Question 1

Which of the following statements is TRUE about contestable markets?

Accepted Answer

A) There are significant barriers to entry. 
B) Firms earn large economic profits. 
C) Each firm faces a perfectly elastic demand. 
D) There are few firms in the industry. 
E) The Herfindahl-Hirschman Index is close to zero. 
A) There are significant barriers to entry. 
B) Firms earn large economic profits. 
C) Each firm faces a perfectly elastic demand. 
D) There are few firms in the industry. 
E) The Herfindahl-Hirschman Index is close to zero.

Question 2

Suppose that industry A consists of four firms who collectively control 96 percent of total sales in the market. We can conclude that industry A is

Accepted Answer

A) perfectly competitive. 
B) a duopoly. 
C) monopolistically competitive. 
D) an oligopoly. 
E) a monopoly. 
A) perfectly competitive. 
B) a duopoly. 
C) monopolistically competitive. 
D) an oligopoly. 
E) a monopoly.

Question 3

Which is not a characteristic of oligopoly?

Accepted Answer

A) Each firm faces a downward-sloping demand curve. 
B) Firms are profit-maximizers. 
C) The sales of one firm will not have a significant effect on other firms. 
D) There is more than one firm in the industry. 
E) Firms set prices. 
A) Each firm faces a downward-sloping demand curve. 
B) Firms are profit-maximizers. 
C) The sales of one firm will not have a significant effect on other firms. 
D) There is more than one firm in the industry. 
E) Firms set prices.

Question 4

Use the information below to answer the following question.
Fact 15.4.1
Apple conspired with five publishers to undercut Amazon's 90 percent share of the e-book market, which caused e-book prices to rise to $12.99 or $14.99 from the $9.99 that Amazon charged.
-Refer to Fact 15.4.1. This conspiracy to raise prices violates the anti-combine law because

Accepted Answer

A) Apple is merging with the five publishers. 
B) Apple is telling the publishers the price at which they must sell e-books. 
C) Apple is refusing to deal with Amazon. 
D) it substantially lessens competition in the e-book market. 
E) it is creating a monopoly. 
A) Apple is merging with the five publishers. 
B) Apple is telling the publishers the price at which they must sell e-books. 
C) Apple is refusing to deal with Amazon. 
D) it substantially lessens competition in the e-book market. 
E) it is creating a monopoly.

Question 5

A duopoly is

Accepted Answer

A) a market where three dominant firms collude to decide the profit-maximizing price. 
B) a market where two firms compete for profit and market share. 
C) the same as a monopoly. 
D) not an oligopoly. 
E) a market with two distinct products. 
A) a market where three dominant firms collude to decide the profit-maximizing price. 
B) a market where two firms compete for profit and market share. 
C) the same as a monopoly. 
D) not an oligopoly. 
E) a market with two distinct products.

Question 6

Use the table below to answer the following questions.
Table 15.2.1
  
-Refer to Table 15.2.1. This table includes the sentences that Bob and Joe will receive if convicted. They have been apprehended by the police under the suspicion of committing armed robbery. The two are immediately separated and questioned about the case. Which one of the following observations is correct?

Accepted Answer

A) If Joe confesses, Bob would be better off not confessing. 
B) If Bob confesses, Joe would be better off confessing. 
C) The outcome of the game, assuming Joe and Bob cannot collude, is they will both go free. 
D) If Joe does not confess, Bob would be better off confessing. 
E) The outcome of the game, assuming Joe and Bob cannot collude, is they will both confess. 
A) If Joe confesses, Bob would be better off not confessing. 
B) If Bob confesses, Joe would be better off confessing. 
C) The outcome of the game, assuming Joe and Bob cannot collude, is they will both go free. 
D) If Joe does not confess, Bob would be better off confessing. 
E) The outcome of the game, assuming Joe and Bob cannot collude, is they will both confess.

Question 7

Use the figure below to answer the following question.
   
Figure 15.1.1
In the figure, D is the demand curve for taxi rides in a town, and ATC is the average total cost curve of a taxi company.
-Refer to Figure 15.1.1. In the scenario above, the market is

Accepted Answer

A) a natural duopoly. 
B) a natural oligopoly with three firms. 
C) a natural monopoly. 
D) monopolistically competitive. 
E) perfectly competitive. 
A) a natural duopoly. 
B) a natural oligopoly with three firms. 
C) a natural monopoly. 
D) monopolistically competitive. 
E) perfectly competitive.

Question 8

Table 15.2.10
  
-Refer to Table 15.2.10. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The equilibrium ________ a dominant strategy equilibrium because the strategy in this game is for a firm ________.

