Chapter 9 – Practice Question

According to the information presented in the text the parcel and express delivery industry could best be characterized as:
a. a perfectly competitive market.
b. an oligopoly.
c. a monopoly.
d. a monopolistically competitive market.

Which of the following is not an example of a noncooperative oligopoly model?
a. The kinked demand curve model.
b. The prisoner's dilemma game.
c. The cartel model.
d. The model of limit pricing.

Which of the following is not an example of a practice that facilitates "tacit collusion"?
a. The formation of a cartel.
b. Advance notice of price changes by one or more of the firms in an industry.
c. The use of most-favored-customer clauses.
d. Uniform prices charged by the firms in a particular industry.

Which of the following is not a characteristic of an oligopolistic industry?
a. Substantial barriers to entry.
b. One dominant firm and low entry barriers.
c. The output produced by the firms in the industry may be homogeneous or differentiated.
d. A small number of large firms.

Which of the following statements regarding cartels is not correct?
a. Cartels are sometimes difficult to maintain because a member can cheat by raising its price above the agreed price.
b. Cartels restrict industry output in order to raise price.
c. Cartels are inherently stable, because oligopolistic firms rarely change price.
d. are easier to establish and maintain when the cost functions of the individual members are more similar to one another.

Which of the following would not be classified as an oligopolistic industry?
a. Defense contractors.
b. The women's clothing industry.
c. The tobacco industry.
d. The recorded music industry.

From the airlines' perspective, amenities competition is preferable to price competition because revenues are not adversely affected and it is easier to determine the strategies of one's competitors.
True
False

Which of the following would make it easier to maintain an effective collusive agreement in a cartel?
a. An increase in the number of substitutes for the product produced by the cartel.
b. A decrease in the elasticity of demand for the cartel's product.
c. A new method of pricing that makes it more difficult for each firm to monitor the prices that the other firms in the cartel are charging.
d. An increase in the number of potential entrants into the industry.

Which of following is not a condition that must be met for a cartel to maximize its joint profits?
a. Each member firm must employ the least-cost method of production.
b. The cartel must be operating in the inelastic portion of its demand curve.
c. Total output by the cartel must be allocated among the member firms such that the individual firm's marginal costs are equal.
d. The cartel must produce the level of output at which its marginal revenues and marginal costs are equal.

Assume the four major grocery stores in a large metropolitan area decide to meet secretly to fix prices for meat. It would be easiest to maintain this arrangement when:
a. demand for meat and fresh vegetables is falling.
b. individual firms are able to offer secret price discounts to selected buyers.
c. the number of additional competitors is very small.
d. the cost conditions for the four firms differ substantially.

A common theme in the discussions of the airline, soft drink, doughnut, and express delivery industries is that oligopolistic firms tend to compete:
a. primarily on the basis of product differentiation and price.
b. strictly on the basis of cost minimization.
c. strictly on the basis of price and nothing else.
d. primarily by erecting barriers into the market.

Which of the following best describes the basic characteristics of noncooperative oligopoly models?
a. Managers attempt to deliberately mislead their rivals regarding the strategy they will pursue.
b. Managers make decisions based on the strategy they think their rivals will pursue.
c. When making decisions, managers basically ignore the mutual interdependence that exists among rivals.
d. Managers refuse to negotiate with their rivals when it comes to such decisions as what price to charge.

Predatory pricing is used primarily to:
a. discourage new firms from entering a market.
b. drive other firms out of a market.
c. reduce (limit) the profits of all of the firms in the industry.
d. establish a minimum price all of the firms in the market will charge.

Assume the production of a particular good is characterized by significant economies of scale. In addition, three different versions of the good can be produced, and large segments of the population prefer different versions of the good. In this case, the preferred market structure for this good would be:
a. monopolistic competition.
b. oligopoly.
c. monopoly.
d. perfect competition.

It has been observed that whenever one imported beer distributor raises its price, other imported beer distributors quickly raise their price as well. Such behavior is characteristic of:
a. explicit collusion.
b. the kinked-demand curve model of oligopoly.
c. price leadership.
d. the barometric-firm model of price leadership.

According to the kinked demand curve model, if an oligopolistic firm lowers its price, it should expect to see its total revenue:
a. cannot be determined without more information.
b. stay the same.
c. decrease
d. increase.

Suppose an oligopoly consists of two firms. Firm A lowers price and Firm B responds by lowering its price by the same amount. If average costs and industry output remain the same, which of the following will occur?
a. The profits of the two firms will remain the same.
b. The profits of the two firms will increase.
c. The profits of the two firms will decrease.
d. Barriers to entry will come tumbling down and new firms will enter.

When oligopolistic companies engage in collusion, the companies are involved in a
a. competitive game.
b. noncooperative game.
c. cooperative game.
d. negative-sum game.

In comparing an oligopolistic firm to a perfectly competitive firm it is generally assumed that the price charged by the competitive firm will be higher than the price charged by the oligopolistic firm.
True
False

In game theory, the strategy that results in the highest payoff to a player regardless of what the other player decides to do is called the:
a. min-max strategy.
b. equilibrium strategy.
c. Stackleberg equilibrium.
d. dominant strategy.

Assume the four-firm concentration ratio in industry X is 75 percent and that the firms in the industry produce a differentiated product. Industry X most likely would be characterized as:
a. an oligopoly.
b. monopolistically competitive.
c. perfectly competitive.
d. a monopoly.

