24-1. In which of the following market structures does a
firm produce a unique product for which there are no
close substitutes?
Perfect competition
Monopolistic competition
Oligopoly
→ Monopoly
24-2. There are many corn farmers, each of whom
produces the same product. The corn market can best be
classified as:
Monopolistic competition.
→ Perfect competition.
Oligopoly.
Monopoly.
24-3. Which of the following market structures is
characterized by the absence of market power?
Monopolistic competition
Oligopoly
Monopoly
→ Perfect competition
24-4. Which market structure is characterized by a few
interdependent firms?
Monopoly
Perfect competition
Monopolist competition
→ Oligopoly
24-5. It is most difficult for new firms to enter into:
A perfectly competitive market.
→ An oligopolistic market.
A monopolistically competitive market.
A perfectly contestable market.
24-6. A contestable market is:
A perfectly competitive market.
→ An imperfectly competitive situation that is subject to
entry.
An imperfectly competitive situation with high barriers
to entry.
A market with only one producer.
24-7. The measure of market power found by adding
together the market shares of the largest four firms is:
→ The concentration ratio.
Their Herfindahl-Hirshman Index.
The sales of the market.
The barriers to entry.
24-8. Which of the following is the best indication of high
market power?
→ A small firm with a market share of 80 percent
A firm with $10 billion in sales in a market with an HHI
of 800
A large firm with a concentration ratio of 10 percent
An elastic demand curve for the firm's product
24-9. Market share can be computed by dividing:
The amount that a buyer buys by the total amount that
is produced in the market.
Profit by total cost.
→ The amount sold by a single firm by the total sold in the
market.
Price by average total cost.
24-10. Suppose there are only three firms in a market. The
largest firm has sales of $500 million, the second-largest
has sales of $300 million, and the smallest has sales of
$200 million. The market share of the largest firm is:
→ 50 percent.
100 percent.
60 percent.
40 percent.
24-2. Many agricultural products fall into perfectly
competitive markets because there are a large number of
producers with no market power, no barriers to entry and
they sell a homogeneous product.
24-1. A monopoly is one firm that is protected by high
barriers to entry with substantial market power that sells
a unique product.
24-4. An oligopoly is a market with a few firms that are
protected by high barriers to entry and have substantial
market power.
24-3. In a perfectly competitive market, firms have
absolutely no market power due to the fact that they sell a
homogeneous product and have so many competitors.
Firms in all of the other market structures have at lease
some control over price.
24-6. A contestable market is a monopoly or oligopoly
market subject to potential entry if prices or profits
increase.
24-5. Although oligopolies are protected by barriers to
entry; the monopoly market typically has the highest
barriers to entry.
24-8. A concentration ratio an industry with above 60
percent is considered an oligopoly therefore a ratio of 80
percent would definitely represent a high degree of
market power. Sales do not necessarily indicate market
power; you must look at sales relative to the entire
market.
24-7. The standard measure of market power is the
concentration ratio which tells the share of output (or
combined market share) accounted for by the largest
firms (usually four) in an industry.
24-10. Total market sales are equal to $1,000 (500 + 300 +
200) and therefore the largest firm has 50% (500/1,000)
of the market share.
24-9. Market share is the percentage of total market
output produced by a single firm and is equal to the
revenues of a single firm divided by the revenues of the
entire market.
24-11. If one firm in an oligopoly market increases its
advertising expenditures in an effort to increase market
share, the most likely response by its competitors would
be to:
→ Keep the price of their products the same but increase
advertising expenditures even if it means reducing profits.
Increase the price of their products to raise profits and
then increase advertising expenditures.
Reduce advertising expenditures to maintain profits.
Make no changes in price or advertising expenditures.
24-13. If oligopolists start cutting prices to capture a
larger market share, the result will be a:
Lower prices, decreased output, and larger profits.
Higher prices, increased output, and larger profits.
Lower prices, increased output, and larger profits.
→ Lower prices, increased output, and smaller profits.
24-12. Product differentiation:
Involves charging different prices to different
customers.
Is commonly practiced in perfect competition and
monopoly markets.
→ Involves advertising unique product features.
Is a rarely successful advertising campaign.
24-14. The kinked demand curve explains the observation
that in oligopoly markets:
Rivals match price increases.
Rivals do not match price reductions.
→ Prices may not change even in the face of cost
increases.
Practice product differentiation.
24-15. The demand curve will be kinked if rival
oligopolists:
Match price increases but not price reductions.
→ Match price reductions but not price increases.
Match both price increase and price reductions.
Do not match price changes at all.
24-16. If a firm is producing at the kink in its demand
curve and it decides to increase its price, according to the
kinked-demand model:
It will gain market share.
→ It will lose market share to the firms that do not follow
the price increase.
Its market share will not be affected.
It will not gain market share but it will definitely
increase profits.
24-17. If an oligopolist is going to change its price or
output, its initial concern is:
→ The response of its competitors.
A change in its cost structure.
The concentration ratio.
The response of the Federal Trade Commission.
24-18. Game theory is:
The study of price fixing and collusion.
→ The study of how decisions are made when
interdependence exists between firms.
An explanation of how oligopolists become
monopolists.
Practiced by perfectly competitive firms.
24-12. Product differentiation is designed to make one
firm's products appear different and superior to those
produced by other firms.
24-11. If an advertising campaign is successful at gaining
market share, the remaining oligopolists will necessarily
lose market share. In response a firm can step up their
own marketing efforts or cut their prices, however price
competition is typically self-defeating.