Accepted Answer

A) is; to comply regardless of the other firm's choice 
B) is not; to comply when the other firm cheats and to cheat when the other firm complies 
C) is; to cheat regardless of the other firm's choice 
D) is not; to comply when the other firm complies and to cheat when the other firm cheats 
E) is; to comply when the other firm cheats and to cheat when the other firm complies 
A) is; to comply regardless of the other firm's choice 
B) is not; to comply when the other firm cheats and to cheat when the other firm complies 
C) is; to cheat regardless of the other firm's choice 
D) is not; to comply when the other firm complies and to cheat when the other firm cheats 
E) is; to comply when the other firm cheats and to cheat when the other firm complies

Question 9

In a contestable market the Herfindahl-Hirschman Index is ________ and the market behaves as if it is ________.

Accepted Answer

A) low; perfectly competitive 
B) low; a monopoly 
C) high; perfectly competitive 
D) high; a monopoly 
E) zero; perfectly competitive 
A) low; perfectly competitive 
B) low; a monopoly 
C) high; perfectly competitive 
D) high; a monopoly 
E) zero; perfectly competitive

Question 10

Use the information below to answer the following questions.
Fact 15.1.1 An Energy Drink with a Monster of a Stock
The $5.7 billion energy-drink category, in which Monster holds the No. 2 position behind industry leader Red Bull, has slowed down as copycat brands jostle for shelf space. Over the past five years Red Bull's market share in dollar terms has gone from 91 percent to well under 50 percent and much of that loss has been Monster's gain.
-Refer to Fact 15.1.1. During the past few years, the energy-drink market has changed from ________ to ________.

Accepted Answer

A) oligopoly; perfectly competitive 
B) monopolistically competitive; perfectly competitive 
C) oligopoly; monopolistically competitive 
D) near monopoly; oligopoly 
E) near monopoly; perfectly competitive 
A) oligopoly; perfectly competitive 
B) monopolistically competitive; perfectly competitive 
C) oligopoly; monopolistically competitive 
D) near monopoly; oligopoly 
E) near monopoly; perfectly competitive

Question 11

Prisoners' dilemma describes a case where

Accepted Answer

A) collusion of the participants leads to the best solution from their point of view. 
B) rivalry among a large number of rivals leads to lower overall profit. 
C) one prisoner has no chance to be acquitted since there is no other prisoner to support his testimony. 
D) a prisoner has no incentive to confess to his crime, and stands a greater chance of not going to prison. 
E) rivalry of the participants leads to the worst solution from their point of view. 
A) collusion of the participants leads to the best solution from their point of view. 
B) rivalry among a large number of rivals leads to lower overall profit. 
C) one prisoner has no chance to be acquitted since there is no other prisoner to support his testimony. 
D) a prisoner has no incentive to confess to his crime, and stands a greater chance of not going to prison. 
E) rivalry of the participants leads to the worst solution from their point of view.

Question 12

If the efficient scale of production only allows three firms to supply a market, the market is a

Accepted Answer

A) three-firm monopoly. 
B) cost-based oligopoly. 
C) natural oligopoly. 
D) monopolistic competition. 
E) competitive monopoly. 
A) three-firm monopoly. 
B) cost-based oligopoly. 
C) natural oligopoly. 
D) monopolistic competition. 
E) competitive monopoly.

Question 13

Table 15.2.6
  
-Refer to Table 15.2.6. Firms A and B can conduct research and development (R&D)or not conduct it. R&D is costly but can increase the quality of the product and increase sales. The payoff matrix is the economic profits of the two firms and is given above, where the numbers are millions of dollars. A's best strategy is to

Accepted Answer

A) conduct R&D regardless of what B does. 
B) not conduct R&D regardless of what B does. 
C) conduct R&D only if B conducts R&D. 
D) conduct R&D only if B does not conduct R&D. 
E) not conduct R&D only if B does not conduct R&D. 
A) conduct R&D regardless of what B does. 
B) not conduct R&D regardless of what B does. 
C) conduct R&D only if B conducts R&D. 
D) conduct R&D only if B does not conduct R&D. 
E) not conduct R&D only if B does not conduct R&D.

Question 14

Caven and John have been arrested by the police, who have evidence that will convict them of robbing a bank. If convicted, each will receive a sentence of 6 years for the robbery. During questioning, the police suspect that Caven and John are responsible for a series of bank robberies. If both confess to the series, each will receive 12 years in jail. If only one confesses, he will receive 4 years and the one who does not confess will receive 14 years. What is the equilibrium for this game?

Accepted Answer

A) Both deny. 
B) Caven confesses and John denies. 
C) John confesses and Caven denies. 
D) Both confess. 
E) Both serve 8 years in jail. 
A) Both deny. 
B) Caven confesses and John denies. 
C) John confesses and Caven denies. 
D) Both confess. 
E) Both serve 8 years in jail.

