1
Chapter 17 Oligopoly
MULTIPLE CHOICE
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.
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.
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
2 ❖ Chapter 17/Oligopoly
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.
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.
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.
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.
Chapter 17/Oligopoly ❖ 3
3. The simplest type of oligopoly is
a.
monopoly.
b.
duopoly.
c.
monopolistic competition.
d.
oligopolistic competition.
4. 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.
5. 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 in order to capture more profit.
d.
each duopolist wants to charge a higher price than the monopoly price.
6. An agreement among firms in a market about quantities to produce or prices to charge is called
a.
collusion.
b.
a strategic situation.
c.
excess capacity.
d.
tying.
7. 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.
8. Suppose that Jay-Z and Beyonce are duopolists in the music industry. In January, they agree to work together
as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs.
By February, each singer is considering breaking the agreement. What would you expect to happen next?
a.
Jay-Z and Beyonce will determine that it is in each singer’s best self interest to maintain the
agreement.
b.
Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will
increase, and the new equilibrium price will decrease.
c.
Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will
decrease, and the new equilibrium price will increase.
d.
Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will
increase, and the new equilibrium price also will increase.
4 ❖ Chapter 17/Oligopoly
9. 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.
10. If a certain market were a monopoly, then the monopolist would maximize its profit by producing 1,000 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 1,000 units of output.
b.
Each duopolist produces 600 units of output.
c.
One duopolist produces 400 units of output and the other produces 600 units of output.
d.
One duopolist produces 800 units of output and the other produces 400 units of output.
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
11. 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
Chapter 17/Oligopoly ❖ 5
12. 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
13. 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
14. 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
b.
600
c.
900
d.
1,200
15. 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
16. 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
17. Refer to Table 17–1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from oper-
ating 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
6 ❖ Chapter 17/Oligopoly
18. Refer to Table 17–1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from oper-
ating 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
Table 17–2. The table shows the town of Pittsville’s demand schedule for gasoline. For simplicity, assume
the town’s gasoline seller(s) incur no costs in selling gasoline.
Quantity
(in gallons)
Price
Total Revenue
(and total profit)
0
$10
$0
100
9
900
200
8
1,600
300
7
2,100
400
6
2,400
500
5
2,500
600
4
2,400
700
3
2,100
800
2
1,600
900
1
900
1,000
0
0
19. Refer to Table 17-2. If the market for gasoline in Pittsville is perfectly competitive, then the equilibrium price
of gasoline is
a.
$8 and the equilibrium quantity is 200 gallons.
b.
$5 and the equilibrium quantity is 500 gallons.
c.
$2 and the equilibrium quantity is 800 gallons.
d.
$0 and the equilibrium quantity is 1,000 gallons.
20. Refer to Table 17-2. If the market for gasoline in Pittsville is a monopoly, then the profit-maximizing mo-
nopolist will charge a price of
a.
$8 and sell 200 gallons.
b.
$5 and sell 500 gallons.
c.
$2 and sell 800 gallons.
d.
$0 and sell 1,000 gallons.
21. Refer to Table 17-2. If there are exactly two sellers of gasoline in Pittsville and if they collude, then which of
the following outcomes is most likely?
a.
Each seller will sell 500 gallons and charge a price of $5.
b.
Each seller will sell 250 gallons and charge a price of $2.50.
c.
Each seller will sell 350 gallons and charge a price of $3.
d.
Each seller will sell 250 gallons and charge a price of $5.
Chapter 17/Oligopoly ❖ 7
22. Refer to Table 17-2. If there are exactly three sellers of gasoline in Pittsville and if they collude, then which
of the following outcomes is most likely?
a.
Each seller will sell 166.67 gallons and charge a price of $1.33.
b.
Each seller will sell 166.67 gallons and charge a price of $5.
c.
Each seller will sell 200 gallons and charge a price of $4.
d.
Each seller will sell 233.33 gallons and charge a price of $5.
23. Refer to Table 17-2. Suppose there are exactly two sellers of gasoline in Pittsville: Exxoff and BQ. If Exxoff
sells 300 gallons and BQ sells 400 gallons, then
a.
