Question 1

The only case where profit-maximising production decisions by firms will drive price to equal marginal cost are when:

Accepted Answer

In a perfectly competitive market, where there are many sellers selling identical products, firms are price takers and can sell as much as they want at the market price. In this scenario, the profit-maximising production decision for a firm is to produce the quantity where marginal cost equals price, as any deviation from this point would result in lower profits. Therefore, in a perfectly competitive market, price will be driven to equal marginal cost.

Question 2

During the 1990s, the members of OPEC operated independently from one another, causing the world market for crude oil to become close to a(n):

Accepted Answer

When members of OPEC operated independently during the 1990s, it increased the number of suppliers in the market, making it more competitive rather than controlled by a few entities (as in oligopoly or monopoly).

Question 3

Suppose a group of four opal-mining firms operate as an oligopoly.If there is an increase in output from one of the firms, then:

Accepted Answer

In an oligopoly, firms are interdependent. An increase in output by one firm typically leads to a decrease in market prices, affecting all firms in the market. This is because the additional supply reduces the scarcity of the product, leading to lower prices.

Question 4

When deciding which structure best describes a market, you will need to know which of the following?
(i) the number of sellers
(ii) the type of product being sold
(iii) the average fixed cost curves for the given firms

Accepted Answer

The number of sellers and the type of product being sold are the two primary factors that determine the market structure. Average fixed cost curves for the given firms do not play a significant role in determining the market structure.

Question 5

OPEC can be classified as which of the following?
(i) a group whose concern is to control production levels of oil
(ii) a group of oligopolists
(iii) a cartel

Accepted Answer

OPEC (Organization of the Petroleum Exporting Countries) is a group that aims to control the production levels of oil to influence its price on the global market, making it a cartel. Additionally, since it consists of a few dominant oil-producing countries acting together to influence market conditions, it can also be considered a group of oligopolists.

Question 6

The logic of self-interest causes the duopoly's output level to be which of the following?
(i) above the monopoly level
(ii) above the oligopoly level
(iii) below the competitive level

Accepted Answer

The logic of self-interest causes firms in a duopoly to produce where marginal revenue equals marginal cost, which is below the monopoly level but above the competitive level. Therefore, the output level will be below the monopoly level (option i) but above the competitive level (option iii). Option ii is not applicable as it refers to the oligopoly level, which is not directly relevant to the output level in a duopoly. Hence, option B is the best choice.

Question 7

The theory of oligopoly provides another reason that free-trade can benefit all countries for which of the following reasons?
(i) as the number of firms within a given market increases, the price of the good falls
(ii) increased competition leads to lower deadweight losses
(iii) profit increases directly with competition for oligopoly firms

Accepted Answer

The theory of oligopoly suggests that increased competition, such as that from free trade, can lead to benefits such as lower prices (i) due to more firms in the market and reduced deadweight losses (ii) because competition tends to make markets more efficient. Profit does not necessarily increase directly with competition for oligopoly firms (iii), making options involving (iii) incorrect.

Question 8

The only way a cartel is able to maintain its market power is if:

Accepted Answer

Cartels maintain their market power through cooperation among members to control prices or output. Without cooperation, individual members may undercut prices or increase output, undermining the cartel's objectives. Horizontal demand curves (perfect competition) or inelastic demand do not ensure cartel stability. Government intervention typically aims to break up cartels, not sustain them.

Question 9

Binding agreements concerning production levels between oligopolists can lead the involved firms to:

Accepted Answer

Binding agreements between oligopolists to control production levels can lead to monopoly-like profits. By limiting production, they can artificially keep prices high, similar to a monopoly's behavior, thus potentially increasing their profits.

Question 10

Individual profit earned by Dave, an oligopolist, depends on which of the following?
(i) the quantity that Dave produces
(ii) the quantity that the other firms in the market produce
(iii) the price Dave can sell his product for in the market

Accepted Answer

In an oligopolistic market, an individual firm's profit depends on its own production quantity, the production quantity of other firms (since these firms are interdependent and the actions of one can affect the others), and the price at which the firm can sell its product in the market.

Question 11

The typical firm in the economy:

Accepted Answer

The typical firm in the economy has some degree of market power, which means it has the ability to influence prices due to differentiated products or other factors that make it stand out from its competitors. This is not to say that all firms are monopolies or have complete control over the market, but rather that they have some level of pricing power.

