Chapter 17 Oligopoly Sec01 Multiple Choice

132 ❖ Chapter 17/Oligopoly Sec01 - Oligopoly - Markets with Only a Few Sellers MULTIPLE CHOICE 1. A distinguishing feature of an oligopolistic industry is the tension between a. profit maximization and cost minimization. b. cooperation and self interest. c. producing a small amount of output and charging a price above marginal cost. d. short-run decisions and long-run decisions. ANS: B 2. In studying oligopolistic markets, economists assume that a. there is no conflict or tension between cooperation and self-interest. b. it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly outcome. c. each oligopolist cares only about its own profit. d. strategic decisions do not play a role in such markets. ANS: C 3. The simplest type of oligopoly is a. monopoly. b. duopoly. c. monopolistic competition. d. oligopolistic competition. ANS: B 4. A special kind of imperfectly competitive market that has only two firms is called a. a two-tier competitive structure. b. an incidental monopoly. c. a doublet. d. a duopoly. ANS: D 5. An agreement between two duopolists to function as a monopolist usually breaks down because a. they cannot agree on the price that a monopolist would charge. b. they cannot agree on the output that a monopolist would produce. c. each duopolist wants a larger share of the market in order to capture more profit. d. each duopolist wants to charge a higher price than the monopoly price. ANS: C 6. Which of the following statements is correct? a. If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly. b. Although the logic of self-interest decreases a duopoly’s price below the monopoly price, it does not push the duopolists to reach the competitive price. c. Although the logic of self-interest increases a duopoly’s level of output above the monopoly level, it does not push the duopolists to reach the competitive level. d. All of the above are correct. ANS: D Chapter 17/Oligopoly ❖ 133 7. Suppose that Sonny and Cher are duopolists in the music industry. In January, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By February, each singer is considering breaking the agreement. What would you expect to happen next? a. Sonny and Cher will determine that it is in each singer’s best self interest to maintain the agreement. b. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price will decrease. c. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will decrease, and the new equilibrium price will increase. d. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase. ANS: B 8. As the number of firms in an oligopoly increases, the a. price approaches marginal cost, and the quantity approaches the socially efficient level. b. price and quantity approach the monopoly levels. c. price effect exceeds the output effect. d. individual firms’ profits increase. ANS: A 9. If a certain market were a monopoly, then the monopolist would maximize its profit by producing 1,000 units of output. If, instead, that market were a duopoly, then which of the following outcomes would be most likely if the duopolists successfully collude? a. Each duopolist produces 1,000 units of output. b. Each duopolist produces 600 units of output. c. One duopolist produces 400 units of output and the other produces 600 units of output. d. One duopolist produces 800 units of output and the other produces 400 units of output. ANS: C 134 ❖ Chapter 17/Oligopoly Table 17-1 Imagine a small town in which only two residents, Lisa and Mark, own wells that produce safe drinking water. Each week Lisa and Mark work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Lisa and Mark can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Quantity (in gallons) 0 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 10. Price $120 110 100 90 80 70 60 50 40 30 20 10 0 Total Revenue (and Total Profit) $0 11,000 20,000 27,000 32,000 35,000 36,000 35,000 32,000 27,000 20,000 11,000 0 Refer to Table 17-1. If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, what price will they charge? a. $20 b. $40 c. $60 d. $70 ANS: C 11. Refer to Table 17-1. If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, how many gallons of water will be produced and sold? a. 0 b. 500 c. 600 d. 1,200 ANS: C 12. Refer to Table 17-1. If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, how much profit will each of them earn? a. $0 b. $18,000 c. $32,000 d. $36,000 ANS: B 13. Refer to Table 17-1. If the market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? a. 0 b. 600 c. 900 d. 1,200 ANS: D Chapter 17/Oligopoly ❖ 135 14. Refer to Table 17-1. What is the socially efficient quantity of water? a. 0 gallons b. 600 gallons c. 900 gallons d. 1,200 gallons ANS: D 15. Refer to Table 17-1. If this market for water were perfectly competitive instead of monopolistic, what price would be charged? a. $0 b. $50 c. $60 d. $120 ANS: A 16. Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from operating as a monopoly. What will be the price of water once Lisa and Mark reach a Nash equilibrium? a. $30 b. $40 c. $50 d. $60 ANS: B 17. Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from operating as a monopoly. How many gallons of water will be produced and sold once Lisa and Mark reach a Nash equilibrium? a. 600 b. 700 c. 800 d. 900 ANS: C 136 ❖ Chapter 17/Oligopoly Table 17-2. The table shows the town of Pittsville’s demand schedule for gasoline. For simplicity, assume the town’s gasoline seller(s) incur no costs in selling gasoline. Quantity (in gallons) 0 100 200 300 400 500 600 700 800 900 1,000 18. Price $10 9 8 7 6 5 4 3 2 1 0 Total Revenue (and total profit) $0 900 1,600 2,100 2,400 2,500 2,400 2,100 1,600 900 0 Refer to Table 17-2. If the market for gasoline in Pittsville is perfectly competitive, then the equilibrium price of gasoline is a. $8 and the equilibrium quantity is 200 gallons. b. $5 and the equilibrium quantity is 500 gallons. c. $2 and the equilibrium quantity is 800 gallons. d. $0 and the equilibrium quantity is 1,000 gallons. ANS: D 19. Refer to Table 17-2. If the market for gasoline in Pittsville is a monopoly, then the profit-maximizing monopolist will charge a price of a. $8 and sell 200 gallons. b. $5 and sell 500 gallons. c. $2 and sell 800 gallons. d. $0 and sell 1,000 gallons. ANS: B 20. Refer to Table 17-2. If there are exactly two sellers of gasoline in Pittsville and if they collude, then which of the following outcomes is most likely? a. Each seller will sell 500 gallons and charge a price of $5. b. Each seller will sell 500 gallons and charge a price of $2.50. c. Each seller will sell 350 gallons and charge a price of $3. d. Each seller will sell 250 gallons and charge a price of $5. ANS: D 21. Refer to Table 17-2. If there are exactly three sellers of gasoline in Pittsville and if they collude, then which of the following outcomes is most likely? a. Each seller will sell 166.67 gallons and charge a price of $1.33. b. Each seller will sell 166.67 gallons and charge a price of $5. c. Each seller will sell 200 gallons and charge a price of $4. d. Each seller will sell 233.33 gallons and charge a price of $5. ANS: B Chapter 17/Oligopoly ❖ 137 22. Refer to Table 17-2. Suppose there are exactly two sellers of gasoline in Pittsville: Exxoff and BQ. If Exxoff sells 300 gallons and BQ sells 400 gallons, then a. Exxoff’s profit is $900 and BQ’s profit is $1,200. b. Exxoff’s profit is $2,100 and BQ’s profit is $2,400. c. there is an excess demand for gasoline in Pittsville. d. there is an excess supply of gasoline in Pittsville. ANS: A 23. Refer to Table 17-2. Suppose there are exactly two sellers of gasoline in Pittsville: Exxoff and BQ. Currently, Exxoff sells 300 gallons and BQ sells 400 gallons. Which of the following statements is correct? (Hint: Perform simple interpolation between rows of the chart where necessary.) a. The current situation is a Nash equilibrium. b. The current situation is not a Nash equilibrium, as indicated by the fact that Exxoff’s profit would increase if it increased its output to 400 gallons and BQ kept its output at 400 gallons. c. The current situation is not a Nash equilibrium, as indicated by the fact that BQ’s profit would increase if it decreased its output to 350 gallons and Exxoff kept its output at 300 gallons. d. The current situation is not a Nash equilibrium, as indicated by the fact that both sellers’ profits would increase if they colluded, decided on a total level of output, and agreed to each produce onehalf of that amount. ANS: C 24. Which of the following statements is correct? a. When duopoly firms reach a Nash equilibrium, their combined level of output is the monopoly level of output. b. When oligopoly firms collude, they are behaving as a cartel. c. In an oligopoly, self-interest drives the market to the competitive outcome. d. An oligopoly is an example of monopolistic competition. ANS: B 25. As the number of firms in an oligopoly increases, the magnitude of the a. output effect increases. b. output effect decreases. c. price effect increases. d. price effect decreases. ANS: D 26. As the number of sellers in an oligopoly becomes very large, a. the quantity of output approaches the socially efficient quantity. b. the price approaches marginal cost. c. the price effect is diminished. d. All