Exxoff’s profit is $900 and BQ’s profit is $1,200.
b.
Exxoff’s profit is $2,100 and BQ’s profit is $2,400.
c.
there is an excess demand for gasoline in Pittsville.
d.
there is an excess supply of gasoline in Pittsville.
24. 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.
25. 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.
26. 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.
27. 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.
8 ❖ Chapter 17/Oligopoly
28. 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.
29. 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.
30. Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists to-
gether,
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 17-3. The information in the table below shows the total demand for premium-channel digital cable TV
subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of
$200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of
providing the premium channel service to a household is zero.
Price (per year)
$180
$150
$120
$ 90
$ 60
$ 30
$ 0
31. Refer to Table 17-3. If there is only one digital cable TV company in this market, what price would it charge
for a premium digital channel subscription to maximize its profit?
a.
$30
b.
$60
c.
$90
d.
$150
32. Refer to Table 17-3. Assume there are two digital cable TV companies operating in this market. If they are
able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for sub-
scriptions, then their agreement will stipulate that
a.
each firm will charge a price of $90 and each firm will sell 4,500 subscriptions.
b.
each firm will charge a price of $90 and each firm will sell 9,000 subscriptions.
c.
each firm will charge a price of $120 and each firm will sell 3,000 subscriptions.
d.
each firm will charge a price of $150 and each firm will sell 1,500 subscriptions.
Chapter 17/Oligopoly ❖ 9
33. Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this
market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on
the price that will be charged for subscriptions. How much profit will each company earn?
a.
$610,000
b.
$550,000
c.
$405,000
d.
$205,000
34. Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this
market. Further assume that they are not able to collude on the price and quantity of premium digital channel
subscriptions to sell. How many premium digital channel cable TV subscriptions will be sold altogether when
this market reaches a Nash equilibrium?
a.
6,000
b.
9,000
c.
12,000
d.
15,000
35. Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this
market. Further assume that they are not able to collude on the price and quantity of premium digital channel
subscriptions to sell. What price will premium digital channel cable TV subscriptions be sold at when this
market reaches a Nash equilibrium?
a.
$30
b.
$60
c.
$90
d.
$120
36. Refer to Table 17-3. Assume that there are two profit-maximizing digital cable TV companies operating in
this market. Further assume that they are not able to collude on the price and quantity of premium digital chan-
nel subscriptions to sell. How much profit will each firm earn when this market reaches a Nash equilibrium?
a.
$25,000
b.
$90,000
c.
$160,000
d.
$215,000
10 ❖ Chapter 17/Oligopoly
Table 17–4. The information in the table below shows the total demand for high-speed Internet subscriptions in a
small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost
of $200,000 (per year) and that the marginal cost of providing an additional subscription is always $80.
Price (per year)
$320
$280
$240
$200
$160
$120
$ 80
$ 40
$ 0
37. Refer to Table 17-4. Suppose there is only one high-speed Internet service provider in this market and it seeks
to maximize its profit. The company will
a.
sell 6,000 subscriptions and charge a price of $200 for each subscription.
b.
sell 8,000 subscriptions and charge a price of $160 for each subscription.
c.
sell 10,000 subscriptions and charge a price of $120 for each subscription.
d.
sell 12,000 subscriptions and charge a price of $80 for each subscription.
38. Refer to Table 17-4. Assume there are two high-speed Internet service providers that operate in this market. If
they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged
for subscriptions, then their agreement will stipulate that
a.
each firm will charge a price of $120 and each firm will sell 5,000 subscriptions.
b.
each firm will charge a price of $160 and each firm will sell 4,000 subscriptions.
c.
each firm will charge a price of $100 and each firm will sell 3,000 subscriptions.
d.
each firm will charge a price of $200 and each firm will sell 3,000 subscriptions.
39. Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers operating
in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold
and on the price that will be charged for subscriptions. How much profit will each company earn?
a.
$80,000
b.
$120,000
c.
