Question 1

If both firms in a duopoly cheat on a collusive agreement, the price ________ and both firms are ________.

Accepted Answer

A)  falls; better off 
B)  rises; worse off 
C)  falls; worse off 
D)  rises; better off

Question 2

Two duopoly firms form a cartel. They decide to collude and fix the price of their good. Each individual firm will earn the highest profit if

Accepted Answer

A)  it cheats and the other sticks with the agreement. 
B)  both stick with the agreement. 
C)  it sticks with the agreement and the other cheats. 
D)  they both cheat.

Question 3

The EU's antitrust chief in November 2008 fined car glass producers Asahi, Pilkington, Saint-Gobain and Soliver more than 1.3 billion euros ($1.66 billion) for price-fixing, the largest sum ever levied by the EU for a cartel. What is the reason why Asahi, Pilkington, Saint-Gobain and Soliver would price fix?

Accepted Answer

A)  restrict output 
B)  increase profits 
C)  raise prices 
D)  increase sales

Question 4

Antitrust law is law that

Accepted Answer

A)  does not allow individuals to open trust savings accounts. 
B)  prohibits competition in certain industries. 
C)  prohibits certain kinds of market behavior by firms. 
D)  allows firms under special circumstances to be a monopoly.

Question 5

Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5 million in economic profit. If only firm signs, they earn $8 million in economic profit and the other firm incurs an economic loss of $1 million. If neither firm signs, they break even. Which of the following pairs of payoffs would NOT appear together in a square of the payoff matrix?

Accepted Answer

A)  $5 million; $5 million 
B)  $0 million; $0 million 
C)  $8 million; $5 million 
D)  -$1 million; $8 million

Question 6

In 2008, a former Intel engineer has been charged with stealing trade secrets worth $1 billion. Intel owns 90 percent of the worldwide market for microprocessors, AMD has the rest. Conducting R&D is very expensive so suppose that each of these firms can either steal R&D or develop their own R&D. If both firms develop their own R&D, economic profit will be $50 million each. If one company steals R&D, that firm earns $100 million in economic profit while the other firm earns $10 million. If both firms steal R&D, each firm breaks even. What is the outcome of this game?

Accepted Answer

A)  Both firms will conduct R&D. 
B)  Both firms will steal R&D. 
C)  The outcome will be a dominant strategy equilibrium. 
D)  Only one firm will conduct R&D, but we cannot predict which firm will conduct R&D.

Question 7

A duopoly occurs when ________.

Accepted Answer

A)  there are only two producers of a particular good competing in the same market 
B)  there are two producers of two goods competing in an oligopoly market 
C)  there are numerous producers of two goods competing in a competitive market 
D)  the one producer of two goods sells the goods in a monopoly market

Question 8

One difference between oligopoly and monopolistic competition is that

Accepted Answer

A)  a monopolistically competitive industry has fewer firms. 
B)  in monopolistic competition, the products are identical. 
C)  monopolistic competition has barriers to entry. 
D)  fewer firms compete in oligopoly than in monopolistic competition.

Question 9

A monopolistically competitive firm is like an oligopolistic firm insofar as

Accepted Answer

A)  both face perfectly elastic demand. 
B)  both can earn an economic profit in the long run. 
C)  both have MR curves that lie beneath their demand curves. 
D)  neither is protected by high barriers to entry.

Question 10

Two firms, Alpha and Beta, produce identical computer hard drives. They have identical costs, and the hard drives they produce are identical. The industry is a natural duopoly. Alpha and Beta enter into a collusive agreement, according to which they split the market equally. If both firms cheat on the agreement so the market is the same as a competitive market

Accepted Answer

A)  they will operate in a way indistinguishable from a monopoly. 
B)  each firm will make zero economic profit. 
C)  each firm will increase its economic profit. 
D)  the price of a hard drive will be above marginal cost.

Question 11

As the Federal Trade Commission currently interprets the Herfindahl-Hirschman index (HHI), an industry is considered to be moderately concentrated if the HHI value is

Accepted Answer

A)  between 100 and 1,500. 
B)  between 1,500 and 2,500. 
C)  between 1,000 and 3,500. 
D)  between 3,000 and 6,000.

Question 12

The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 2175 and two of the competing banks have considered merging. Because the merger would raise the HHI by 25 points, the Federal Trade Commission would likely

Accepted Answer

A)  challenge the merger. 
B)  not challenge the merger. 
C)  allow the merger under the condition that HHI does not rise by more than 25 points as promised. 
D)  allow the merger under the condition that the HHI remain at the premerger level of 2175.

Question 13

Of the following, the best example of firm that might operate in a contestable market is a

Accepted Answer

A)  cable TV company. 
B)  wheat farmer. 
C)  ship owner operating on a major waterway. 
D)  private college operating in a state with many public colleges.

Question 14

When a cartel maximizes its profit,

Accepted Answer

A)  each firm necessarily produces the same amount. 
B)  the industry level of output is efficient. 
C)  industry marginal revenue equals industry marginal cost at the level of total output. 
D)  total output is greater than it would be without collusion.

Question 15

If firms in an industry make output decisions that are partially based on the price and output decisions of their competitors, then these firms are in ________ market have ________ with the other firms in the market.

Accepted Answer

A)  an oligopoly; interdependence 
B)  an oligopoly; no interdependence 
C)  an oligopoly or monopolistically competitive; interdependence 
D)  a monopolistically competitive; no interdependence

Question 16

What is a natural oligopoly? How does it arise? Give an example.

Accepted Answer

The answer of What is a natural oligopoly? How does...

Question 17

A cartel usually has a collusive agreement to

Accepted Answer

A)  restrict output. 
B)  boost output. 
C)  lower the price. 
D)  increase the number of firms in the industry.

Question 18

OPEC, the Organization of Petroleum Exporting Countries, was formed in Baghdad in 1960. Since its formation, this cartel has suffered from a major problem with respect to the quota (limit) of output it assigns each member nation. What is OPEC's goal and what sort of quota do you think the cartel assigns? How and why do nations cheat on their quota? What happens when a nation cheats on its quota?

Accepted Answer

The answer of OPEC, the Organization of Petroleum Exporting Countries,...

Question 19

A group of firms that has entered into a collusive agreement to restrict output and increase prices and profits is called

Accepted Answer

A)  a compliance. 
B)  a cartel. 
C)  an oligopoly. 
D)  a duopoly.

Question 20

The maximum economic profit that can be made by a duopoly that colludes is equal to the ________.

Accepted Answer

A)  economic profit made by duopolists who cheat 
B)  normal profit made by an oligopoly 
C)  economic profit made by a monopoly 
D)  normal profit made by firms in perfect competition

Exam 15: Oligopoly

If both firms in a duopoly cheat on a collusive agreement, the price and both firms are .