions among firms most likely to occur?
a. markets to which patent and copyright laws apply
b. the market for piano lessons
c. the market for tennis balls
d. the market for corn
6. Game theory is important for understanding which of the following market types?
a. perfectly competitive and oligopolistic markets
b. perfectly competitive markets but not oligopolistic markets
c. oligoplistic but not perfectly competitive markets
d. neither oligopolistic nor perfectly competitive markets.
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7. In choosing among alternative courses of action, Raj must consider how others might respond to
the action he takes. In the language of game theory, we say that Raj must think
a. openly.
b. strategically.
c. dominantly.
d. cooperatively.
8. We must be knowledgeable of how people behave in strategic situations if we are to understand
a. perfectly competitive markets.
b. monopolistically competitive markets.
c. oligopolistic markets.
d. All of the above are correct.
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9. In an oligopoly, each firm knows that its profits
a. depend only on how much output it produces.
b. depend only on how much output its rival firms produce.
c. depend on both how much output it produces and how much output its rival firms produce.
d. will be zero in the long run because of free entry.
10. Because oligopoly markets have only a few sellers, the actions of any one seller
a. do not affect other sellers in the market.
b. can have a large impact on the profits of other sellers in the market.
c. will affect how other firms behave in the market.
d. Both b and c are correct.
11. Game theory is necessary to understand which kinds of markets?
a. monopoly
b. competitive
c. oligopoly
d. All of the above are correct.
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12. Which of the following examples illustrates an oligopoly market?
a. a farmers’ market with many individuals selling sweet corn and tomatoes
b. a city whose electrical service is provided by one electric co-operative
c. a city with two firms who are licensed to sell school uniforms for the local schools
d. a city with many independently-owned hair styling salons
13. Game theory is necessary to understand which kinds of markets?
(i) perfectly competitive
(ii) monopolistically competitive
(iii) oligopoly
(iv) duopoly
(v) monopoly
a. (i) and (ii) only
b. (iii), (iv), and (v) only
c. (iii) and (iv) only
d. (i), (ii), (iii), (iv), and (v)
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Multiple Choice – Section 01: Markets with Only a Few Sellers
1. A distinguishing feature of an oligopolistic industry is the tension between
a. profit maximization and cost minimization.
b. cooperation and self interest.
c. producing a small amount of output and charging a price above marginal cost.
d. short–run decisions and long-run decisions.
2. In studying oligopolistic markets, economists assume that
a. there is no conflict or tension between cooperation and self-interest.
b. it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly
outcome.
c. each oligopolist cares only about its own profit.
d. strategic decisions do not play a role in such markets.
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3. The simplest type of oligopoly is
a. monopoly.
b. duopoly.
c. monopolistic competition.
d. oligopolistic competition.
4. If two firms comprise the entire soft drink market, the market would be a(n)
a. Nash equilibrium.
b. monopolistically competitive market.
c. oligopolistically competitive market.
d. duopoly.
5. A special kind of imperfectly competitive market that has only two firms is called
a. a two-tier competitive structure.
b. an incidental monopoly.
c. a doublet.
d. a duopoly.
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6. Game theory is necessary to understand which kinds of markets?
(i) perfectly competitive
(ii) monopolistically competitive
(iii) oligopoly
(iv) duopoly
(v) monopoly
a. (i) and (ii) only
b. (iii), (iv), and (v) only
c. (iii) and (iv) only
d. (i), (ii), (iii), (iv), and (v)
7. If four firms comprise the entire golf club industry, the market would be
a. competitive.
b. characterized by interdependence of firms.
c. a duopoly.
d. a monopoly.
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8. An agreement between two duopolists to function as a monopolist usually breaks down because
a. they cannot agree on the price that a monopolist would charge.
b. they cannot agree on the output that a monopolist would produce.
c. each duopolist wants a larger share of the market to capture more profit.
d. each duopolist wants to charge a higher price than the monopoly price.
9. An agreement among firms in a market about quantities to produce or prices to charge is called
a. collusion.
b. Nash equilibrium
c. dominant strategy.
d. behavioral economics.
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10. Which of the following statements is correct?
a. If duopolists successfully collude, then their combined output will be equal to the output that
would be observed if the market were a monopoly.
b. Although the logic of self–interest decreases a duopoly’s price below the monopoly price, it
does not push the
duopolists to reach the competitive price.
c. Although the logic of self-interest increases a duopoly’s level of output above the monopoly
level, it does not
push the duopolists to reach the competitive level.
d. All of the above are correct.