Question 15

The firms Trick and Gear form a cartel to collude to maximize profit. If this game is nonrepeated, the Nash equilibrium is

Accepted Answer

A) both firms cheat on the agreement. 
B) both firms comply with the agreement. 
C) Trick cheats, while Gear complies with the agreement. 
D) Gear cheats, while Trick complies with the agreement. 
E) unknown. 
A) both firms cheat on the agreement. 
B) both firms comply with the agreement. 
C) Trick cheats, while Gear complies with the agreement. 
D) Gear cheats, while Trick complies with the agreement. 
E) unknown.

Question 16

There exists an incentive to cheat on a collusive agreement as long as

Accepted Answer

A) price equals marginal cost. 
B) price equals marginal revenue. 
C) price exceeds marginal cost. 
D) price is above minimum average total cost. 
E) the market is perfectly competitive. 
A) price equals marginal cost. 
B) price equals marginal revenue. 
C) price exceeds marginal cost. 
D) price is above minimum average total cost. 
E) the market is perfectly competitive.

Question 17

Use the information below to answer the following questions.
Fact 15.2.1
Two firms, FastNet and SmartCast are the only Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other firm's service. The industry is a natural duopoly. FastNet and SmartCast decide to collude and agree to share the market equally.
-Refer to Fact 15.2.1. Which of the following actions maximizes the industry's economic profit?

Accepted Answer

A) Both firms cheat on the agreement. 
B) One firm cheats and one firm complies. 
C) Both firms comply with the agreement. 
D) New firms enter the market. 
E) Both firms charge the price that would exist in a perfectly competitive market. 
A) Both firms cheat on the agreement. 
B) One firm cheats and one firm complies. 
C) Both firms comply with the agreement. 
D) New firms enter the market. 
E) Both firms charge the price that would exist in a perfectly competitive market.

Question 18

Consider a duopoly with collusion. If the duopoly maximizes profit,

Accepted Answer

A) each firm will produce the same amount. 
B) each firm will produce its maximum output possible. 
C) industry marginal revenue will equal industry marginal cost at the level of total output. 
D) industry demand will equal industry marginal cost at the level of total output. 
E) price equals average total cost. 
A) each firm will produce the same amount. 
B) each firm will produce its maximum output possible. 
C) industry marginal revenue will equal industry marginal cost at the level of total output. 
D) industry demand will equal industry marginal cost at the level of total output. 
E) price equals average total cost.

Question 19

Anti-combine law attempts to

Accepted Answer

A) support prices. 
B) establish Crown corporations. 
C) prevent monopoly behaviour. 
D) establish fair trade laws. 
E) deregulate monopolies. 
A) support prices. 
B) establish Crown corporations. 
C) prevent monopoly behaviour. 
D) establish fair trade laws. 
E) deregulate monopolies.

Question 20

Use the table below to answer the following questions.
Table 15.2.2
  
-Table 15.2.2 gives the payoff matrix in terms of economic profit for firms A and B when there are two strategies facing each firm: (1)charge a low price, or (2)charge a high price. Refer to the nonrepeated game in the table. If both firms could successfully collude, what would be firm A's economic profit?

Accepted Answer

A) -$10 
B) $2 
C) $10 
D) $20 
E) $5 
A) -$10 
B) $2 
C) $10 
D) $20 
E) $5

Exam 15: Oligopoly

Which of the following statements is TRUE about contestable markets?

Suppose that industry A consists of four firms who collectively control 96 percent of total sales in the market. We can conclude that industry A is

Which is not a characteristic of oligopoly?

A duopoly is

Use the figure below to answer the following question. Figure 15.1.1 In the figure, D is the demand curve for taxi rides in a town, and ATC is the average total cost curve of a taxi company. -Refer to Figure 15.1.1. In the scenario above, the market is

Table 15.2.10 -Refer to Table 15.2.10. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The equilibrium ________ a dominant strategy equilibrium because the strategy in this game is for a firm ________.

In a contestable market the Herfindahl-Hirschman Index is ________ and the market behaves as if it is ________.

Prisoners' dilemma describes a case where

If the efficient scale of production only allows three firms to supply a market, the market is a

The firms Trick and Gear form a cartel to collude to maximize profit. If this game is nonrepeated, the Nash equilibrium is

There exists an incentive to cheat on a collusive agreement as long as

Consider a duopoly with collusion. If the duopoly maximizes profit,

Anti-combine law attempts to

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Table 15.2.10 -Refer to Table 15.2.10. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The equilibrium a dominant strategy equilibrium because the strategy in this game is for a firm .

In a contestable market the Herfindahl-Hirschman Index is and the market behaves as if it is .