Assume firm X is one of the three largest firms in an oligopolistic industry. Firm X is currently considering a vertical merger with another firm that is the sole supplier of an input used by all of the firms that compete with firm X. If the merger goes through, firm X would be able to operate much like:
a. an oligopolist.
b. a monopolist.
c. a monopolistically competitive firm.
d. a perfectly competitive firm.

The soft drink industry can best be described as:
a. a monopoly.
b. an oligopoly.
c. perfectly competitive.
d. monopolistically competitive.

In which of the following scenarios would a predatory pricing scheme have the greatest chance of success, all else constant?
a. The predatory price is set just below cost, relatively few rivals are likely to enter after the strategy ends, and profits can be recouped in a very short period of time.
b. The predatory price is set well below cost, relatively few rivals are likely to enter after the strategy ends, and profits can be recouped in a relatively long period of time.
c. The predatory price is set well below cost, many rivals are likely to enter after the strategy ends, and profits can be recouped only over a relatively long period of time.
d. The predatory price is set just below cost, many rivals are likely to enter after the strategy ends, and profits can be recouped in a moderate period of time.

Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the dominant strategy for Greenco?
a. There is no best strategy.
b. Not enough information is given to determine the best strategy.
c. High price.
d. Low price.

Why is the prisoner's dilemma game useful in studying oligopoly behavior?
a. To illustrate the problems encountered when making decisions under uncertainty.
b. To illustrate how barriers to entry lead to economic profits.
c. To show that oligopolies behave as monopolists in the long run and earn positive economic profits.
d. Because oligopolies make out like bandits.

Price leadership:
a. is usually the result of a dominant firm in the industry.
b. is always illegal in the United States.
c. has rarely occurred in U.S. history.
d. usually results in the smaller firms in the industry incurring economic losses.

To maximize joint profits, a cartel must determine the level of output at which:
a. joint marginal revenue equals the marginal cost of the largest member of the cartel.
b. the horizontally sum of the members marginal cost curves is at a minimum.
c. joint marginal revenue equals the marginal cost of the smallest member of the cartel.
d. marginal revenue equals joint marginal cost.

The key distinguishing characteristic of an oligopoly is the:
a. presence of long-run economic profits.
b. near total absence of advertising.
c. fact that in all cases firms produce a standardized product.
d. mutual interdependence of the firms in the market

Assume the firms in an oligopoly produce a differentiated product and are initially colluding. If each firm begins to cheat (to increase sales) by underpricing the other firms, as the amount of cheating increases, the resulting industry price and output will approach the outcome for:
a. monopolistic competition.
b. noncooperative monopoly.
c. noncooperative oligopoly.
d. perfect competition.

Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the best strategy for Greenco if Ajax decides on charging a low price?
a. There is no best strategy.
b. High price.
c. Low price.
d. Not enough information is given to determine the best strategy.

The dominant strategy for each of the players in the prisoner's dilemma game does not yield the optimal outcome for each player because:
a. the players do not understand the consequences of each of the choices they can make.
b. each player is misinformed about the decision that has been made by the other player.
c. the two players are not allowed to communicate or otherwise cooperate with each other.
d. each player fails to consider how the other player might act.

The assumption that rival firms will match a firm's price decreases but not its price increases is a basic feature of:
a. cartel theory.
b. the predatory pricing model.
c. the kinked demand curve model.
d. model of limit pricing.

In order for "limit pricing" to be effective, the firm practicing such a strategy must be able to charge a price that is:
a. lower than the potential entrant's ATC but greater than the firm's own ATC.
b. greater than the potential entrant's ATC but lower than the firm's own ATC.
c. lower than the potential entrant's ATC but greater than the firm's own AVC.
d. greater than the potential entrant's ATC but lower than the firm's own AVC.

Over the past few years, airlines have tended to compete in the market for intercontinental business class travelers on the basis of:
a. price.
b. cost.
c. timeliness of their flight schedules.
d. amenities.

In game theory, a Nash equilibrium is defined as:
a. the set of strategies that result in the maximum payoff to each player.
b. a set of strategies for which all players are choosing their best strategy, given the actions of the other players.
c. the set of strategies chosen when the players in a game can cooperate with each other.
d. the dominant strategy of each player.

Limit pricing is used primarily to:
a. establish a minimum price all of the firms in the market will charge.
b. reduce (limit) the profits of all of the firms in the industry.
c. drive other firms out of a market.
d. discourage new firms from entering a market.

Assume a group of firms has formed a cartel and the cartel is in engaged in joint profit maximization. As such, each firm, acting in its own interests, has an incentive to expand production up to the point at which:
a. its marginal revenue equals the cartel's marginal costs of production.
b. its marginal cost equals the cartel-determined marginal revenue from the good being sold.
c. its marginal cost equals the marginal revenue earned by the cartel.
d. its marginal cost equals the cartel-determined price of the product being sold.

The success of a predatory pricing strategy in an oligopolistic market depends on all of the following except:
a. the number of firms operating in the industry prior to enactment of the policy.
b. the period of time for which the predatory price is in effect.
c. how far the predatory price is below cost.
d. the length of time over which recoupment of profits occurs.

Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the best strategy for Greenco if Ajax decides on charging a high price?
a. Not enough information is given to determine the best strategy.
b. There is no best strategy.
c. High price.
d. Low price.High price.