Answers to Problem Set 15 Oligopolistic Market
1.
Refer to the graph shown. The oligopolist shown currently charges a price P1. It believes that
rival firms will:
A. gain market share if it lowers its price.
B. lose market share if it lowers price.
C. raise price if it raises price.
D. lower price if it lowers price.
The oligopolist depicted faces an inelastic demand curve if it lowers price because it believes rival
firms also will lower price. It also faces an elastic demand curve if it raises price because it believes
rival firms will not follow price increases.
2. The contestable market model of oligopoly bases pricing and output decisions on:
A. the threat of new entrants into the market.
B. market structure.
C. the degree of product differentiation.
D. market share.
In a contestable market, firms behave as if they have competition because of easy entry into the
industry.
Which of the following market structures does not have predictable price and output decisions at which
the firms will arrive rationally?
A. Oligopoly.
B. Monopolistic competition.
C. Perfect competition.
D. Monopoly.
4. Firms base decisions on the decisions of other firms in the market in:
A. a monopolistic industry.
B. an oligopolistic industry.
C. a monopolistically competitive industry.
D. a perfectly competitive industry.
5. Cartels are organizations that:
A. keep markets contestable.
B. encourage price wars.
C. coordinate the output and pricing decisions of a group of firms.
D. use predatory pricing to monopolize industries.
6. According to the kinked demand curve theory of sticky prices, in an oligopolistic market:
A. a price decrease by one firm will not be followed by the other firms.
B. a price increase by one firm will be followed by the other firms.
C. the kinked demand curve is inelastic in the upper portion and elastic in the lower portion of the
curve.
D. the kinked demand curve is elastic in the upper portion and inelastic in the lower portion of the
curve.
7. If a profit-maximizing oligopolist has a kinked demand curve, a downward shift in its marginal
cost curve:
A. may not affect output or price.
B. increases output or price but not both.
C. reduces both output and price.
D. reduces output but not price.
Refer to the graph shown. If a firm operating as if it were faced with a kinked demand curve believes
that if it lowers price from P2 to P4, its rival will match the price cut:
A. the demand curve used by the firm for decision making is highly elastic.
B. it probably will lower price, since doing so will increase sales.
C. it probably won't lower price, since the percentage decline in price will exceed the percentage
increase in quantity sold.
D. D1 is the relevant demand curve.
In the kinked demand curve model, firms believe their demand to be highly inelastic (like D2) if they
lower price because they believe the rival will match a price decrease to protect its market share.