Microeconomics: Monopoly, Price Discrimination, Game Theory, Oligopoly, Monopolistic Competition

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Microeconomic terms related to monopoly, price discrimination, game theory, oligopoly, and monopolistic competition

Sticky prices

Prices that are resistant to change.

Monopolistic competition

A market structure with many producers selling products that are not identical but are close substitutes and with no barriers to entry.

antitrust

Government intervention to alter market structure or prevent abuse of market power.

barriers to entry

Obstacles such as patents that make it difficult or impossible for would-be producers to enter a particular market.

cartel

A group of firms with an explicit, formal agreement to fix prices and output shares in a particular market.

concentration ratio

The proportion of total industry output produced by the largest firms (usually the four largest).

contestable market

An imperfectly competitive industry subject to potential entry if prices or profits increase.

game theory

The study of decision making in situations where strategic interaction (moves and countermoves) occurs between rivals

Herfindahl-Hirshman Index (HHI)

Measure of industry concentration that accounts for number of firms and size of each.

market failure

An imperfection in the market mechanism that prevents optimal outcomes

market share

The percentage of total market output produced by a single firm.

market structure

The number and relative size of firms in an industry.

oligopolist

One of the dominant firms in an oligopoly.

oligopoly

A market in which a few firms produce all or most of the market supply of a particular good or service.

payoff matrix

A table showing the risks and rewards of alternative decision options.

predatory pricing

Temporary price reductions designed to alter market shares or drive out competition.

price-fixing

Explicit agreements among producers regarding the price(s) at which a good is to be sold.

price leadership

An oligopolistic pricing pattern that allows one firm to establish the (market) price for all firms in the industry.

product differentiation

Features that make one product appear different from competing products in the same market.

1. In which of the following market structures does a firm produce a unique product for which there are no close substitutes?

monopoly

2. In which of the following market structures are entry barriers the highest?

monopoly

3. There are many wheat farmers, each of whom produces the same product. The wheat market can best be classified as:

Perfect competition

4. Which of the following market structures is characterized by many firms?

Monopolistic competition.

5. Which market structure is characterized by a few interdependent firms?

Oligopoly.

6. The only market structure in which there is significant interdependence among firms with regard to their pricing and output decisions is:

`Oligopoly.

7. The number of firms in an oligopoly must be:

Small enough so that one firm's decisions have a significant impact on the decisions of the other firms in the industry.

8. Which of the following may characterize an oligopoly?

A) A few firms. B) High barriers to entry. C) Significant market power

9. It is most difficult for new firms to enter into .

An oligopolistic market.

10. The soft drink market is dominated by Coke, Pepsi, and very few other firms. The firms often start price wars. The market can best be classified as:

Oligopoly

11. Which of the following is a determinant of market power?

A) Number of producers. B) Barriers to entry. C) Availability of substitutes.

13. The correct ranking of degree of market power (from highest to lowest) is:

Monopoly, oligopoly, monopolistic competition, perfect competition.

14. The correct ranking of barriers to entry (from highest to lowest) in the market is:

A) Monopoly, oligopoly, monopolistic competition, perfect competition.

15. A similarity of an oligopoly and a monopoly is:

The existence of market power.

16. If an oligopoly market is contestable and new firms enter, the:

A) Market power of the former oligopolists will be reduced.;

17. A contestable market is:

B) An imperfectly competitive situation that is subject to entry.

19. The measure of market power found by adding together the market shares of the largest four firms is:

The concentration ratio.

20. Which of the following is the best indication of high market power?

A concentration ratio of 90 percent.

21. Which of the following is the best indication of high market power?

A small firm with a market share of 80 percent.

22. While there are many newspapers in the U.S., each city tends to have only one or two. If newspapers are generally local markets, then newspapers are characterized by a:

Low national concentration and a high HHI at the local level

23. Concentration ratios tend to overstate the power of some corporations to influence economic outcomes because they measure output:

Only for domestic production, when the true market boundaries are international for some markets.