of the above are correct. ANS: D 27. In markets characterized by oligopoly, a. the oligopolists earn the highest profit when they cooperate and behave like a monopolist. b. collusive agreements will always prevail. c. collective profits are always lower with cartel arrangements than they are without cartel arrangements. d. pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market. ANS: A 138 ❖ Chapter 17/Oligopoly 28. As a group, oligopolists would always be better off if they would act collectively a. as if they were each seeking to maximize their own individual profits. b. in a manner that would prohibit collusive agreements. c. as a single monopolist. d. as a single perfectly competitive firm. ANS: C 29. As a group, oligopolists would always earn the highest profit if they would a. produce the perfectly competitive quantity of output. b. produce more than the perfectly competitive quantity of output. c. charge the same price that a monopolist would charge if the market were a monopoly. d. operate according to their own individual self-interests. ANS: C 30. Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together, a. they are unable to maintain the same degree of monopoly power enjoyed by a monopolist. b. each firm's profit always ends up being zero. c. society is worse off as a result. d. Both a and c are correct. ANS: A Table 17-3. The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero. Quantity 0 3,000 6,000 9,000 12,000 15,000 18,000 31. Price (per year) $180 $150 $120 $ 90 $ 60 $ 30 $ 0 Refer to Table 17-3. If there is only one digital cable TV company in this market, what price would it charge for a premium digital channel subscription to maximize its profit? a. $30 b. $60 c. $90 d. $150 ANS: C 32. Refer to Table 17-3. Assume there are two digital cable TV companies operating in this market. If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their agreement will stipulate that a. each firm will charge a price of $90 and each firm will sell 4,500 subscriptions. b. each firm will charge a price of $90 and each firm will sell 9,000 subscriptions. c. each firm will charge a price of $120 and each firm will sell 3,000 subscriptions. d. each firm will charge a price of $150 and each firm will sell 1,500 subscriptions. ANS: A Chapter 17/Oligopoly ❖ 139 33. Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions. How much profit will each company earn? a. $610,000 b. $550,000 c. $410,000 d. $205,000 ANS: D 34. Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell. How many premium digital channel cable TV subscriptions will be sold altogether when this market reaches a Nash equilibrium? a. 6,000 b. 9,000 c. 12,000 d. 15,000 ANS: C 35. Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell. What price will premium digital channel cable TV subscriptions be sold at when this market reaches a Nash equilibrium? a. $30 b. $60 c. $90 d. $120 ANS: B 36. Refer to Table 17-3. Assume that there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell. How much profit will each firm earn when this market reaches a Nash equilibrium? a. $25,000 b. $90,000 c. $160,000 d. $215,000 ANS: C 140 ❖ Chapter 17/Oligopoly Table 17-4. The information in the table below shows the total demand for high-speed Internet subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $200,000 (per year) and that the marginal cost of providing an additional subscription is always $80. Quantity 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Price (per year) $320 $280 $240 $200 $160 $120 $ 80 $ 40 $0 37. Refer to Table 17-4. Suppose there is only one high-speed Internet service provider in this market and it seeks to maximize its profit. The company will a. sell 6,000 subscriptions and charge a price of $200 for each subscription. b. sell 8,000 subscriptions and charge a price of $160 for each subscription. c. sell 10,000 subscriptions and charge a price of $120 for each subscription. d. sell 12,000 subscriptions and charge a price of $80 for each subscription. ANS: A 38. Refer to Table 17-4. Assume there are two high-speed Internet service providers that operate in this market. If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their agreement will stipulate that a. each firm will charge a price of $120 and each firm will sell 5,000 subscriptions. b. each firm will charge a price of $160 and each firm will sell 4,000 subscriptions. c. each firm will charge a price of $100 and each firm will sell 3,000 subscriptions. d. each firm will charge a price of $200 and each firm will sell 3,000 subscriptions. ANS: D 39. Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers operating in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions. How much profit will each company earn? a. $80,000 b. $120,000 c. $160,000 d. $210,000 ANS: C 40. Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers operating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to sell. How many subscriptions will be sold altogether when this market reaches a Nash equilibrium? a. 6,000 b. 8,000 c. 10,000 d. 12,000 ANS: B Chapter 17/Oligopoly ❖ 141 41. Refer to Table 17-4. Assume there are two high-speed Internet service providers operating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to sell. What price will they charge for a subscription when this market reaches a Nash equilibrium? a. $120 b. $160 c. $200 d. $240 ANS: B 42. Refer to Table 17-4. Assume that there are two profit-maximizing high-speed Internet service providers operating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to sell. How much profit will each firm earn when this market reaches a Nash equilibrium? a. $120,000 b. $150,000 c. $200,000 d. $225,000 ANS: A Table 17-5. Imagine a small town in which only two residents, Bill and Ben, own wells that produce safe drinking water. Each week Bill and Ben work together to decide how many gallons of water to pump, to bring the water to town, and to sell it at whatever price the market will bear. Assume Bill and Ben can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water are shown in the table below. Weekly Quantity (in gallons) 0 10 20 30 40 50 60 70 80 90 100 110 120 43. Price $12 11 10 9 8 7 6 5 4 3 2 1 0 Weekly Total Revenue (and Total Profit) $0 110 200 270 320 350 360 350 320 270 200 110 0 Refer to Table 17-5. Since Bill and Ben operate as a profit-maximizing monopoly in the market for water, what price will they charge for water? a. $2 b. $4 c. $6 d. $7 ANS: C 142 ❖ Chapter 17/Oligopoly 44. Refer to Table 17-5. If the market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? a. 70 b. 90 c. 110 d. 120 ANS: D 45. Refer to Table 17-5. As long as Bill and Ben operate as a profit-maximizing monopoly, what will their combined weekly revenue amount to? a. $200 b. $270 c. $350 d. $360 ANS: D 46. Refer to Table 17-5. The socially efficient level of water supplied to the market would be a. 60 gallons. b. 80 gallons. c. 100 gallons. d. 120 gallons. ANS: D 47. Refer to Table 17-5. Suppose the town enacts new antitrust laws that prohibit Bill and Ben from operating as a monopolist. What will the new price of water be once the Nash equilibrium is reached? a. $3 b. $4 c. $5 d. $6 ANS: B Scenario 17-1. Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume that both countries have entered into an agreement to maintain certain production levels in order to maximize profits. In the world market for oil, the demand curve is downward sloping. 48. Refer to Scenario 17-1. The fact that both countries have colluded to earn higher profit shows their desire to keep their combined level of output a. above the monopoly level. b. below the Nash equilibrium level. c. equal to the Nash equilibrium level. d. above the Nash equilibrium level. ANS: B 49. Refer to Scenario 17-1. As long as the combined level of output is less than the Nash equilibrium level, both Irun and Urun have the individual incentive to a. hold production constant. b. decrease production. c. increase production. d. increase price. ANS: C Chapter 17/Oligopoly ❖ 143 50. Refer to Scenario 17-1. The agreed-upon production level between the two countries will invariably be a. lower than the Nash equilibrium level. b. equal to the Nash equilibrium level. c. equal to the duopoly market equilibrium level. d. higher than the duopoly market equilibrium level. ANS: A 51. Refer to Scenario 17-1. If Irun fails to live up to the production agreement and overproduces, which of the following statements will be true of Urun's condition? a. Urun will invariably be worse off than before the agreement was broken. b. Urun will counter by decreasing its production in order to maintain price stability. c. Urun's profit will be maximized by holding its production constant. d. Urun’s profit will decrease if it follows suit and increases production. ANS: A 52. Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash equilibrium, it a. is always in their best interest to supply more to the market. b. is always in their best interest to supply less to the market. c. is always in their best interest to leave their quantities supplied unchanged. d. may be in their best interest to do any of the above, depending on market conditions. ANS: C 53. When an oligopoly market reaches a Nash equilibrium, a. the market price will be different for each firm. b. the firms will not have behaved as profit maximizers. c. a firm will have chosen its best strategy, given the strategies chosen by other firms in the market. d. a firm will not take into account the strategies of competing firms. ANS: C 54. In a duopoly situation, the logic of self-interest results in a total output level that a. equals the output level that would prevail in a competitive market. b. equals the output level that would prevail in a monopoly. c. exceeds the monopoly level of output, but falls short of the competitive level of output. d. falls short of the monopoly level of output. ANS: C 55. As a group, oligopolists earn the highest profit when they a. achieve a Nash equilibrium. b. produce a total quantity of output that falls short of the Nash-equilibrium total quantity. c. produce a total quantity of output that exceeds the Nash-equilibrium total quantity. d. charge a price that falls short of the Nash-equilibrium price. ANS: B 56. In order to be successful, a cartel must a. find a way to encourage members to produce more than they would otherwise produce. b. agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. c. agree on the total level of production and on the amount produced by each member. d. agree on the prices charged by each member, but they need not agree on amounts produced. ANS: C 144 ❖ Chapter 17/Oligopoly 57. In a particular town, Metrovision and Cableview are the only two providers of cable TV service. Metrovision and Cableview constitute a a. duopoly, whether they collude or not. b. cartel, whether they collude or not. c. Nash industry, whether they collude or not. d. monopolistically competitive market if they charge the same price. ANS: A 58. Which of these situations produces the largest profits for oligopolists? a. The firms reach a Nash equilibrium. b. The firms reach the monopoly outcome. c. The firms reach the competitive outcome. d. The firms produce a quantity of output that lies between the competitive outcome and the monopoly outcome. ANS: B 59. When firms have agreements among themselves on the quantity to produce and the price at which to sell output, we refer to their form of organization as a a. Nash arrangement. b. cartel. c. monopolistically competitive oligopoly. d. perfectly competitive oligopoly. ANS: B 60. The equilibrium quantity in markets characterized by oligopoly is a. higher than in monopoly markets and higher than in perfectly competitive markets. b. higher than in monopoly markets and lower than in perfectly competitive markets. c. lower than in monopoly markets and higher than in perfectly competitive markets. d. lower than in monopoly markets and lower than in perfectly competitive markets. ANS: B quantity 61. The equilibrium price in a market characterized by oligopoly is a. higher than in monopoly markets and higher than in perfectly competitive markets. b. higher than in monopoly markets and lower than in perfectly competitive markets. c. lower than in monopoly markets and higher than in perfectly competitive markets. d. lower than in monopoly markets and lower than in perfectly competitive markets. ANS: C 62. When oligopolistic firms interacting with one another each choose their best strategy given the strategies chosen by other firms in the market, we have a. a cartel. b. a group of oligopolists behaving as a monopoly. c. a Nash equilibrium. d. the perfectly competitive outcome. ANS: C 63. As the number of firms in an oligopoly market a. decreases, the price charged by firms likely decreases. b. decreases, the market approaches the competitive market outcome. c. increases, the market approaches the competitive market outcome. d. increases, the market approaches the monopoly outcome. ANS: C Chapter 17/Oligopoly ❖ 145 64. Assume oligopoly firms are profit maximizers, they do not form a cartel, and they take other firms' production levels as given. Then in equilibrium the output effect a. must dominate the price effect. b. must be smaller than the price effect. c. must balance with the price effect. d. can be larger or smaller than the price effect. ANS: C 65. For cartels, as the number of firms (members of the cartel) increases, a. the monopoly outcome becomes more likely. b. the magnitude of the price effect decreases. c. the more concerned each seller is about its own impact on the market price. d. the easier it becomes to observe members violating their agreements. ANS: B 66. Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time, however, suppose the merging of firms results in the market being served by only three or four firms selling this same product. As a result, we would expect a. an increase in market output and an increase in the price of the product. b. an increase in market output and an decrease in the price of the product. c. a decrease in market output and an increase in the price of the product. d. a decrease in market output and a decrease in the price of the product. ANS: C 67. Cartels are difficult to maintain because a. antitrust laws are difficult to enforce. b. cartel agreements are conducive to monopoly outcomes. c. there is always tension between cooperation and self-interest in a cartel. d. firms pay little attention to the decisions made by other firms. ANS: C 68. There are two types of markets in which firms face some competition yet are still able to have some control over the prices of their products. Those two types of market are a. monopolistic competition and oligopoly. b. duopoly and triopoly. c. perfect competition and monopolistic competition. d. duopoly and imperfect competition. ANS: A 69. A group of firms that act in unison to maximize collective profits is called a a. monopolistically competitive industry. b. monopoly. c. cartel. d. Nash equilibrium market. ANS: C 146 ❖ Chapter 17/Oligopoly 70. An agreement among firms regarding price and/or production levels is called a. an antitrust market. b. a free-trade arrangement. c. collusion. d. a Nash agreement. ANS: C 71. If duopolists individually pursue their own self-interest when deciding how much to produce, the amount they will produce collectively will a. be less than the monopoly quantity. b. be equal to the monopoly quantity. c. be greater than the monopoly quantity. d. Any of the above are possible. ANS: C 72. If duopolists individually pursue their own self-interest when deciding how much to produce, the profitmaximizing price they will charge for their product will be a. less than the monopoly price. b. equal to the perfectly competitive market price. c. greater than the monopoly price. d. possibly less than or greater than the monopoly price. ANS: A 73. To increase their individual profits, members of a cartel have an incentive to a. charge a higher price than the other members of the cartel. b. increase production above the level agreed upon. c. ignore the choices made by the other firms and act as a monopolist. d. charge the same price a monopolist would charge. ANS: B 74. Once a cartel is formed, the market is in effect served by a. a monopoly. b. an oligopoly. c. imperfect competition. d. monopolistic competition. ANS: A 75. A situation in which firms choose their best strategy given the strategies chosen by the other firms in the market is called a. a competitive equilibrium. b. an open-market solution. c. a socially-optimal solution. d. a Nash equilibrium. ANS: D 76. If an oligopolist is part of a cartel that is collectively producing the monopoly level of output, then that oligopolist has the incentive to lower production with the aim of a. lowering prices. b. increasing profits for the group of firms as a whole. c. increasing profits for itself, regardless of the impact on profits for the group of firms as a whole. d. None of the above is correct. ANS: D Chapter 17/Oligopoly ❖ 147 77. When price is above marginal cost, selling one more unit at the current price will increase profit. This concept is known as the a. income effect. b. price effect. c. output effect. d. cartel effect. ANS: C 78. In imperfectly competitive markets, increasing production will decrease the price of all units sold. This concept is known as the a. income effect. b. cost effect. c. output effect. d. price effect. ANS: D 79. In a typical cartel agreement, the cartel maximizes profit when it a. behaves as a monopolist. b. behaves as a duopolist. c. is flexible in enforcing production targets. d. behaves as a perfectly competitive firm. ANS: A 80. An oligopolist will increase production if the output effect is a. less than the price effect. b. equal to the price effect. c. greater than the price effect. d. The oligopolist never has an incentive to increase production. ANS: C 81. As the number of firms in an oligopoly increases, a. each seller becomes more concerned about its impact on the market price. b. the output effect decreases. c. the total quantity of output produced by firms in the market gets closer to the socially efficient quantity. d. the oligopoly has more market power and firms earn a greater profit. ANS: C 82. When an oligopoly grows very large, the a. output effect disappears. b. price effect disappears. c. output effect equals the price effect. d. price of the product greatly exceeds marginal cost. ANS: B 83. As the number of firms in an oligopoly