11. Suppose that Bieber and Rihanna are duopolists in the music industry. In May, they agree to work
together as a monopolist, charging the monopoly price for their music and producing the monopoly
quantity of songs. By June, each singer is considering breaking the agreement. What would you
expect to happen next?
a. Bieber and Rihanna will determine that it is in each singer’s self interest to maintain the
agreement.
b. Bieber and Rihanna will each break the agreement. Both singers’ profits will decrease.
c. Bieber and Rihanna will each break the agreement. Both singers’ profits will increase.
d. Bieber and Rihanna will each break the agreement. The new equilibrium quantity of songs will
increase, and the new equilibrium price also will increase.
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12. As the number of firms in an oligopoly increases, the
a. price approaches marginal cost, and the quantity approaches the socially efficient level.
b. price and quantity approach the monopoly levels.
c. price effect exceeds the output effect.
d. individual firms’ profits increase.
13. If a certain market were a monopoly, then the monopolist would maximize its profit by producing
4,000 units of output. If, instead, that market were a duopoly, then which of the following
outcomes would be most likely if the duopolists successfully collude?
a. Each duopolist produces 4,000 units of output.
b. Each duopolist produces 1,500 units of output.
c. One duopolist produces 2,400 units of output and the other produces 1,600 units of output.
d. One duopolist produces 3,000 units of output and the other produces 1,500 units of output.
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14. Which of the following statements is correct?
a. When duopoly firms reach a Nash equilibrium, their combined level of output is the monopoly
level of output.
b. When oligopoly firms collude, they are behaving as a cartel.
c. In an oligopoly, self-interest drives the market to the competitive outcome.
d. An oligopoly is an example of monopolistic competition.
15. As the number of firms in an oligopoly increases, the magnitude of the
a. output effect increases.
b. output effect decreases.
c. price effect increases.
d. price effect decreases.
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16. As the number of sellers in an oligopoly becomes very large,
a. the quantity of output approaches the socially efficient quantity.
b. the price approaches marginal cost.
c. the price effect is diminished.
d. All of the above are correct.
17. In markets characterized by oligopoly,
a. the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
b. collusive agreements will always prevail.
c. collective profits are always lower with cartel arrangements than they are without cartel
arrangements.
d. pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the
market.
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18. As a group, oligopolists would always be better off if they would act collectively
a. as if they were each seeking to maximize their own individual profits.
b. in a manner that would prohibit collusive agreements.
c. as a single monopolist.
d. as a single perfectly competitive firm.
19. As a group, oligopolists would always earn the highest profit if they would
a. produce the perfectly competitive quantity of output.
b. produce more than the perfectly competitive quantity of output.
c. charge the same price that a monopolist would charge if the market were a monopoly.
d. operate according to their own individual self–interests.
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20. Because each oligopolist cares about its own profit rather than the collective profit of all the
oligopolists together,
a. they are unable to maintain the same degree of monopoly power enjoyed by a monopolist.
b. each firm’s profit always ends up being zero.
c. society is worse off as a result.
d. Both a and c are correct.
Table 17-1
Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce
safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of
water to pump. They bring the water to town and sell it at whatever price the market will bear.
To keep things simple, suppose that Rochelle and Alec can pump as much water as they want
without cost so that the marginal cost of water equals zero. The weekly town demand schedule
and total revenue schedule for water is shown in the table below:
Quantity (in gallons)
Price
Total Revenue (and
Total Profit)
0
$60
$0
100
55
5,500
200
50
10,000
300
45
13,500
400
40
16,000
500
35
17,500
600
30
18,000
700
25
17,500
800
20
16,000
900
15
13,500
1,000
10
10,000
1,100
5
5,500
1,200
0
0
21.
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22. Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the
market for water, what price will they charge?
a. $25
b. $30
c. $35
d. $40
23. Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the
market for water, how many gallons of water will be produced and sold?
a. 0
b. 500
c. 600
d. 1,200
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24. Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the
market for water, how much profit will each of them earn?
a. $8,750
b. $9,000
c. $12,000
d. $18,000
25. Refer to Table 17-1. If the market for water were perfectly competitive instead of monopolistic,
how many gallons of water would be produced and sold?
a. 0 gallons
b. 600 gallons
c. 900 gallons
d. 1,200 gallons
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26. Refer to Table 17-1. What is the socially efficient quantity of water?
a. 0 gallons
b. 600 gallons
c. 900 gallons
d. 1,200 gallons
27. Refer to Table 17-1. If this market for water were perfectly competitive instead of
monopolistic, what price would be charged?
a. $0
b. $30
c. $40
d. $60
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28. Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and
Alec from operating as a monopoly. What will be the price of water once Rochelle and Alec reach
a Nash equilibrium?
a. $15
b. $20
c. $25
d. $30
29. Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and
Alec from operating as a monopoly. How many gallons of water will be produced and sold once
Rochelle and Alec reach a Nash equilibrium?
a. 600
b. 700
c. 800
d. 900