Question 1

As a result of a kinked demand curve,the price:

Accepted Answer

A kinked demand curve is created when the demand for a product is more elastic above a certain price and more inelastic below that price. As a result, firms face a situation where a small change in their cost or output may cause a significant change in price due to the abrupt shift in demand elasticity. Therefore, firms tend to keep their prices stable at the kink point to avoid losing customers or facing excessive price competition from rivals. So, the price settles at the kink.

Question 2

In which of the following market structures must the price and output decisions of an individual firm include the possible price and output reactions of the firm's rivals?

Accepted Answer

In oligopoly market structure, there are only a few dominant firms who have a significant control over the market. Due to this, the price and output decisions of one firm can have a significant impact on the market and can lead to reactions from other firms. Hence, the price and output decisions of an individual firm in oligopoly must consider the possible reactions from its rivals.

Question 3

Pricing and output determination under an oligopoly is more complicated than pricing and output determinations in other industries.The primary reason for the complication is the:

Accepted Answer

In an oligopoly, there are only a few firms that dominate the market. As a result, each firm's decisions regarding pricing and output have a significant impact on the other firms' profitability. This mutual interdependence makes it challenging for firms to make pricing and output decisions without considering the potential reactions of their competitors. It is, therefore, the primary reason that pricing and output determination under an oligopoly is more complicated than other industries. The other options such as brand loyalty, powerful effect of advertising, variability of concentration ratios, and small number of firms are just some of the factors that further complicate the decision-making process under oligopoly.

Question 4

According to the kinked demand theory,when one firm raises its price,other firms will:

Accepted Answer

According to the kinked demand theory, if one firm raises its price, other firms in the oligopoly market will not follow suit and will instead keep their prices constant. This is because they fear losing market share to the firm that lowers their prices. As a result, the demand curve facing the firm that raised its price becomes relatively elastic, while the demand curve facing other firms remains relatively inelastic. Therefore, the best choice is B- other firms will refuse to follow.

Question 5

A kinked demand curve is perceived by the firm as being:

Accepted Answer

A kinked demand curve implies that there is a significant change in demand at a particular price level. In this case, the kink represents a point where competitors have agreed to match any price change made by the firm. Therefore, if the firm increases its price, its competitors will not follow suit, resulting in a significant drop in demand for the firm's product. Conversely, if the firm reduces its price, its competitors will follow suit, resulting in a minimal increase in demand for the firm's product. As a result, demand is more inelastic to the right of the kink, and the firm must maintain its price level despite any fluctuations in demand.

Question 6

When Pepsi is considering a price hike,it needs to consider how Coke may react.This situation is called:

Accepted Answer

Mutual interdependence refers to the situation where the pricing and marketing decisions of one firm affect the pricing and marketing decisions of its competitors. In this case, Pepsi's decision to hike prices will have an impact on Coke's pricing decision, and vice versa. Therefore, Pepsi needs to consider Coke's likely response when making its pricing decision, and vice versa. This mutual interdependence is a characteristic of oligopolistic markets, where a few large firms dominate the industry.

Question 7

Mutual interdependence means that:

Accepted Answer

Mutual interdependence in an oligopoly means that actions taken by one firm will have an impact on the other firms in the market. Therefore, firms must consider the reactions of their competitors when making decisions about pricing or production. This can lead to strategic behavior, such as price-fixing or non-price competition, in order to gain an edge over competitors.

Question 8

Oligopoly is a market structure characterised by:

Accepted Answer

Oligopoly is a market structure where only a few firms dominate the market, and they face significant barriers to entry. These barriers may include economies of scale, patents, high start-up costs, or strict government regulations. In such a market, firms are mutually dependent on each other's decisions regarding pricing, advertising, and product development. Therefore, the correct option is (A) barriers to entry and mutual interdependence.

Question 9

Oligopolies are characterised by:

Accepted Answer

Oligopolies are characterised by mutual interdependence, where each firm's actions affect the other firms in the market. This can lead to strategic behaviour, such as price collusion or aggressive advertising, as firms try to gain a competitive advantage. Oligopolies can have homogeneous or differentiated products, but their mutual interdependence is the defining characteristic.

Question 10

The oligopoly market structure does not have which of the following characteristics?

