Chapter 13/Oligopoly and Monopolistic Competition
CHAPTER 13Oligopoly and Monopolistic Competition
MULTIPLE CHOICE
Choose the one alternative that best completes the statement or answers the question.
1)Perfect competition and monopolistic competition are similar in that both market structures include
A) price-taking behavior by firms.
B) a homogeneous product.
C) no barriers to entry.
D) very few firms.
Answer: C
Diff: 1
Topic: Market Structures
2)Perfect competition and monopolistic competition are similar in that firms in both types of market structure will
A) act as price takers.
B) produce a level of output where price equals marginal cost.
C) earn zero profit in the long run.
D) act as price setters.
Answer: C
Diff: 1
Topic: Market Structures
3)Oligopoly differs from monopolistic competition in that an oligopoly includes
A) product differentiation.
B) barriers to entry.
C) no barriers to entry.
D) downward-sloping demand curves facing the firm.
Answer: B
Diff: 1
Topic: Market Structures
4)Regardless of market structure, all firms
A) consider the actions of rivals.
B) maximize profit by setting marginal revenue equal to marginal cost.
C) produce a differentiated product.
D) have the ability to set price.
Answer: B
Diff: 1
Topic: Market Structures
Figure 13.1
5)Figure 13.1 shows a payoff matrix for two firms, A and B, that must choose between a high-price strategy and a low-price strategy. For firm B,
A) setting a high price is the dominant strategy.
B) setting a low price is the dominant strategy.
C) there is no dominant strategy.
D) doing the opposite of firm A is always the best strategy.
Answer: B
Diff: 1
Topic: Game Theory
6)Figure 13.1 shows a payoff matrix for two firms, A and B, that must choose between a high-price strategy and a low-price strategy. The Nash equilibrium in this game
A) does not exist.
B) occurs when both firms set a low price.
C) occurs when both firms set a high price.
D) occurs when firm A sets a high price and firm B sets a low price.
Answer: B
Diff: 1
Topic: Game Theory
7)Figure 13.1 shows a payoff matrix for two firms, A and B, that must choose between a high-price strategy and a low-price strategy. Both firms setting a high price is not a Nash equilibrium because
A) setting a high price is the dominant strategy for each firm.
B) neither firm can improve its payoff by setting a low price given that the other firm is setting a high price.
C) there is no dominant strategy for either firm.
D) both firms can improve their payoff by setting a low price given that the other firm
is setting a high price.
Answer: D
Diff: 1
Topic: Game Theory
Figure 13.2
8)Figure 13.2 shows a payoff matrix for two firms, A and B, that must choose between selling basic computers or advanced computers. Firm B's dominant strategy
A) is to make basic computers.
B) is to make advanced computers.
C) is to adopt firm A's strategy.
D) does not exist in this game.
Answer: D
Diff: 2
Topic: Game Theory
9)Figure 13.2 shows a payoff matrix for two firms, A and B, that must choose between selling basic computers or advanced computers. How many Nash equilibria are there?
A) 0
B) 1
C) 2
D) 4
Answer: C
Diff: 2
Topic: Game Theory
10)Figure 13.2 shows a payoff matrix for two firms, A and B, that must choose between selling basic computers or advanced computers. Which of the following is a Nash equilibrium?
A) Both firms make advanced computers.
B) Both firms make basic computers.
C) Firm A makes basic computers and firm B makes advanced computers.
D) There are no Nash equilibria.
Answer: C
Diff: 2
Topic: Game Theory
11) In a non-cooperative, imperfect information, simultaneous-choice, one-period
game, a Nash equilibrium
A)will never exist.
B) will always include dominant strategies.
C)will always result in both players taking the same action.
D)may not maximize the sum of the firms' profits.
Answer: D
Diff: 1
Topic: Game Theory
12)The term prisoners' dilemma refers to a game in which
A) there are no Nash equilibria.
B) there are no dominant strategies.
C) the payoff from playing the dominant strategy is the same for each player.
D) the payoff from playing the dominant strategy is not the highest payoff possible.
Answer: D
Diff: 1
Topic: Game Theory
13)Collusion is more likely to occur when
A) there is fear of punishment for not colluding.
B) there is a known finite time horizon.
C) there are large gains to be made by cheating on an agreement.
D) the game lasts only one period.
