ECON EXAM STUDY QUSTIONS - Answered
Test Bank: II Topic: Oligopoly
A defining characteristic of an oligopolistic market is that there are
many buyers.
few buyers.
C. few sellers.
D. many sellers.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
The characteristic most closely associated with oligopoly is
A. easy entry into the industry.
B. a few large producers.
product standardization.
no control over price.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
The product in an oligopolistic market
is assumed to be homogeneous.
is always differentiated from one firm to another.
C. may be homogeneous or differentiated.
D. has very many close substitutes.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
The consumer Wi-Fi-service providers' market is best described as a
monopolistic competition.
monopoly.
C. differentiated oligopoly.
D. homogeneous oligopoly.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
In the US market, people often refer to the "Big Three" in autos and the "Big Four" in accounting.These terms suggest that these two industriesare
purely competitive.
monopolistically competitive.
monopolies.
D. oligopolies.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
A unique feature of an oligopolistic industry is
low barriers to entry.
standardized products.
diminishing marginal returns.
D. mutual interdependence.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
Mutual interdependence does not refer to which ofthe following?
A firm must consider how rival firms would respond to its own decisions and actions.
A firm’s profit depends not just on its own decisions and actions but also on those of other firms.
C. Entry by new firms into the industry tends to shrink existing firms’ profits.
D. Competing firms respondto one another’s pricing, production, or marketingdecisions.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
Mergers of firms in an industry tend to
A. transformmonopolistic competitioninto pure competition.
B. transformmonopolistic competition into oligopoly.
reduce the Herfindahl index for the industry.
break up an oligopoly.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
A major distinction between a monopolisticallycompetitive firm and an oligopolistic firm is that
A. one is a price taker and the other is a price maker.
B. a recognized interdependence exists betweenfirms in one industry but not in the other.
one always producesdifferentiated products and the other always produces a homogeneous product.
one necessarily faces a downward-sloping demand curve and the other a horizontal demand curve.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
In which set of market models are there the most significant barriers to entry?
monopolistic competition and pure competition
monopolistic competition and pure monopoly
oligopoly and monopolistic competition
D. oligopoly andpure monopoly
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
Mutual interdependence means that each firmin an oligopoly
A. faces a perfectlyinelastic demand for its product.
B. considers the reactions of its rivals when it determines its pricingpolicy.
depends on the other firms for its inputs.
depends on the other firms for its markets.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
Mutual interdependence means that
A. a firm's behavior is affectedby other firms' actions.
a firm's profits are affected by other firms' entry orexit.
a firm's costs are affected by other firms' costs.
a firm's revenuesare affected by other firms' demand for its product.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
In which market model is there mutual interdependence?
monopolistic competition
pure competition
pure monopoly
D. oligopoly
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
A firm in an oligopoly is similar to a monopoly in that
A. both firms do not face competition from others.
B. both firms could have significant market power and control over price.
both firms face very inelastic demand for their products.
both firms do not need to advertise.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
Which cannot be a characteristic of an oligopolistic industry?
differentiated products
a large number of consumers
significant barriers to entry
D. a perfectly elasticfirm demand curve
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
Which statement about oligopolyis false?
A. Oligopolistic firms recognize their interdependence.
B. Prices in oligopoly are predicted to fluctuate widelyand frequently.
A few firms play an important role in the sale of a product.
One firm's behavior is a function of what its rivals do.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
A high concentration ratio indicates that
the industry is highly profitable.
the industry is highly competitive.
many firms produce most of the output in an industry.
D. few firms producemost of the output in an industry.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
A low concentration ratio means that
there is a low probability of enteringthe industry.
there is a low probability of success in the industry.
C. each firm accountsfor a small market share of theindustry.
D. each firm accountsfor a large market share of the industry.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
The larger the Herfindahl index, the
less the degree of import competition in an industry.
greater the degree of import competition in an industry.
less the degree of market power in an industry.
D. greater the degree of market power in an industry.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
The increased use of plastic bags instead of paper bags in grocerystores and retail shops is an exampleof
overt collusion.
covert collusion.
import competition.
