Question 1

Why are oligopolies difficult to analyse?

Accepted Answer

A) The firms are so large. 
B) Demand and cost curves do not exist for these types of industries. 
C) How firms respond to a price change by a rival is uncertain. 
D) Oligopolies are a recent development so economists have not had time to develop models.

Question 2

Two firms would sometimes be better off if they got together and agreed to charge a high price, rather than to compete and risk having to charge a lower, competitive price.What is the greatest deterrent to this strategy?

Accepted Answer

A) The firms may find that the price they charge is greater than the price that would maximise their profits. 
B) An agreement by firms to charge high prices is illegal.The government can fine the firms and send their managers to jail. 
C) Consumers may resent having to pay high prices and not buy from either of the firms. 
D) One of the firms may decide to lower its price and take business away from the firm that charged the high price.

Question 3

What is a characteristic found only in oligopolies?

Accepted Answer

A) Break even level of profits. 
B) Interdependence of firms. 
C) Independence of firms. 
D) Products that are slightly different.

Question 4

A cooperative equilibrium results when firms

Accepted Answer

A) choose the best strategy regardless of what other players do. 
B) choose the strategy that maximises the total game payoff. 
C) choose the strategy that minimises the payoff to other players. 
D) choose a strategy by random chance.

Question 5

A market comprised of only two firms is called a

Accepted Answer

A) competitive market. 
B) duopoly. 
C) monopoly. 
D) monopolistically competitive market.

Question 6

A game in which each player adopts its dominant strategy

Accepted Answer

A) will not lead to an equilibrium. 
B) must be a cooperative game. 
C) could result in a Nash equilibrium. 
D) can never result in a Nash equilibrium.

Question 7

A large majority of the personal computers (PCs)in Australia use an operating system purchased from Microsoft.Microsoft's relationship with PC manufacturers is an example of which of Porter's competitive forces?

Accepted Answer

A) the threat from new entrants 
B) the bargaining power of suppliers 
C) the bargaining power of buyers 
D) competition from substitute goods or services

Question 8

A dominant strategy

Accepted Answer

A) is one that is the best for a firm, no matter what strategies other firms use. 
B) is one that a firm is forced into following by government policy. 
C) involves colluding with rivals to maximise joint profits. 
D) involves deciding what to do after all rivals have chosen their own strategies.

Question 9

Producing a homogeneous product occurs in which of the following industries?

Accepted Answer

A) Oligopoly, monopolistic competition and perfect competition 
B) Perfect competition only 
C) Oligopoly and perfect competition 
D) Monopolistic competition and perfect competition

Question 10

In a Nash equilibrium, all players select non-dominant strategies.

Accepted Answer

A) True 
 B)False

Question 11

Figure 11.2  The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high-speed Internet service.Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL).Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent 'harmful' competition.Figure 11.2 shows the decision tree for this game.
-Refer to Figure 11.2.Now suppose that the government delays Xenophone's entry and Gigacom moves first.What is the likely outcome in the market?

Accepted Answer

A) Both offer Internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million. 
B) Both offer DSL Internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million. 
C) Xenophone offers DSL Internet service and earns a profit of $5 million, while Gigacom offers Internet service via cable line and earns a profit of $6.5 million. 
D) Xenophone offers Internet service via cable line and earns a profit of $4 million, while Gigacom offers DSL Internet service and earns a profit of $4.5 million.

Question 12

An oligopolist's demand curve is

Accepted Answer

A) identical to that of a perfectly competitive firm. 
B) identical to that of a monopolistically competitive firm. 
C) vertical on a price-quantity diagram. 
D) unknown because a response of firms to price changes by rivals is uncertain.

Question 13

Decision trees are commonly used to illustrate how firms make business decisions that depend on the actions of rival firms.A decision tree has boxes that contain points that represent when firms must make the decisions contained in the boxes.What are these points called?

Accepted Answer

A) Option points 
B) Decision nodes 
C) Either-or terminals 
D) Decision options

Question 14

For years economists believed that market structure explained the ability of some firms to earn economic profits.Today, economists and business strategists put greater emphasis on

Accepted Answer

A) the number of years a firm has been in business and the average price of the products sold by the firm. 
B) the number of countries in which a firm conducts business and the number of employees the firm has in each country. 
C) the characteristics of individual firms and the strategies their managements use to continue to earn economic profits. 
D) the size of a firm relative to the industry average and the number of firms in the domestic industry.

Question 15

The most important barrier to entry is economies of scale.

Accepted Answer

A) True 
 B)False

Question 16

Price leadership is a form of explicit collusion where one firm in an oligopoly announces a price change and expects all other firms to follow suit.

Accepted Answer

A) True 
 B)False

Question 17

What does a prisoner's dilemma illustrate?

Accepted Answer

A) How oligopolists engage in implicit collusion under strategic situations. 
B) Why firms will not cooperate if they behave strategically. 
C) Why firms have an incentive to cheat on agreements. 
D) How cooperation in strategic situations leads to the economically efficient market outcome.

Question 18

The economist that did not help to develop game theory analysis is

Accepted Answer

A) Adam Smith 
B) John Nash 
C) John von Neumann 
D) Oskar Morgenstern

Question 19

Which of the following is not a characteristic of game theory?

Accepted Answer

A) rules that determine what actions are allowable. 
B) payoffs that are the results of the interaction among players' strategies. 
C) strategies that players employ to attain their objectives. 
D) independence among players.

Question 20

Decision trees can only be used to analyse sequential games.

Accepted Answer

A) True 
 B)False

Exam 11: Oligopoly: Markets With Few Competitors

Why are oligopolies difficult to analyse?

Two firms would sometimes be better off if they got together and agreed to charge a high price, rather than to compete and risk having to charge a lower, competitive price.What is the greatest deterrent to this strategy?

What is a characteristic found only in oligopolies?

A cooperative equilibrium results when firms

A market comprised of only two firms is called a

A game in which each player adopts its dominant strategy

A large majority of the personal computers (PCs) in Australia use an operating system purchased from Microsoft.Microsoft's relationship with PC manufacturers is an example of which of Porter's competitive forces?

A dominant strategy

Producing a homogeneous product occurs in which of the following industries?

In a Nash equilibrium, all players select non-dominant strategies.

An oligopolist's demand curve is

Decision trees are commonly used to illustrate how firms make business decisions that depend on the actions of rival firms.A decision tree has boxes that contain points that represent when firms must make the decisions contained in the boxes.What are these points called?

For years economists believed that market structure explained the ability of some firms to earn economic profits.Today, economists and business strategists put greater emphasis on

The most important barrier to entry is economies of scale.

Price leadership is a form of explicit collusion where one firm in an oligopoly announces a price change and expects all other firms to follow suit.

What does a prisoner's dilemma illustrate?

The economist that did not help to develop game theory analysis is

Which of the following is not a characteristic of game theory?

Decision trees can only be used to analyse sequential games.