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Econ 201 Chapter 13: Oligopoly

Terms in this set (43)

A firm in monopolistically competitive market is producing 100 units of output. At this level of production, the firm charges $60 per unit. Its marginal cost is $44 and marginal revenue is $44, and average cost is $35 per unit. In the long run, this would

cause firms to exit the market.

lead this firm to continue to produce at its current level and price.

lead the price for this firm to rise.

cause output by this firm to drop.
cause output by this firm to drop.
If a monopolistically competitive firm earns economic profit in the short run, it will attract new firms in the market and this will

shift each firm's demand curve to the left in the long run.

increase the output produced by each firm in the long run.

shift each firm's supply curve to the right in the long run.

increase the long-run equilibrium price.
shift each firm's demand curve to the left in the long run.
The Organization of Petroleum Exporting Countries (OPEC) that first started taking joint decisions on oil production in the 1970s is _____

a cartel.

an example of a sales maximizer.

an example of a tacit collusion.

a price taker.
a cartel.
Suppose that two drug manufacturers represent the only two producers in the industry and further suppose that the companies can spend a lot of money on research to develop new drug treatment. If only one develops a product, they make very high profits, but if they produce similar drugs, their profits are lower given the high research costs and they split the market for their products. But if they both sell their current products and spend little on research, they can still make good profits. This description sounds like a

prisoner's dilemma.

zero-sum game.

Nash equilibrium.

repeated game.
prisoner's dilemma.
_____ explains why prices in oligopolistic markets change less frequently than competitive market prices.

The law of diminishing marginal utility

The increasing rate of marginal substitution

The sales maximization model

The kinked demand curve model
The kinked demand curve model
If two cable television providers in a local market form a successful cartel, then the output that the two produce in total will

equal the output in a perfectly competitive market.

be greater than the output of this market without the cartel.

be greater than the output of a market with a large number of firms.

equal the output of a monopoly market.
equal the output of a monopoly market.
A market that fits the characteristics of monopolistic competition is

corn farming.

auto manufacturing.

cable television providers.

women's retail clothing.
women's retail clothing.
The long-run equilibrium in monopolistic competition occurs at the point of tangency between _____

the horizontal demand curve and the negatively sloped part of the average cost curve.

the negatively sloped demand curve and the positively sloped part of the average cost curve.

the negatively sloped demand curve and the negatively sloped part of the average cost curve.

the horizontal demand curve and the positively sloped part of the average cost curve.
the negatively sloped demand curve and the negatively sloped part of the average cost curve.
Price leadership where one firm sets the price for the industry to follow is a _____

form of tacit collusion.

feature of monopoly.

form of explicit collusion.

feature of perfect competition.
form of tacit collusion.
Dave's Doughnut Shop operates in a monopolistically competitive market. Dave is currently operating where his average cost per unit is minimized. If this is the case, we would expect Dave to

raise his output and price.

increase output so that cost per unit would fall.

lower his output and Dave would see average costs increase.

continue to produce at the cost minimizing output level.
lower his output and Dave would see average costs increase.
According to the maximin criterion,

a player adopts the strategy that will give him the highest possible payoff if his rival sticks to his chosen strategy.

a player adopts the strategy that will give him the maximum payoff irrespective of the strategy chosen by his rival.

a player seeks the minimum of the maximum losses among the various available strategies.

a player seeks the maximum of the minimum payoffs to the various available strategies.
a player seeks the maximum of the minimum payoffs to the various available strategies.
In game theory, a prisoner's dilemma

always has a dominant strategy.

has the best outcome that is the equilibrium.

does not have a Nash equilibrium.

cannot result in the best outcome for players if the game is played repeatedly.
always has a dominant strategy.
Bob's Big Hawaiian Resort operates regularly with an average vacancy rate of 20% (that is, 80% of the resort's rooms are occupied, on average). Given this information about the excess capacity at this resort, it's possible to conclude that Bob's resort operates in

a highly competitive market.

a monopolistically competitive market.

a duopoly market.

an oligopoly market
a monopolistically competitive market.
One of the similarities between monopolistic competition and perfect competition is that _____

economic profit of the firms in both the market forms is zero in the long run.

the firms in both markets have kinked demand curves.

the firms in both markets have horizontal demand curves.