increases, the price approaches a. zero. b. marginal cost. c. infinity. d. the monopoly price. ANS: B 148 ❖ Chapter 17/Oligopoly 84. Like monopolists, oligopolists are aware that an increase in the quantity of output always a. reduces the price of their product. b. reduces their profit. c. reduces their revenue. d. reduces productivity. ANS: A 85. Oligopolies would like to act like a a. duopoly, but self-interest often drives them closer to the perfectly competitive outcome. b. competitive firm, but self-interest often drives them closer to the duopoly outcome. c. monopoly, but self-interest often drives them to charge a higher price than would be charged by a monopoly. d. monopoly, but self-interest often drives them closer to the perfectly competitive outcome. ANS: D 86. Oligopolies can end up looking like competitive markets if the number of firms is a. large and they all cooperate. b. large and they do not cooperate. c. small and they all cooperate. d. small and they do not cooperate. ANS: B 87. The theory of oligopoly provides another reason that free trade can benefit all countries because a. increased competition leads to larger deadweight losses. b. as the number of firms within a given market increases, the price of the good decreases. c. as the number of firms within a given market increases, the profit of each firm increases. d. All of the above are correct. ANS: B 88. Firms do not need to be concerned about striking a balance between the price effect and the output effect when making production decisions in which of the following types of markets? a. oligopoly b. duopoly c. monopoly d. competitive markets ANS: D 89. If nations such as Germany, Japan, and the United States prohibited international trade in automobiles, a likely effect would be that a. the price effect would become a more significant consideration for each firm that makes automobiles. b. the excess of price over marginal cost would become less pronounced in the automobile market. c. all countries would become better off. d. automobile producers in the U.S. would collude to produce a large number of cars. ANS: A 90. The theory of oligopoly provides a reason as to why a. perfect competition is not a useful object of study. b. price is less than marginal cost for many firms. c. all countries can benefit from free trade among nations. d. firms do not want to capture larger shares of their markets. ANS: C Chapter 17/Oligopoly ❖ 149 91. During the 1990s, the members of OPEC operated independently from one another, causing the world market for crude oil to become close to a. a monopoly market. b. an oligopoly market. c. a duopoly market. d. a competitive market. ANS: D 92. Consider the diagram below, which shows the market demand curve for a particular product. Suppose this market is served by two duopolists who each face the marginal cost curve shown in the diagram. The marginal revenue curve that a monopolist would face in this market is also shown. Which of the following statements is true? a. b. c. d. The total output in this market will likely be 2 units when the market is served by a duopoly. The price in this market will likely be $6 when the market is served by a duopoly. The total revenue to each firm will likely be more than $16 when the market is served by a duopoly. The total output in this market will likely be less than 4 units when the market is served by a duopoly. ANS: D 93. The more firms an oligopoly has, a. the more market power the oligopoly has. This results in higher prices and lower quantities of output than an oligopoly with fewer firms would have. b. the more important the price effect is, resulting in the market price being higher than when there are fewer firms in the oligopoly. c. the farther market price will be from marginal cost. d. the more likely the firms will charge a price closer to the perfectly competitive price. ANS: D 94. In an oligopoly, the total output produced in the market is a. higher than the total output that would be produced if the market were a monopoly and higher than the total output that would be produced if the market were perfectly competitive. b. higher than the total output that would be produced if the market were a monopoly but lower than the total output that would be produced if the market were perfectly competitive. c. lower than the total output that would be produced if the market were a monopoly but higher than the total output that would be produced if the market were perfectly competitive. d. lower than the total output that would be produced if the market were a monopoly and lower than the total output that would be produced if the market were perfectly competitive. ANS: B 150 ❖ Chapter 17/Oligopoly Table 17-6. The table shows the demand schedule for a particular product. Quantity 0 1 2 3 4 5 6 7 8 Price 16 14 12 10 8 6 4 2 0 95. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $0? a. $6 b. $8 c. $10 d. $12 ANS: B 96. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $4? a. $6 b. $8 c. $10 d. $12 ANS: C Table 17-7. The table shows the demand schedule for a particular product. Quantity 0 5 10 15 20 25 30 35 40 45 50 97. Price 10 9 8 7 6 5 4 3 2 1 0 Refer to Table 17-7. Suppose the market for this product is served by two duopolists who have formed a cartel and are colluding to set the price and quantity in this market. If the marginal cost to produce this product is constant at $2 per unit, then what price will the cartel set in this market? a. $4 b. $5 c. $6 d. $7 ANS: C Chapter 17/Oligopoly ❖ 151 98. Refer to Table 17-7. Suppose the marginal cost to produce this product is constant at $1 per unit. If this market is served by two duopolists who choose their production levels independently, acting in their own selfinterest, what is the Nash equilibrium production level for each firm? a. 5 units b. 10 units c. 15 units d. 20 units ANS: C 99. Refer to Table 17-7. Suppose that the marginal cost to produce this product is constant at $1 per unit and that the fixed cost of producing this product is $10. If the market is served by two duopolists who each, acting in their own self-interest, choose the Nash equilibrium level of production, how much profit will each firm earn? a. $10 b. $20 c. $35 d. $50 ANS: C Table 17-8. For a certain small town, the table shows the demand schedule for water. Assume the marginal cost of supplying water is constant at $4 per bottle. Price $9 $8 $7 $6 $5 $4 $3 $2 Quantity (bottles) 100 200 300 400 500 600 700 800 100. Refer to Table 17-8. If there were many suppliers of bottled water, what would be the price and quantity? a. The price would be $6 per gallon and the quantity would be 400 gallons. b. The price would be $5 per gallon and the quantity would be 500 gallons. c. The price would be $4 per gallon and the quantity would be 600 gallons. d. The price would be $3 per gallon and the quantity would be 700 gallons. ANS: C 101. Refer to Table 17-8. If there were only one supplier of water, what would be the price and quantity? a. The price would be $7 per gallon and the quantity would be 300 gallons. b. The price would be $6 per gallon and the quantity would be 400 gallons. c. The price would be $5 per gallon and the quantity would be 500 gallons. d. The price would be $4 per gallon and the quantity would be 600 gallons. ANS: A 102. Refer to Table 17-8. If there are two suppliers of water, Mort and Callie, and if they have successfully formed a cartel, then what would be the price and the market quantity? a. The price would be $7 per bottle and the market quantity would be 300 bottles. b. The price would be $6 per bottle and the market quantity would be 400 bottles. c. The price would be $5 per bottle and the market quantity would be 500 bottles. d. The price would be $4 per bottle and the market quantity would be 600 bottles. ANS: A 152 ❖ Chapter 17/Oligopoly 103. Refer to Table 17-8. If there are two suppliers of water, Mort and Callie, and if they have successfully formed a cartel and split the market evenly, then how many bottles will Callie supply? a. 50 b. 100 c. 150 d. 200 ANS: C 104. Refer to Table 17-8. If there are two suppliers of water, Mort and Callie, then what will be their combined level of output when a Nash equilibrium is reached? a. 200 b. 400 c. 600 d. 800 ANS: B 105. Cartels in the United States are a. legal if price is competitively determined. b. legal if all firms in the industry agree to the terms of the cartel. c. legal if all conditions of the cartel are made public. d. illegal. ANS: D 106. Which of the following would be most likely to contribute to the breakdown of a cartel in a natural resource (e.g., bauxite) market? a. high prices b. low price elasticity of demand c. high compatibility of member interests d. unequal member ownership of the natural resource ANS: D 107. An equilibrium in which each firm in an oligopoly maximizes profit, given the actions of its rivals, is called a. a general equilibrium. b. a dominant equilibrium. c. a Nash equilibrium. d. an oligopoly equilibrium. ANS: C 108. An oligopoly would tend to restrict output and drive up price if a. barriers to entering the industry are negligible. b. firms engage in informative advertising. c. firms produce a standardized product. d. firms collude and behave like a monopoly. ANS: D