D. interindustry competition.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
Assume that an industry is significantly affected by import competition from foreign suppliers. Taking this factor into account, it would mean that
A. the Herfindahlindex would be significantly higher in that industry because there are more firms in the industry.
B. the industry is less concentrated than suggested by domesticconcentration ratios.
there is a highdegree of interindustry competition.
there is a low degree of interindustrycompetition.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
The Herfindahl index is a measure of
profitability in an industry.
the price level in an industry.
the costs in an industry.
D. market power in an industry.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
You are told that the four-firmconcentration ratio in an industryis 20. Based on this information you can concludethat
each of the top four firms has 20 percentof industry sales.
the four largest firms account for a combined 80 percent of the industry sales.
C. the four largest firms account for 20 percent of industrysales.
D. each of the four largest firms accountsfor 5 percent of industry sales.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
Industry Y is dominatedby five large firms that hold market shares of 20, 20, 25, 25, and 10. The Herfindahlindex for this industryis A. 1,560.
B. 2,150.
C. 2,340.
D. 3,500.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
Industry Y is dominatedby five large firms that hold market shares of 20, 25, 15, 10, and 25 percent.The four-firm concentration ratio for this industry is
70 percent.
80 percent.
C. 85 percent.
D. 90 percent.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
The Herfindahl index for an industry is 2,550. Which of the followingsets of market shares and industry with four firms would produce such an index?
A. 20, 20, 30, and 30
B. 25, 25, 25, and 25
C. 20, 25, 25, and 30
D. 10, 20, 30, and 40
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
Which of the following has not contributed to the development of oligopolies in the U.S. economy?
mergers
patents
economies of scale
D. interindustry competition
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
Interindustry competitionrefers to the fact that
oligopolistic producersestablish a common price for their products.
products are identicalin a purely competitive industry.
firms that sell a product at one stage of production buy materials and parts from other firms at prior stages of production.
D. in some markets, the producers of a certain commoditymight face competition from products of other industries.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
One major problemwith four-firm concentration ratios is that they fail to take into account
A. the localized market for products.
excess capacityin production.
price leadership.
mutual interdependence.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
The four-firm concentration ratio for the nationalindustry does not capture the effects of all of the following, except
localized marketswhen transportation costs are high.
interindustry competition.
import competition when there is world trade.
D. market coverageof the four largestfirms.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
An oligopolistic firm tends to have less control over its own pricing decisions than a firm in
A. pure competition or monopolistic competition.
B. monopolyonly.
pure competition or monopoly.
pure competition only.
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Learning Objective: 14-01 Describethe characteristics of oligopoly.
Test Bank: II Topic: Oligopoly
The study of how people behave and decide in strategic situations is called
A. game theory.
collusion.
market structure.
product differentiation.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
When firms in an industry reachan agreement to fix prices, divide up market share, or otherwise restrict competition, they are practicing the strategy of
interindustry competition.
limit pricing.
price leadership.
D. collusion.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
Game theory, which is used in studyingoligopoly behavior,originated from the study of games such as the following, except
A. poker.
B. solitaire.
chess.
bridge.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
Collusion refers to a situation where rival firms decide to
compete aggressively against each other.
cheat on each other.
C. agree with each other to set prices and output.
D. combine their operations and merge with each other.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
In game theory, each player is assumed to have the following, except
alternative strategies or actions.
alternative outcomes or results.
alternative payoffs or earnings.
D. alternative partners or coplayers.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
In game theory, a "payoff matrix" is a table that shows the following, except
A. the profitsto each firm or player that would result from various strategycombinations.
B. the target payoffs that each firm or player is aiming for in their different strategies.
the interdependence of the firms’ or players’profits, based on their alternative actions.
the alternative results that the firms or players would get, based on their actions and those of others.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
Which one of the following is not illustrated by the so-called Prisoner’s Dilemma?
A. Each player in the game ends up with resultsthat depend on the other player’saction.
B. It does not pay for the playersto collude with each other.
Both players would be better off, if they could only agree on which action to take.
The results for each player in the game are uncertain, if they are not able to communicate.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
In a duopoly, if one firm increases its price, then the other firm can
A. keep its price constant and thus increase its market share.
keep its price constantand thus decrease its market share.
increase its price and thus increase its market share.
decrease its price and thus decrease its market share.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
227.