24. A nationwide concentration ratio is likely to understate market power when:

The true markets are local and small.

25. Which of the following industries is likely to have the highest concentration ratio?

B) Video game systems.

26. Which of the following industries has the highest concentration ratio?

Soft drinks.

The market share of a monopolist is:

100 percent.

28. Market share can be computed by dividing:

The amount sold by a single firm by the total sold in the market.

29. Suppose there are only three firms in a market. The largest firm has sales of $500 million, the second-largest has sales of $200 million, and the smallest has sales of $100 million. The market share of the second-largest firm is:

25 percent

30. Suppose the larger firm of a duopoly has sales of $800 million and the smaller firm has sales of $200 million. The market share of the larger firm is:

80 percent

31. The danger of experimenting with pricing for an oligopoly is:

A) Retaliation. B) The uncertainty of competitor response. C) Price wars.

32. Which of the following may characterize oligopolistic behavior?

A) Price leadership. B) Collusion. C) Retaliation.

33. Which of the following is evidence of the interdependence which characterizes the relationship among oligopolists?

A) Retaliation. B) Price wars. C) Gamesmanship.

34. When a business advertises that its product has unique features that make it superior to other similar products, it is engaging in:

Product differentiation

35. Product differentiation is:

Involves advertising unique product features.

36. The kinked-demand curve indicates:

Why oligopoly prices might be sticky

37. The kinked-demand curve explains the observation that in oligopoly markets:

Prices may not change even in the face of cost increases.

38. Which of the following is true about the kink in the demand curve?

It occurs at the same rate of output as the vertical segment in the marginal revenue curve. ;
It leads to an explanation of sticky prices.
It is the result of the difference in rival responses to price increases and reductions.

39. The kinked-demand curve explains:

The consequences of the interdependent behavior of oligopolists

41. Which of the following types of pricing by rivals is consistent with a kinked oligopoly demand curve?

Matching price decreases only

42. If a firm is producing at the kink in its demand curve and it decides to increase its price, according to the kinked-demand model:

It will lose market share to the firms that do not follow the price increase.

43. If a firm is producing at the kink in its demand curve and it decides to decrease its price, according to the kinked-demand model:

Its market share will not be affected.

44. A kinked-demand curve indicates that rival oligopolists match all:

Price reductions.

45. What is the most likely response by rivals when an oligopolist cuts its price to increase its sales?

Cut their prices.

46. If an oligopolist is going to change its price or output, its initial concern is:

The response of its competitors.

47. If an oligopolist is going to change its price or output, its initial concern is:

Gamesmanship practiced by its competitors.

48. Game theory is:

The study of how decisions are made when interdependence exists between firms.

49. The study of decision making in situations where strategic interaction between rivals occurs is known as:

game theory

50. The study of how decisions are made when strategic interaction between firms exists is known as:

game theory

51. Oligopolists have a mutual interest in coordinating production decisions in order to maximize joint:

profits

52. The goal of an oligopoly is to maximize:

Market share to achieve long-run economic profit.

53. If a market changes from oligopoly to perfect competition, then as a result:

Output should increase in the long run

54. Oligopolists will maximize total profits for all of the firms in the market at the rate of output where:

MR = MC for the market.

55. Which of the following is not true about coordinating oligopolies?

Each coordinating firm will produce the output where the firm's MR = the firm's MC.

56. If one firm in an oligopoly market increases its advertising expenditures in an effort to increase market share, the most likely response by its competitors would be to:

Keep the price of their products the same but increase advertising expenditures even if it means reducing profits.

57. In oligopoly markets sticky prices are the result of:

The uncertainty of competitor responses to price changes.

58. As long as the marginal cost curve continues to intersect the gap in the marginal revenue curve for a kinked-demand curve, the oligopolist will:

Maintain both production rates and prices.