Question 12

While on holiday in Berserkistan, you are arrested and accused of spying for Australia.You are, of course, innocent.Your captors inform you that if you confess, you will receive a sentence of two years while your co-conspirator (whom you have never heard of) will receive a sentence of 20 years.If you both confess, you will each receive a sentence of three years.You are also told that your co-conspirator is being offered the same option.You suspect that there is not enough evidence to convict you unless your alleged co-conspirator confesses.If you are risk-averse, what should you choose to do?

Accepted Answer

The answer of While on holiday in Berserkistan, you are...

Question 13

OPEC is able to raise the price of its product by:

Accepted Answer

OPEC is able to raise the price of its product by setting production levels for each of its members, since controlling the supply of oil can affect its price on the global market. Tying and bundling refer to different pricing strategies that are not applicable in the context of oil production and exportation. Therefore, option C is the only correct answer.

Question 14

As the number of firms in an oligopoly market grows larger, the price will approach:

Accepted Answer

In an oligopoly market, as the number of firms increases, competition among them also increases. This leads to a situation where firms will start to price their goods closer to their marginal cost to remain competitive, thus the price will approach marginal cost.

Question 15

Identify the market in the following list where economic profit is driven to zero in the long run:

Accepted Answer

In perfect competition, there are no barriers to entry and many firms producing identical products. This means that in the long run, new firms will enter the market to compete for profits, driving prices down until economic profit is zero for all firms.

Question 16

Suppose a cartel collapses.The firms resume individual rather than collusive production.This outcome:

Accepted Answer

The answer of Suppose a cartel collapses.The firms resume individual...

Question 17

Which of the following statements are true of the prisoners' dilemma?
(i) cooperation between the prisoners is difficult to maintain
(ii) rational self-interest leads neither party to confess
(iii) cooperation between the prisoners is individually irrational

Accepted Answer

The prisoners' dilemma illustrates that while cooperation would be beneficial to all, rational self-interest leads each prisoner to betray the other, making cooperation difficult to maintain and individually irrational. Rational self-interest actually leads each party to confess (betray), not to remain silent, which contradicts statement (ii).

Question 18

Which of the following will weaken OPEC's effect on the world price of oil?
(i) member countries increase their own production
(ii) member countries set their level of production in order to capture a larger share of the total profit available
(iii) member countries abide by the regulatory policy set forth under the original collusive agreement

Accepted Answer

If member countries increase their own production and set their level of production to capture a larger share of the total profit available, it will lead to an increase in the global supply of oil. This increase in supply will drive down the world price of oil, weakening OPEC's effect on the price. On the other hand, if member countries abide by the regulatory policy set forth under the original collusive agreement, it will help OPEC maintain its market power and influence over oil prices. Therefore, options (i) and (ii) are the best choices to weaken OPEC's effect on the world price of oil.

Question 19

The standard price for monopoly firms is a price that:

Accepted Answer

Monopoly firms have market power, which means they can set the price higher than marginal cost. Setting the price higher than marginal cost allows the firm to maximize profits, as long as the demand for the product allows it. Therefore, the standard price for a monopoly firm is one that exceeds marginal cost.

Question 20

Two suspected drug dealers are stopped by the highway patrol for speeding.The officer searches the car and finds a small bag of marijuana, and arrests the two.During the interrogation, each is separately made the following offer: 'If you confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will get 10 years in prison.If you both confess, you will each get five years'.If neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of marijuana.If each suspected drug dealer follows a dominant strategy, what should they do?

Accepted Answer

Confessing, regardless of the partner's decision, is the dominant strategy for each suspected drug dealer. If one confesses and the other does not, the confessor gets immunity while the other gets 10 years. If both confess, they each get 5 years, which is better than the 10 years one would get if they didn't confess and their partner did. If neither confesses, they both get 1 year, but the risk of getting 10 years if the other confesses makes confessing the safer option to minimize potential prison time.

Quiz 17: Business Strategy and Oligopoly

The only case where profit-maximising production decisions by firms will drive price to equal marginal cost are when:

During the 1990s, the members of OPEC operated independently from one another, causing the world market for crude oil to become close to a(n) :

Suppose a group of four opal-mining firms operate as an oligopoly.If there is an increase in output from one of the firms, then:

When deciding which structure best describes a market, you will need to know which of the following? (i) the number of sellers (ii) the type of product being sold (iii) the average fixed cost curves for the given firms

OPEC can be classified as which of the following? (i) a group whose concern is to control production levels of oil (ii) a group of oligopolists (iii) a cartel

The logic of self-interest causes the duopoly's output level to be which of the following? (i) above the monopoly level (ii) above the oligopoly level (iii) below the competitive level