Answer: A
Diff: 1
Topic: Game Theory
Figure 13.3
14)Figure 13.3 shows the payoff matrix for two firms, A and B, selecting an advertising budget. The firms must choose between a high advertising budget and a low advertising budget. Firm A's dominant strategy
A) does not exist.
B) is to do the opposite of firm B.
C) is to select a high advertising budget.
D) is to select a low advertising budget.
Answer: A
Diff: 2
Topic: Game Theory
15)Figure 13.3 shows the payoff matrix for two firms, A and B, selecting an advertising budget. The firms must choose between a high advertising budget and a low advertising budget. Firm B's dominant strategy
A) does not exist.
B) is to copy firm A.
C) is to select a high advertising budget.
D) is to select a low advertising budget.
Answer: C
Diff: 2
Topic: Game Theory
16)Figure 13.3 shows the payoff matrix for two firms, A and B, selecting an advertising budget. The firms must choose between a high advertising budget and a low advertising budget. A Nash equilibrium is that
A) firm A selects a high advertising budget and firm B selects a low advertising budget.
B) firm A selects a low advertising budget and firm B selects a high advertising budget.
C) both firms select a high advertising budget.
D) both firms select a low advertising budget.
Answer: C
Diff: 2
Topic: Game Theory
17)Figure 13.3 shows the payoff matrix for two firms, A and B, selecting an advertising budget. The firms must choose between a high advertising budget and a low advertising budget. A Nash equilibrium
A) occurs when both firms select a high advertising budget.
B) exists at any of the four possible strategy combinations because there is never an incentive to change strategy.
C) is for both firms to choose the low advertising budget because this yields the highest joint profit.
D) does not exist because firm A does not have a dominant strategy.
Answer: A
Diff: 2
Topic: Game Theory
18)A cartel is a group of firms that attempts to
A) maximize joint revenue.
B) maximize joint profit.
C) behave independently.
D) increase consumer surplus.
Answer: B
Diff: 1
Topic: Cooperative Oligopoly Models
19)If a cartel is unable to monitor its members and punish those firms that violate the agreement, then
A) the member firms will each act as price setters.
B) the cartel will prosper in the long run.
C) the market will become a monopoly.
D) the cartel will fail.
Answer: D
Diff: 1
Topic: Cooperative Oligopoly Models
20)In a sense, a cartel is self-destructive because
A) it reduces consumer surplus.
B) it sets price above marginal cost.
C) each cartel member has the incentive to cheat on the cartel.
D) each cartel member earns economic profit.
Answer: C
Diff: 1
Topic: Cooperative Oligopoly Models
21)Which of the following conditions can help prolong the life of a cartel?
A) There are only a few firms in the market and they all belong to the cartel.
B) There are many firms in the market that are not members of the cartel.
C) It is difficult to know what price any cartel member is actually charging.
D) The cartel has no ability to punish members who cheat on the cartel.
Answer: A
Diff: 1
Topic: Cooperative Oligopoly Models
Figure 13.4
22)Figure 13.4 shows the reaction functions for two pizza shops in a small isolated town. The Cournot equilibrium is at point
A) a.
B) b.
C) c.
D) d.
Answer: B
Diff: 1
Topic: Cournot Model
23)Figure 13.4 shows the reaction functions for two pizza shops in a small isolated town. Collusion would result in
A) each firm producing 25 pizzas.
B) each firm producing 40 pizzas.
C) each firm producing 50 pizzas.
D) firm A monopolizing the market by selling 50 pizzas.
Answer: C
Diff: 1
Topic: Cournot Model
24)Figure 13.4 shows the reaction functions for two pizza shops in a small isolated town. The perfect competitive outcome is that
A) each firm produces 40 pizzas.
B) each firm produces 50 pizzas.
C) each firm produces 100 pizzas.
D) each firm produces 200 pizzas.
Answer: C
Diff: 1
Topic: Cournot Model
25)Figure 13.4 shows the reaction functions for two pizza shops in a small isolated town. Firm B producing 100 pizzas and firm A producing 50 pizzas is not a Cournot equilibrium because
A) Cournot duopolists agree to share the market equally.
B) firm B is not on its best-response function.
C) firm A is not on its best-response function.
D) neither firm is on its best-response function.