Answer the question based on the payoff matrix for a duopoly in which the numbers indicatethe profit in millionsof dollars for each firm. If Firm A adopts the low-price strategy, then Firm B would adopt the
A. high-pricestrategy and earn $250.
B. high-pricestrategy and earn $200.
low-price strategyand earn $325.
low-price strategyand earn $175.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
228.
Answer the question based on the payoff matrix for a duopolyin which the numbers indicatethe profit in millionsof dollars for each firm. Assume that firm B adopts a low-price strategy, while firm A maintainsa high-price strategy.Compared to the results from a high-pricestrategy for both firms, firm B will now
lose $75 millionin profit and firm A will gain $50 million in profit.
gain $50 million in profit and firm A will lose $50 million in profit.
C. gain $75 millionin profit and firm A will lose $50 millionin profit.
D. gain $50 millionin profit and firm A will lose $75 millionin profit.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
229.
Answer the question based on the payoff matrix for a duopoly in which the numbers indicate the profit in millions of dollars for each firm. If the two firms colludeto maximize joint profits,the total profits for the two firms will be
$350 million.
$400 million.
$500 million.
D. $525 million.
AACSB: Knowledge Application
Blooms: Understand Difficulty:02Medium
Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
230.
Answer the question based on the payoff matrix for a duopoly in which the numbers indicate the profit in millions of dollars for each firm. If the two firms colludeto maximize joint profits,
there will be an incentivefor Firm A to cheat and earn more if Firm B does not switch strategies.
there will be an incentivefor Firm B to cheat and earn more if Firm A does not switch strategies.
C. there will be no incentive for either Firm A or Firm B to cheat.
D. there will be incentives for both Firm A and Firm B to cheat.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
231.
Answer the question based on the payoff matrix for a duopoly in which the numbers indicate the profit in thousands of dollars for a high-priceor a low-price strategy.If both firms collude to maximize joint profits, the total profits for the two firms will be
A. $1,200,000.
B. $1,250,000.
C. $1,400,000.
D. $1,500,000.
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Blooms: Understand Difficulty:02Medium
Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
232.
Answer the question based on the payoff matrix for a duopoly in which the numbers indicate the profit in thousands of dollars for a high-priceor a low-price strategy.If both firms operate independently and do not collude, the most likely profit is
A. $400,000 for firm X and $400,000 for firm Y.
$725,000 for firm X and $475,000 for firm Y.
$475,000 for firm X and $725,000 for firm Y.
$625,000 for firm X and $625,000 for firm Y.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
Under oligopoly, if one firm in an industry significantly increases advertising expenditures in order to capture a greater market share, it is most likely that other firms in that industry will
A. pursue a strategy to reduce advertising expenditures to maintain profits.
B. decide to increaseadvertising expenditures even if it means a reduction in profits.
make no changes in advertising expenditures becauseadvertising is effectivein the short run, but not the long run.
increase the price of the product to improve profits and then increaseadvertising expenditures.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
One inherent factor that tends to destroycollusion among oligopolists is the
A. incentiveto cheat.
product differentiation.
mutual interdependence.
leadership of the dominant firm.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
Which of the followingis not a reason for there being no single standard model of oligopoly?
A. There is great diversityof situations in oligopolymarkets.
B. The productsof oligopolistic firms cannot be standardized.
Mutual interdependence complicates the analysis of firm behavior and results.
Firms cannot predict what their rivals’ actions and reactions might be.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
Two characteristics of oligopoly pricing that have frequently been observed are that
A. oligopolistic prices tend to be "sticky" or inflexible, and when the firms do change their prices, they tend to do so together.
oligopolistic firms’ prices tend to fluctuate a lot, and these prices tend to move together with each other.
oligopolists tend to practice a lot of price discrimination, and there tends to be a wide variancein oligopoly pricing.
oligopolistic firms’ prices tend to fluctuate a lot, and there tends to be a wide variance in oligopoly pricing.
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Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.
Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview
The kinked-demand model of oligopoly assumes that
A. rivals will ignore price increasesbut will match price cuts.
rivals will ignore price cuts but will match price increases.
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