24-14. The demand curve will be kinked if rival
oligopolists match price reductions but not price
increases. If costs increase for oligopolists, firms are
unlikely to increase prices because the quantity demanded
will fall and revenues will fall causing profits to decrease.
24-13. An attempt by one oligopolist to increase its market
share by cutting prices will lead to a general reduction in
the market price because all of the oligopolists will end up
reducing prices in order to gain (or maintain) market
share. This will reduce profits as prices slide down the
market demand curve.
24-16. According to the kinked-demand model,
oligopolists will not increase prices because the
consumers will substitute the relatively cheaper
competitor's goods, revenues will fall and profits will
decrease.
24-15. The demand curve will be kinked if rival
oligopolists match price reductions but not price
increases.
24-18. Game theory attempts to explain behavior in
strategic situations, in which a businesses success
depends on the choices of others.
24-17. The initial concern of firm when it decreases its
price is how responsive consumers will be to the change,
however how much of an oligopolist's sales increase
depends on the response of rival oligopolists.
24-19. Given the payoff matrix in Table 24.2, if the
probability of rivals matching a price reduction is 99
percent, what is the expected payoff for Company ABC to a
price cut?
$0
→ $5
-$500
-$5000
24-20. Given the payoff matrix in Table 24.2, if the
probability of rivals reducing their price even though you
don't is 10 percent, what is the expected payoff for
Company ABC not to cut prices?
$0
$5
→ -$500
-$5000
24-21. Oligopolists will maximize total profits for all of the
firms in the market at the rate of output where:
TR = TC for the total market.
MR = MC for the marginal firm.
AR = AC for each firm.
→ MR = MC for the market.
24-22. The pricing strategy in which there is an explicit
agreement among producers regarding price is called:
Price discrimination.
→ Price-fixing.
Price leadership.
Marginal cost pricing.
24-23. Price leadership is a method by which oligopolies
can:
→ Increase prices without explicit price fixing.
Illegally raise prices.
Maintain the "kink" in their demand curves.
Encourage competition.
24-24. The pricing strategy in which one firm is allowed
by its rivals to establish the market price for all firms in
the market is called:
Overt collusion.
→ Price leadership.
Pattern pricing.
Price fixing.
24-25. Temporary price reductions intended to drive out
competition are referred to as:
→ Predatory pricing.
Price fixing.
Price leadership.
Retaliation.
24-26. In the long run, an oligopolist is most likely to:
→ Experience economic profits because of barriers to
entry.
Experience zero economic profits because barriers to
entry do not exist in the long run.
Produce at the most technically efficient output level
due to long-run competition.
Face a straight line demand curve.
24-20. The expected value of a choice is equal to sum of
the probability of rivals lowering their price times the size
of the loss leaving your price unchanged and the
probability of neither rivals changing their price. In this
case, ((.10 × -5,000) + (.90 × 0)) which is -$500.
24-19. The expected value of a choice is equal to sum of
the probability of rivals matching times the size of the loss
from price cuts and the probability of rivals not matching
times the gain from a lone price cut. In this case, ((.99 × 500) + (.01 × 50,000)) which is $5.
24-22. The most explicit form of coordination among
oligopolists is price-fixing which is when firms in an
oligopoly explicitly agree to charge a uniform (monopoly)
price.
24-21. An oligopoly will maximize profits where marginal
revenue equals marginal cost, just like a monopoly.
24-24. Price leadership is a subtle (not explicit) pricing
pattern that allows one firm to establish the (market)
price for all firms in the industry.
24-23. Price leadership is a subtle (not explicit) pricing
pattern that allows one firm to establish the (market)
price for all firms in the industry.
24-25. Oligopoly markets have high barriers to entry;
therefore it is likely that profits will persist in the long run.
24-26. Predatory pricing is a temporary price reduction
designed to alter market shares or drive out competition.
24-27. Refer to Table 24.1. What is the HerfindalHirshman Index for this industry?
2,500
50
→ 4,150
4,125
24-28. Refer to Table 24.1. The U.S. Justice Department
would most likely:
Allow a merger between North Star and Blue Lagoon.
Allow a merger between Hurricane and Blue Lagoon.
Allow a merger between Blue Lagoon and Clean Sweep.
→ Not allow any mergers among firms in this industry.
24-29. Refer to Figure 24.1 for an oligopoly firm. Assume
that the existing price and quantity are $10 and 2000
units. Which of the following statements is most likely
correct?
Demand curves D1 and D2 both assume that rivals will
not match any price changes.
Demand curves D1 and D2 both assume that rivals
match any price changes.
Demand curve D1 assumes that rivals do not match
price changes.
→ Demand curve D2 assumes that rivals do not match
price changes.
24-30. Refer to Figure 24.1 for an oligopoly firm. The
existing price and quantity are $10 and 2,000 units. If we
assume that rival firms match price decreases but not
price increases, the firm's demand curve will most likely
be (from left to right):
D1ED1.
D2ED2.
D1ED2.
→ D2ED1.
24-28. For policy purposes, the Justice Department
decided it would draw the line at 1,800. Any merger that
creates an HHI value over 1,800 will be challenged by the
Justice Department.
24-29. D2 is an elastic demand curve which means if the
firm lowers its price, quantity demanded increases
significantly. This would not occur if the firm's
competitors matched its price decrease.
24-30. The demand will be elastic at higher prices and
inelastic at lower prices if rival firms match price
decreases but not price increases.
24-27. The HHI is equal to the sum of the scares of the
market share of each firm in the industry. Therefore if you
take the sum of the squares of 50%, 40%, 5% and 5% you
will get an HHI of 4,150.