Answer: B
Diff: 2
Topic: Cournot Model
26)Suppose two Cournot duopolist firms operate at zero marginal cost. The market demand is p = a - bQ. Firm 1's best-response function is
A) q1 = (a - bq2)/2b.
B) q1 = (a - 2bq2)/2b.
C) q1 = a /b.
D) q1 = a /2b.
Answer: A
Diff: 1
Topic: Cournot Model
27)Suppose two Cournot duopolist firms operate at zero marginal cost. The market demand is p = a - bQ. Each firm will produce
A) a/b.
B) a/2b.
C) a/3b.
D) a/4b.
Answer: C
Diff: 1
Topic: Cournot Model
28)In the Cournot model, a firm maximizes profit by selecting
A) its output, assuming that other firms keep their output constant.
B) its price, assuming that other firms keep their price constant.
C) its output, assuming that other firms will retaliate.
D) its price, assuming that other firms will retaliate.
Answer: A
Diff: 0
Topic: Cournot Model
29)In the Cournot model, the output that a firm chooses to produce increases as
A) the total output of other firms increases.
B) the number of firms in the market increases.
C) the number of firms in the market decreases.
D) its marginal cost increases.
Answer: C
Diff: 1
Topic: Cournot Model
30) Suppose a market with a Cournot structure has five firms and a market price
elasticity of demand equal to -2. What is a Cournot firm's Lerner Index?
A).1
B).2
C).5
D)1
Answer: A
Diff: 1
Topic: Cournot Model
31)The Stackelberg model is more appropriate than the Cournot model in situations where
A) there are more than two firms.
B) all firms enter the market simultaneously.
C) one firm makes its output decision before the other.
D) firms will be likely to collude.
Answer: C
Diff: 1
Topic: Stackelberg Model
32)The outcome of the Stackelberg model is
A) a Nash equilibrium.
B) the same as the Cournot outcome.
C) that the follower earns zero profit.
D) that the follower cannot be on its best-response curve.
Answer: A
Diff: 1
Topic: Stackelberg Model
33)Which of the following is a necessary condition for government subsidies to influence a firm to choose an output level as if it were a Stackelberg leader?
A) The subsidy must be announced before the firms choose output levels.
B) The subsidy must be equal to the firm's marginal cost.
C) The subsidy must be equal to the firm's rival's marginal cost.
D) The firm does not have any fixed costs.
Answer: A
Diff: 1
Topic: Stackelberg Model
Figure 13.4
34)Figure 13.4 shows the reaction functions for two pizza shops in a small isolated down. The Stackelberg leader will produce
A) 25 pizzas.
B) 50 pizzas.
C) 66.7 pizzas.
D) 100 pizzas.
Answer: D
Diff: 1
Topic: Stackelberg Model
35)Suppose two duopolists operate at zero marginal cost. The market demand is p = a - bQ. If firm 1 is the Stackelberg leader, what level of output will it choose?
A) q1 = (a - bq2)/2b
B) q1 = (a - 2bq2)/2b
C) q1 = a /b
D) q1 = a /2b
Answer: D
Diff: 2
Topic: Cournot Model
36)Which of the following models results in the highest level of output assuming a fixed number of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Cartel
Answer: B
Diff: 1
Topic: Comparison of Models
37)Which of the following market models results in the highest price assuming a fixed number of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Price is the same in all three markets.
Answer: C
Diff: 1
Topic: Comparison of Models
38)Which of the following market models results in the highest level of consumer surplus assuming a fixed number of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Cartel
Answer: B
Diff: 1
Topic: Comparison of Models
39)Which of the following models results in the greatest deadweight loss assuming a fixed number of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Perfect competition
Answer: C
Diff: 1
Topic: Comparison of Models
40) Which of the following models results in the greatest total profit, assuming a fixed
number of firms with identical costs and a given demand curve?
A)Cournot
B)Stackelberg
C)Monopoly
D)Perfect competition
Answer: C
Diff: 1
Topic: Comparison of Models
41)In the long run, a monopolistically competitive firm
A) earns zero economic profit.
B) produces at minimum average cost.
C) operates at full capacity.
D) All of the above.
Answer: A
Diff: 1
Topic: Monopolistic Competition
42)Monopolistically competitive firms
A) have market power because they can set price above marginal cost.
B) have no market power because they earn zero economic profit.