$160,000
d.
$210,000
40. Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers operating
in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to
sell. How many subscriptions will be sold altogether when this market reaches a Nash equilibrium?
a.
6,000
b.
8,000
c.
10,000
d.
12,000
Chapter 17/Oligopoly ❖ 11
41. Refer to Table 17-4. Assume there are two high-speed Internet service providers operating in this market.
Further assume that they are not able to collude on the price and quantity of subscriptions to sell. What price
will they charge for a subscription when this market reaches a Nash equilibrium?
a.
$120
b.
$160
c.
$200
d.
$240
42. Refer to Table 17-4. Assume that there are two profit-maximizing high-speed Internet service providers oper-
ating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions
to sell. How much profit will each firm earn when this market reaches a Nash equilibrium?
a.
$120,000
b.
$150,000
c.
$200,000
d.
$225,000
Table 17-5. Imagine a small town in which only two residents, Kunal and Naj, own wells that produce safe drinking
water. Each week Kunal and Naj work together to decide how many gallons of water to pump, to bring the
water to town, and to sell it at whatever price the market will bear. Assume Kunal and Naj 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 are shown in the table below.
Weekly
Quantity
(in gallons)
Price
Weekly
Total Revenue
(and Total Profit)
0
$12
$ 0
25
11
275
50
10
500
75
9
675
100
8
800
125
7
875
150
6
900
175
5
875
200
4
800
225
3
675
250
2
500
275
1
275
300
0
0
43. Refer to Table 17-5. Since Kunal and Naj operate as a profit-maximizing monopoly in the market for water,
what price will they charge for water?
a.
$2
b.
$4
c.
$6
d.
$7
12 ❖ Chapter 17/Oligopoly
44. Refer to Table 17-5. If the market for water were perfectly competitive instead of monopolistic, how many
gallons of water would be produced and sold?
a.
25
b.
100
c.
200
d.
300
45. Refer to Table 17-5. As long as Kunal and Naj operate as a profit-maximizing monopoly, what will their
combined weekly revenue amount to?
a.
$450
b.
$675
c.
$875
d.
$900
46. Refer to Table 17-5. The socially efficient level of water supplied to the market would be
a.
50 gallons.
b.
150 gallons.
c.
225 gallons.
d.
300 gallons.
47. Refer to Table 17-5. Suppose the town enacts new antitrust laws that prohibit Kunal and Naj from operating
as a monopolist. What will the new price of water be once the Nash equilibrium is reached?
a.
$3
b.
$4
c.
$5
d.
$6
48. Refer to Table 17-5. Suppose the town enacts new antitrust laws that prohibit Kunal and Naj from operating
as a monopolist. What will quantity of water will each of them produce once the Nash equilibrium is reached?
a.
Each will produce 50 gallons, for a total of 100 gallons.
b.
Eacb will produce 75 gallons, for a total of 150 gallons.
c.
Each will produce 100 gallons, for a total of 200 gallons.
d.
Each will produce 125 gallons, for a total of 250 gallons.
49. Refer to Table 17-5. Suppose the town enacts new antitrust laws that prohibit Kunal and Naj from operating
as a monopolist. Once the Nash equilibrium is reached, how much profit will each producer earn?
a.
$400.00
b.
$437.50
c.
$450.00
d.
$800.00
Chapter 17/Oligopoly ❖ 13
Scenario 17-1. Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume
that both countries have entered into an agreement to maintain certain production levels in order to maximize
profits. In the world market for oil, the demand curve is downward sloping.
50. Refer to Scenario 17-1. The fact that both countries have colluded to earn higher profit shows their desire to
keep their combined level of output
a.
above the monopoly level.
b.
below the Nash equilibrium level.
c.
equal to the Nash equilibrium level.
d.
above the Nash equilibrium level.
51. Refer to Scenario 17-1. As long as the combined level of output is less than the Nash equilibrium level, both
Irun and Urun have the individual incentive to
a.
hold production constant.
b.
decrease production.
c.
increase production.
d.
increase price.