61. A gap in the marginal revenue curve results from:

A kinked demand curve

62. The best explanation of why there is a gap in the oligopolist's marginal revenue curve according to the kinked-demand model is that the gap:

Reflects the dramatic difference in the response of the competition depending on whether the existing price is increased or decreased.

63. If the marginal cost curve shifts but remains in the gap in the marginal revenue curve, the result will be:

No change in price or output.

65. Suppose costs for all oligopolists in an industry increase to such an extent that the marginal cost curve shifts out of the gap in the marginal revenue curve. Which of the following is the most probable response of oligopolists?

One of the oligopolists would raise prices and the other firms would follow.

66. One reason why prices tend to be less flexible in oligopoly markets than in other market structures is because:

According to the kinked-demand model, a firm will tend to become worse off if it increases or decreases its prices.

68. In an effort to maximize profits, oligopolists will participate in:

Price leadership. B) Price fixing. C) Cartels.

69. The pricing strategy in which there is an explicit agreement among producers regarding price is called:

Price fixing

71. When oligopolists coordinate price, the market demand curve will be:

Strongly inelastic like a monopolist's.

72. Oligopolists have an incentive to coordinate price because with coordination:

Each firm faces a relatively inelastic demand for its product.

73. Price leadership is a method by which oligopolies can:

Increase prices without explicit price fixing

74. Price leadership:

Helps achieve monopoly profit for the market.

75. Price leadership:

Permits oligopolistic firms in a given market to coordinate market-wide price changes.

76. The pricing strategy in which one firm is allowed to establish the market price for all firms in the market is called:

Price leadership

77. The pricing strategy in which one firm is allowed by its rivals to establish the market price for all firms in the market is called:

Price leadership

78. Open and explicit agreements concerning pricing and output shares transform an oligopoly into a:

Cartel

79. Temporary price reductions intended to drive out competition are referred to as:

Predatory pricing

80. Which of the following may characterize oligopolistic behavior?

A) Price leadership. B) Price fixing. C) Predatory pricing

81. Which of the following functions as a barrier to entry into an oligopoly market?

A) Patents. B) The expense involved in nonprice competition. C) Control of distribution outlets.

83. For an oligopoly, above-normal profits cannot be maintained in the long run unless:

Barriers to entry exist

84. In the long run, an oligopolist is most likely to:

Experience economic profits because of barriers to entry.

85. The most common form of nonprice competition is:

Advertising

86. An example of nonprice competition in the automobile market is:

Advertising; Availability of service on weekends; Providing financing for the purchase of an automobile.

87. How might an oligopolist increase total revenue without changing price?

Through nonprice competition.

88. Market power leads to market failure when it results in:

Decreased market outpuT; Increased market prices; Long lasting, above normal economic profits.

89. Collusion is undesirable and illegal because:

Resources are misallocated and suboptimal outputs are produced.

Oligopolistic behavior includes:

Tacit collusion

Which of the following are problems associated with pursuing anti-trust policy based on the behavior of firms rather than the structure of a market?

A) It is more expensive to investigate behavior rather than structure.
B) It is more difficult to prove anti-competitive behavior.
C) The general absence of public awareness and interest in the problem of collusion.

Which of the following may be a legitimate objection to pursuing an anti-trust policy based on structure rather than behavior?

A) A firm may dominate a market because it is the most efficient producer.
B) A firm may dominate a market because it provides the best product.
C) Industry dominance is not likely to last forever because of the unrelenting quest for profits by both foreign and domestic firms.

The Herfindahl-Hirshman Index:

A) Is a measure of industry concentration.
B) Takes into account the number of firms and size of each.
C) Is used to identify cases worthy of antitrust concern.

The Herfindahl-Hirshman Index is:

The sum of the squared market shares of the firms in the market.

The Herfindahl-Hirshman Index is:

Used to identify cases worthy of antitrust concern.

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