C) have no market power because of free entry.
D) have no market power because price equals marginal cost.
Answer: A
Diff: 1
Topic: Monopolistic Competition
43)Minimum efficient scale refers to the lowest level of output at which
A) the firm can earn a profit.
B) average cost is minimized.
C) the firm will operate.
D) the average cost curve is downward sloping.
Answer: B
Diff: 1
Topic: Monopolistic Competition
44)The number of firms in a monopolistically competitive market will be smaller if
A) the market demand curve shifts rightward.
B) minimum efficient scale is lower.
C) fixed costs are smaller.
D) fixed costs are larger.
Answer: D
Diff: 1
Topic: Monopolistic Competition
45)The Bertrand model is a more plausible model of firm behavior than the Cournot model
A) when firms set the quantity to be sold.
B) when firms sell a differentiated product.
C) because firms that sell a non-differentiated product typically act as price takers.
D) because the Bertrand model predicts that firms will price at marginal cost.
Answer: B
Diff: 1
Topic: Price Setting
46)The Bertrand model of price setting assumes that a firm chooses its price
A) independently of what price other firms charge.
B) subject to what price rival firms are charging.
C) so that joint profits are maximized.
D) without considering the shape of the demand curve.
Answer: B
Diff: 1
Topic: Price Setting
47)Assuming a homogeneous product, the Bertrand duopoly equilibrium price is
A) the same as the Cournot equilibrium price.
B) less than the Cournot equilibrium price.
C) greater than the Cournot equilibrium price.
D) equal to the monopoly price.
Answer: B
Diff: 1
Topic: Price Setting
48)Assuming a homogeneous product, the Bertrand equilibrium price is
A) independent of the number of firms.
B) independent of the firms' marginal cost.
C) equal to the Cournot equilibrium price.
D) equal to the monopoly price.
Answer: A
Diff: 1
Topic: Price Setting
49)One criticism of the Bertrand pricing model is that
A) the model is implausible when there is product differentiation.
B) when there is an oligopoly with no product differentiation, the model's prediction is inconsistent with reality.
C) the model's predicted price is solely a function of demand conditions.
D) the model's predicted price is dependent on the number of firms.
Answer: B
Diff: 2
Topic: Price Setting
50)In a Bertrand model, graphically, the intersection of all firms' best-response curves determines
A) the Nash equilibrium prices.
B) the dominant strategy for each firm.
C) the degree of product differentiation.
D) the price of the market leader.
Answer: A
Diff: 1
Topic: Price Setting
51)In a Bertrand model, if one firm has a dominant strategy, its best-response function
A) does not exist.
B) is identical to its rival.
C) is a constant.
D) is to respond to its rival's price increase with a price decrease.
Answer: C
Diff: 2
Topic: Price Setting
52)In a Bertrand model, market power is a function of
A) marginal cost.
B) the number of firms.
C) price elasticity of demand.
D) product differentiation.
Answer: D
Diff: 2
Topic: Price Setting
53)In a Bertrand model with identical firms and a non-differentiated product, price will increase in response to
A) an increase in the number of firms.
B) a decrease in the number of firms.
C) an increase in marginal cost.
D) a decrease in marginal cost.
Answer: C
Diff: 2
Topic: Price Setting
54)In a Bertrand model with differentiated products,
A) firms can set price above marginal cost.
B) firms set price at marginal cost.
C) price is independent of marginal cost.
D) firms set price independently of one another.
Answer: A
Diff: 2
Topic: Price Setting
55) Product differentiation allows a firm to charge a higher price because the residual
demand curve facing the firm
A)is more elastic than the residual demand curve without product differentiation.
B)is less elastic than the residual demand curve without product differentiation.
C)is horizontal.
D)shifts to the left.
Answer: B
Diff: 1
Topic: Price Setting
TRUE/FALSE/EXPLAIN QUESTIONS
1)In comparing monopolistic competition to perfect competition, one can conclude that the lack of free entry is the key to having the ability to set price.
Answer: False. Free entry is the key to driving long-run profit to zero. The key to price-setting ability is the downward-sloping demand curve. This can result from having few firms, but is mainly due to product differentiation.
Diff: 1
Topic: Market Structures
2)If neither firm has a dominant strategy, a Nash equilibrium cannot exist.