52. Refer to Scenario 17-1. If Irun fails to live up to the production agreement and overproduces, which of the
following statements will be true of Urun’s condition?
a.
Urun will invariably be worse off than before the agreement was broken.
b.
Urun will counter by decreasing its production in order to maintain price stability.
c.
Urun’s profit will be maximized by holding its production constant.
d.
Urun’s profit will be unaffected by Irun’s actions.
53. Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash equilib-
rium, it
a.
is always in their best interest to supply more to the market.
b.
is always in their best interest to supply less to the market.
c.
is always in their best interest to leave their quantities supplied unchanged.
d.
may be in their best interest to do any of the above, depending on market conditions.
54. A situation in which firms choose their best strategy given the strategies chosen by the other firms in the mar-
ket is called
a.
a competitive equilibrium.
b.
an open-market solution.
c.
a socially-optimal solution.
d.
a Nash equilibrium.
14 ❖ Chapter 17/Oligopoly
55. When an oligopoly market reaches a Nash equilibrium,
a.
the market price will be different for each firm.
b.
the firms will not have behaved as profit maximizers.
c.
a firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
d.
a firm will not take into account the strategies of competing firms.
56. In a duopoly situation, the logic of self-interest results in a total output level that
a.
equals the output level that would prevail in a competitive market.
b.
equals the output level that would prevail in a monopoly.
c.
exceeds the monopoly level of output, but falls short of the competitive level of output.
d.
falls short of the monopoly level of output.
57. As a group, oligopolists earn the highest profit when they
a.
achieve a Nash equilibrium.
b.
produce a total quantity of output that falls short of the Nash-equilibrium total quantity.
c.
produce a total quantity of output that exceeds the Nash-equilibrium total quantity.
d.
charge a price that falls short of the Nash-equilibrium price.
58. In order to be successful, a cartel must
a.
find a way to encourage members to produce more than they would otherwise produce.
b.
agree on the total level of production for the cartel, but they need not agree on the amount produced
by each member.
c.
agree on the total level of production and on the amount produced by each member.
d.
agree on the prices charged by each member, but they need not agree on amounts produced.
59. In a particular town, Comvision and Veriview are the only two providers of cable TV service. Comvision and
Veriview constitute a
a.
duopoly, whether they collude or not.
b.
cartel, whether they collude or not.
c.
Nash industry, whether they collude or not.
d.
monopolistically competitive market if they charge the same price.
60. Which of these situations produces the largest profits for oligopolists?
a.
The firms reach a Nash equilibrium.
b.
The firms reach the monopoly outcome.
c.
The firms reach the competitive outcome.
d.
The firms produce a quantity of output that lies between the competitive outcome and the
monopoly outcome.
Chapter 17/Oligopoly ❖ 15
61. When firms have agreements among themselves on the quantity to produce and the price at which to sell out-
put, we refer to their form of organization as a
a.
Nash arrangement.
b.
cartel.
c.
monopolistically competitive oligopoly.
d.
perfectly competitive oligopoly.
62. The equilibrium quantity in markets characterized by oligopoly is
a.
higher than in monopoly markets and higher than in perfectly competitive markets.
b.
higher than in monopoly markets and lower than in perfectly competitive markets.
c.
lower than in monopoly markets and higher than in perfectly competitive markets.
d.
lower than in monopoly markets and lower than in perfectly competitive markets.
63. The equilibrium price in a market characterized by oligopoly is
a.
higher than in monopoly markets and higher than in perfectly competitive markets.
b.
higher than in monopoly markets and lower than in perfectly competitive markets.
c.
lower than in monopoly markets and higher than in perfectly competitive markets.
d.
lower than in monopoly markets and lower than in perfectly competitive markets.
64. When oligopolistic firms interacting with one another each choose their best strategy given the strategies cho-
sen by other firms in the market, we have
a.
a cartel.
b.
a group of oligopolists behaving as a monopoly.
c.
a Nash equilibrium.
d.
the perfectly competitive outcome.
