Questions:
1. If the four-firm concentration ratio of an industry is 75%, what does it mean?
2. Industry A is composed of five large firms and 100 small firms. The market shares of the five largest firms are, respectively, 30, 25, 20, 15, and 10. The 100 small firms together have the remaining market share. Calculate the Herfindahl-Hirshman index and determine what degree of concentration it exhibits. Would it be considered an oligopoly?
3. Explain how payoff matrices used in Game Theory illustrate mutual interdependence among firms in oligopolies. How can they be used to predict likely outcomes?
4. Explain, using the prisoners' dilemma analysis, why cooperation can be mutually beneficial, but if conditions prevent cooperation or collusion from happening, the outcome is worse for both parties.
5. What is the basis of the kinked-demand model? Explain the reason for the gap in the oligopolist's marginal-revenue curve. How does this model explain price rigidity in oligopoly?
6. Why is advertising prevalent in many oligopolies, especially when industry demand is inelastic? Illustrate your answer by assuming that with advertising, a firm's demand curve has price elasticity of -1.5 and without advertising, it is -2. If MC is $10, what is the difference in the profit-maximizing price?
7. When participants in a game take actions that are consistent with Nash equilibrium,
a. no single participant has an incentive to change its action.
b. each participant has chosen the best action possible, given what the others have chosen.
c. no other set of actions could make ALL participants better off.
d. both a and b.
8. If significant economies of scale exist in an industry, then
a. a firm that is large is able to produce at a lower unit cost than can a small firm.
b. a firm that is large will have to charge a higher price than will a small firm.
c. entry to that industry will be easy.
d. firms must differentiate their products to earn economic profits.
9. A(n) ____ is characterized by a relatively small number of firms controlling most of the sales or production in an industry.
a. monopoly
b. syndicate
c. cooperative
d. oligopoly
10. In game theory, a dominant strategy is defined as
a. a strategy used by a large firm to compete against smaller firms.
b. a strategy followed by the price leader.
c. a strategy involving a high risk but also a high return.
d. a strategy that leads to the best outcome no matter what a rival does.
11. In markets characterized by oligopoly
a. expectations on how rivals will respond are important considerations when a firm decides to change the price it charges its customers
b. no firm controls more than a 10% share of the market
c. products or services may be branded or unbranded
d. both a and c
12. The largest problem faced in cartel pricing agreements, such as OPEC, is
a. detecting violations of quota barriers by cartel participants.
b. arriving at a profit-maximizing price.
c. attracting participants in the cartel.
d. none of the above.
13. If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical.
a. average total cost
b. average profit
c. marginal profit
d. marginal cost
14. Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include
a. number and size distribution of sellers.
b. size and frequency of orders.
c. extent of product heterogeneity.
d. all of the above.
15. The kinked demand curve model was developed to help explain
a. fluctuations of prices in pure competition.
b. rigidities observed in prices in oligopolistic industries.
c. fluctuations observed in prices in oligopolistic industries.
d. none of the above.
16. Barriers to entry in oligopolies may arise from
a. diseconomies of scale.
b. diminishing returns.
c. economies of scale.
d. patent expirations.
17. Mutual interdependence, a characteristic of oligopoly, arises because
a. the products of firms in the industry are homogeneous.
b. the products of firms in the industry are differentiated.
c. a small number of firms control a large proportion of industry output or sales.
d. the demand curves of firms in the industry are kinked at the prevailing price.
18. The profits of a firm in an oligopoly are interdependent with those of other firms in the industry because
a. there are few firms in the market, so the actions of each can affect the demand for the other firms' profits.
b. the product is differentiated.
c. industry sales are large.
d. all of the above.
19. Which of the following statements is true about oligopolies?
a. A firm must lower price in order to sell more output.
b. Each firm faces a demand curve that depends on how the firm's rivals behave.
c. A few firms account for a large portion of industry sales.
d. All of the above
20. Under dominant firm price leadership
a. the follower firms will set their own prices rather than follow the price it sets.
b. the dominant firm accounts for the supply curve of follower firms when it determines its profit maximizing price.
c. the follower firms are restricted in the amount they can supply.
d. the dominant firm can ignore the presence of follower firms in the market.
21. The household appliance, automobile, and automobile tire industries are examples of
a. homogeneous oligopoly.
b. pure oligopoly.
c. pure monopoly.
d. differentiated oligopoly.