the firms in both the market forms earn zero economic profit in the short run.
economic profit of the firms in both the market forms is zero in the long run.
If a monopolistically competitive firm's average cost curve is tangent to its demand curve, then

in the long run the firm is in equilibrium.

the firm is minimizing its cost per unit.

new firms will enter the market.

the firm is earning positive economic profits.
in the long run the firm is in equilibrium.
In the long run, a monopolistically competitive firm will eventually charge a price

below the average cost so that new firms do not enter the market.

equal to the average cost, including the opportunity cost of capital.

above the average cost and firms will leave the market.

equal to marginal cost and this will attract new firms into the market.
equal to the average cost, including the opportunity cost of capital.
It is difficult to analyze the behavior of oligopolistic firms as

the decisions made by oligopolistic firms are often interdependent.

the price and output decisions are often changed based on market forecasts.

oligopolistic firms form cartels to control production, sales, and price.

the number of firms is very large and firms frequently enter and exit the industry.
the decisions made by oligopolistic firms are often interdependent.
With the help of game theory we can explain

why cartels break down.

the elasticity of demand curve in perfect competition.

how economic profits become zero in the long run.

the presence of entry barriers in a monopoly.
why cartels break down.
If an agreement is reached by firms that covers the output of the firms and the price that the firms charge, and this output is equal to a monopolist's output, we would characterize this as

a duopoly.

a cartel.

a Nash equilibrium.

a differentiated product market.
a cartel.
In _____, the amount gained by one player is equal to the amount lost by the other player.

a zero-sum game

a positive-sum game

a tacit collusion

prisoners' dilemma
a zero-sum game
If the demand curve faced by an oligopolist is kinked, it implies that

it sets the price in the industry and other firms follow the price.

it tries to sell at a price that is lower than the price of its rival firms, and so undercuts the rival firms continually.

it charges different prices for different groups of consumers to maximize its profits.

it expects rival firms to match its price cuts but not its price increases.
it expects rival firms to match its price cuts but not its price increases.
In _____, each player adopts the strategy that gives the highest possible payoff if the rival firm sticks to its chosen strategy.

Nash equilibrium

a cartel

Pareto equilibrium

monopolistic competition
Nash equilibrium
In an oligopoly,

economic profit earned by firms in the long run is always zero.

each firm takes into account the decisions of rival firms and plans counterstrategies accordingly.

identical products are sold and firms prefer not to spend money on advertisements.

the market demand curve is horizontal and each firm is a price taker.
each firm takes into account the decisions of rival firms and plans counterstrategies accordingly.
A firm in monopolistically competitive market is producing 100 units of output. At this level of production, the firm charges $60 per unit. Its marginal cost is $44 and marginal revenue is $44, and average cost is $35 per unit. Given this information, this firm should

continue producing 100 units of output.

begin an extensive advertising campaign.

decrease output to increase profits.

increase output to increase profits.
continue producing 100 units of output.
A duopoly

is a cartel in which a firm sets the price for all others to follow.

refers to a collusion of firms where firms decide to restrict output and charge high prices to maximize profits.

is a market structure that may serve the public interest better than a monopoly because of the competition between the two firms.

is a market structure where the market is catered by only one firm.
is a market structure that may serve the public interest better than a monopoly because of the competition between the two firms.
Which of the following distinguishes monopolistic competition from perfect competition?

A monopolistically competitive firm faces a negatively sloped demand curve, while a perfectly competitive firm faces a horizontal demand curve.

A monopolistically competitive firm does not earn any economic profit in the long run, while a perfectly competitive firm earns economic profit in the long run.

A monopolistically competitive market does not have any entry barriers, while a perfectly competitive market has legal restrictions that prohibit the entry of new firms.

A monopolistically competitive firm sets its price below the average cost of production, while a perfectly competitive firm sets its price above the average cost of production.
A monopolistically competitive firm faces a negatively sloped demand curve, while a perfectly competitive firm faces a horizontal demand curve.
A monopolistically competitive firm maximizes profit by producing the output level where _____

the demand curve intersects the average cost curve.

the demand curve is tangent to the marginal cost curve.

the marginal revenue equals the average variable cost of production.

the marginal revenue equals the marginal cost of production.
the marginal revenue equals the marginal cost of production.
In the presence of excess capacity, _____

a monopolistically competitive firm produces at the minimum point of the average cost curve.

the demand curve faced by a monopolistically competitive firm is kinked.

if every firm expands its output level, cost per unit can be reduced.

a firm can charge different prices to different groups of consumers for the same product.
if every firm expands its output level, cost per unit can be reduced.
_____ distinguishes monopolistic competition from perfect competition.