65. As the number of firms in an oligopoly market
a.
decreases, the price charged by firms likely decreases.
b.
decreases, the market approaches the competitive market outcome.
c.
increases, the market approaches the competitive market outcome.
d.
increases, the market approaches the monopoly outcome.
66. Assume oligopoly firms are profit maximizers, they do not form a cartel, and they take other firms’ production
levels as given. Then in equilibrium the output effect
a.
must dominate the price effect.
b.
must be smaller than the price effect.
c.
must balance with the price effect.
d.
can be larger or smaller than the price effect.
16 ❖ Chapter 17/Oligopoly
67. For cartels, as the number of firms (members of the cartel) increases,
a.
the monopoly outcome becomes more likely.
b.
the magnitude of the price effect decreases.
c.
the more concerned each seller is about its own impact on the market price.
d.
the easier it becomes to observe members violating their agreements.
68. Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time,
however, suppose the merging of firms results in the market being served by only three or four firms selling
this same product. As a result, we would expect
a.
an increase in market output and an increase in the price of the product.
b.
an increase in market output and an decrease in the price of the product.
c.
a decrease in market output and an increase in the price of the product.
d.
a decrease in market output and a decrease in the price of the product.
69. Cartels are difficult to maintain because
a.
antitrust laws are difficult to enforce.
b.
cartel agreements are conducive to monopoly outcomes.
c.
there is always tension between cooperation and self-interest in a cartel.
d.
firms pay little attention to the decisions made by other firms.
70. There are two types of markets in which firms face some competition yet are still able to have some control
over the prices of their products. Those two types of market are
a.
monopolistic competition and oligopoly.
b.
duopoly and triopoly.
c.
perfect competition and monopolistic competition.
d.
duopoly and imperfect competition.
71. A group of firms that act in unison to maximize collective profits is called a
a.
monopolistically competitive industry.
b.
monopoly.
c.
cartel.
d.
Nash equilibrium market.
72. An agreement among firms regarding price and/or production levels is called
a.
an antitrust market.
b.
a free-trade arrangement.
c.
collusion.
d.
a Nash agreement.
Chapter 17/Oligopoly ❖ 17
73. If duopolists individually pursue their own self-interest when deciding how much to produce, the amount they
will produce collectively will
a.
be less than the monopoly quantity.
b.
be equal to the monopoly quantity.
c.
be greater than the monopoly quantity.
d.
Any of the above are possible.
74. If duopolists individually pursue their own self-interest when deciding how much to produce, the profit-max-
imizing price they will charge for their product will be
a.
less than the monopoly price.
b.
equal to the perfectly competitive market price.
c.
greater than the monopoly price.
d.
possibly less than or greater than the monopoly price.
75. To increase their individual profits, members of a cartel have an incentive to
a.
charge a higher price than the other members of the cartel.
b.
increase production above the level agreed upon.
c.
ignore the choices made by the other firms and act as a monopolist.
d.
charge the same price a monopolist would charge.
76. Once a cartel is formed, the market is in effect served by
a.
a monopoly.
b.
an oligopoly.
c.
imperfect competition.
d.
monopolistic competition.
77. If an oligopolist is part of a cartel that is collectively producing the monopoly level of output, then that oligop-
olist has the incentive to lower production with the aim of
a.
lowering prices.
b.
increasing profits for the group of firms as a whole.
c.
increasing profits for itself, regardless of the impact on profits for the group of firms as a whole.
d.
None of the above is correct.
78. When price is above marginal cost, selling one more unit at the current price will increase profit. This concept
is known as the
a.
income effect.
b.
price effect.
c.
output effect.
d.
cartel effect.
18 ❖ Chapter 17/Oligopoly
79. In imperfectly competitive markets, increasing production will decrease the price of all units sold. This con-
cept is known as the
a.
income effect.
b.
cost effect.
c.
output effect.
d.
price effect.
80. In a typical cartel agreement, the cartel maximizes profit when it
a.
behaves as a monopolist.
b.
behaves as a duopolist.
c.
is flexible in enforcing production targets.
d.
behaves as a perfectly competitive firm.