Accepted Answer

The oligopoly market structure is characterized by a few large sellers who dominate the market and have a significant degree of control over prices. A homogeneous product is sold in a pure competition market, while differentiated products are sold in an oligopolistic market. Therefore, option D, which describes many small sellers, is not a characteristic of an oligopoly.

Question 11

A major characteristic of the theory of oligopoly is:

Accepted Answer

One of the major characteristics of oligopoly is interdependence among firms. This means that the actions of one firm will have an impact on the other firms in the market. This interdependence often leads to strategic decision making, where firms must take into account the likely reactions of their competitors when making decisions about pricing, output, and marketing strategies.

Question 12

Suppose Ford,GM and Dodge make the majority of pick-up trucks sold in the United States.If they all sell for approximately the same price,and Ford offers a $2000 rebate on new truck sales,what can Ford expect to see?

Accepted Answer

Ford can expect an immediate response by GM and Dodge, as they are direct competitors in the pick-up truck market and will likely react to maintain their market share.

Question 13

Which of the following statements is always true with respect to oligopolists?

Accepted Answer

Oligopolists take into consideration how other firms might react, as their actions have a significant impact on the market. The other options are not always true for oligopolists - they may react quickly or slowly to actions taken by other firms, and they may either lower or raise prices, depending on the situation. It is also not certain that they know exactly what the other firms will do. Therefore, the best choice is E.

Question 14

What does 'a few sellers' in oligopoly market structure mean?

Accepted Answer

In an oligopoly, 'a few sellers' refers to a market structure where a small number of firms have significant market power, leading to a high concentration ratio.

Question 15

Suppose an oligopoly has a dominant firm that sets the price for the entire industry.In this situation,the oligopoly has:

Accepted Answer

When there is a dominant firm that sets the price for the entire industry, it is known as price leadership. This firm is able to influence the pricing decisions of other firms in the oligopoly, leading to a certain level of price coordination. However, this does not necessarily lead to complete collusion or a formal cartel agreement. Non-price competition refers to competition based on factors other than price, such as quality or advertising. A kinked demand curve is a theoretical concept that suggests that an oligopoly firm will face a relatively elastic demand curve above a certain price point and a relatively inelastic demand curve below that point, creating a “kink” in the demand curve. A monopoly refers to a situation where there is only one firm in a market.

Question 16

Under oligopoly,firms produce:

Accepted Answer

Under oligopoly, firms can produce either a homogeneous product or a differentiated product, depending on the market conditions and the strategies of the firms. In some industries, firms may produce identical products (homogeneous) such as steel or gasoline, while in other industries, firms may differentiate their products through branding, packaging, features, or quality (differentiated). Therefore, option C is the best choice as it covers both possibilities.

Question 17

A high-concentration ratio indicates the market structure is likely to be:

Accepted Answer

A high-concentration ratio in a market indicates that a small number of firms hold a large market share, which is characteristic of an oligopolistic market structure. In such markets, a few companies have significant control over market prices and competition.

Question 18

A kinked demand curve reflects a tendency on the part of an oligopolist to do which of the following?

Accepted Answer

The kink in the demand curve indicates that competitors are matching price decreases and retaliating with price increases. This leads to a situation where lowering price makes demand for the good more elastic, while raising price makes demand for the good more inelastic. As a result, the oligopolist will likely follow price reductions but not price increases.

Question 19

An oligopoly is characterised by having:

Accepted Answer

An oligopoly is a market structure where a few large firms dominate the market. The concentration ratio is high, meaning that a large share of the market is held by a few firms. Therefore, option B, which states that an oligopoly is characterized by a high-concentration ratio and a few large independent firms, is the correct answer.

Question 20

For an oligopolistic market,the most common barrier to entry is often:

Accepted Answer

Economies of scale refer to the cost advantage gained by increasing production volume, and it is often an important barrier to entry for firms trying to compete in an oligopolistic market. Established firms may have already achieved economies of scale, which make it difficult for new entrants to achieve the same level of efficiency and cost-effectiveness. As a result, new firms may not be able to produce at the same low cost as the current firms, putting them at a competitive disadvantage.

Quiz 9: Monopolistic competition and oligopoly