Homogeneity of products

Number of sellers in the market

Full and complete information among the economic agents

Freedom of entry and exit in the industry
Homogeneity of products
Suppose that two drug manufacturers represent the only two producers in the industry and further suppose that the companies can spend a lot of money on research to develop new drug treatment. If only one develops a product, they make very high profits, but if they produce similar drugs, their profits are lower given the high research costs and they split the market for their products. But if they both sell their current products and spend little on research, they can still make good profits. The best outcome that they could achieve would be for the two firms to

engage in extensive research and development.

adopt a contestable market strategy.

form a cartel.

ignore the other firm's actions.
form a cartel.
An oligopoly is a market structure
dominated by two sellers one of

which is a price taker.

with many sellers and high barriers to entry of new firms.

with many sellers, who sell homogeneous products.

dominated by a few sellers, who are large enough to influence the market price.
dominated by a few sellers, who are large enough to influence the market price.
Frequent new-product introductions, free samples, and aggressive advertising are usually features of _____

oligopoly.

monopolistic competition.

perfect competition.

monopoly.
oligopoly.
Which of the following is not a similarity between perfect competition and monopolistic competition?

Homogeneity of products

Perfect information about available products and prices

A large number of buyers and sellers

Absence of entry barriers
Homogeneity of products
A profit-maximizing, monopolistically competitive hair salon washes and cuts hair for 70 customers per day, and its total costs are $800 per day and currently makes an economic profit of $600. In the long run, everything else equal, the

salon will charge more than $20 per client.

salon will cut and wash hair for less than 70 customers per day.

salon will cut and wash more than 70 customers per day.

salon will need to hire new hairstylists to wash and cut the hair for more clients.
salon will cut and wash hair for less than 70 customers per day.
A dominant strategy is

an outcome where all players obtain the best possible outcome.

another term used for a Nash equilibrium.

is the strategy choice a player would make regardless of the actions of other players.

exists for all games.
is the strategy choice a player would make regardless of the actions of other players.
A perfectly contestable market is one where

there is positive economic profit in the long run.

firms charge very high prices to maximize their sales revenues.

entry and exit of firms is costless and unimpeded.

firms have excess capacity.
entry and exit of firms is costless and unimpeded.
A feature of a cartel is that

each member is tempted to offer secret discounts to increase their market share.

it faces a perfectly elastic demand curve.

one firm sets the price for the other members of the cartel to follow.

each firm tries to maximize its payoffs irrespective of the strategy chosen by the other members of the cartel.
each member is tempted to offer secret discounts to increase their market share.
Which of the following is a characteristic of monopolistic competition?

A single firm selling a product for which there are no close substitutes

A single firm selling several products

Many firms selling the same product

Many firms selling slightly differentiated products
Many firms selling slightly differentiated products
A similarity between perfect competition, monopoly, and monopolistic competition is that

long-run economic profits are positive.

firms have freedom to enter and exit the market in the long run.

long-run economic profits are zero.

firms maximize their profits where MR equals MC.
firms maximize their profits where MR equals MC.
Profit-maximizing firms in monopolistically competitive markets, in the short run,

produce where MR > MC.

encounter entry barriers.

can earn economic profits.

face a horizontal demand curve.
can earn economic profits.
_____ distinguishes a monopolistically competitive market from a monopoly market.

Slope of the demand curve

Short-run economic profits

Ease of entry

Profit-maximizing condition
Ease of entry
Each firm in an oligopoly is concerned only with its own profit, instead of the profits for the entire industry, and this implies that

it makes society better off, since output is higher and prices are lower than that if the firms cooperate.

total profits are below that which would be true when firms cooperated.

cooperating is harder to accomplish successfully.

all of these responses are true.
all of these responses are true.
Refer to the following graphs. _____ shows the long-run equilibrium in monopolistic competition.

Graph 1

Graph 2

Graph 3

Graph 4
Graph 3
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