81. An oligopolist will increase production if the output effect is
a.
less than the price effect.
b.
equal to the price effect.
c.
greater than the price effect.
d.
The oligopolist never has an incentive to increase production.
82. As the number of firms in an oligopoly increases,
a.
each seller becomes more concerned about its impact on the market price.
b.
the output effect decreases.
c.
the total quantity of output produced by firms in the market gets closer to the socially efficient
quantity.
d.
the oligopoly has more market power and firms earn a greater profit.
83. When an oligopoly grows very large, the
a.
output effect disappears.
b.
price effect disappears.
c.
output effect equals the price effect.
d.
price of the product greatly exceeds marginal cost.
84. As the number of firms in an oligopoly increases, the price approaches
a.
zero.
b.
marginal cost.
c.
infinity.
d.
the monopoly price.
Chapter 17/Oligopoly ❖ 19
85. Like monopolists, oligopolists are aware that an increase in the quantity of output always
a.
reduces the price of their product.
b.
reduces their profit.
c.
reduces their revenue.
d.
reduces productivity.
86. Oligopolies would like to act like a
a.
duopoly, but self-interest often drives them closer to the perfectly competitive outcome.
b.
competitive firm, but self-interest often drives them closer to the duopoly outcome.
c.
monopoly, but self-interest often drives them to charge a higher price than would be charged by a
monopoly.
d.
monopoly, but self-interest often drives them closer to the perfectly competitive outcome.
87. Oligopolies can end up looking like competitive markets if the number of firms is
a.
large and they all cooperate.
b.
large and they do not cooperate.
c.
small and they all cooperate.
d.
small and they do not cooperate.
88. The theory of oligopoly provides another reason that free trade can benefit all countries because
a.
increased competition leads to larger deadweight losses.
b.
as the number of firms within a given market increases, the price of the good decreases.
c.
as the number of firms within a given market increases, the profit of each firm increases.
d.
All of the above are correct.
89. Firms do not need to be concerned about striking a balance between the price effect and the output effect when
making production decisions in which of the following types of markets?
a.
oligopoly
b.
duopoly
c.
monopoly
d.
competitive markets
90. If nations such as Germany, Japan, and the United States prohibited international trade in automobiles, a likely
effect would be that
a.
the price effect would become a more significant consideration for each firm that makes
automobiles.
b.
the excess of price over marginal cost would become less pronounced in the automobile market.
c.
all countries would become better off.
d.
automobile producers in the U.S. would collude to produce a large number of cars.
20 ❖ Chapter 17/Oligopoly
91. The theory of oligopoly provides a reason why
a.
perfect competition is not a useful object of study.
b.
price is less than marginal cost for many firms.
c.
all countries can benefit from free trade among nations.
d.
firms do not want to capture larger shares of their markets.
92. During the 1990s, the members of OPEC operated independently from one another, causing the world market
for crude oil to become close to
a.
a monopoly market.
b.
an oligopoly market.
c.
a duopoly market.
d.
a competitive market.
Figure 17-1
93. Refer to Figure 17-1. Suppose this market is served by a duopoly in which each firm faces the marginal cost
curve shown in the diagram. The marginal revenue curve that a monopolist would face in this market is also
shown. Which of the following statements is true?
a.
The total output in this market will likely be 2 units when the market is served by a duopoly.
b.
The price in this market will likely be $6 when the market is served by a duopoly.
c.
The total revenue to each firm will likely be more than $16 when the market is served by a duopoly.
d.
The total output in this market will likely be less than 4 units when the market is served by a
duopoly.
94. Refer to Figure 17-1. Suppose this market is served by two firms who each face the marginal cost curve
shown in the diagram. The marginal revenue curve that a monopolist would face in this market is also shown.
If the firms are able to collude successfully,
a.
the total output will be 2 units and the price will be $6.00 per unit.
b.
the total output will be 2 units and the price will be $8.00 per unit.
c.
the total output will be 4 units and the price will be $6.00 per unit.
d.
there will be no deadweight loss.