Question 1

If a firm reacts to other firms' market decisions by anticipating how the others will then react, this reflects

Accepted Answer

Mutual interdependence occurs when firms in an oligopoly market anticipate the reactions of their competitors to their own actions, such as changes in price, product offerings, or marketing strategies. This anticipation influences their strategic decisions, as they understand that their actions will affect the market and elicit responses from their competitors.

Question 2

Which of the following differentiates firm behavior in oligopoly from firm behavior in other market structures?

Accepted Answer

Oligopolies are characterized by a small number of firms where each firm must consider the potential reactions of its rivals to its own actions, such as changes in price, output, or product characteristics. This interdependence is what differentiates oligopolies from other market structures, where firms either do not have significant market power (as in perfect competition) or do not directly consider competitors' reactions in the same manner (as in monopolistic competition or monopoly).

Question 3

What oligopolist pricing theory is based on firm awareness of how competing firms will react to actions it takes and develops strategies based on that reaction?

Accepted Answer

Game theory involves strategic decision-making with the understanding of competitors' potential reactions to actions, which is essential in oligopolistic markets where a few firms dominate and are highly interdependent in their pricing and output strategies.

Question 4

-In Exhibit L-5, if Southwest Airlines charges a high price, it will earn profits of

Accepted Answer

The answer of 
-In Exhibit L-5, if Southwest Airlines charges...

Question 5

-In Exhibit L-5, the most reasonable explanation for what happens to profit when both airlines choose a low price is that

Accepted Answer

When both airlines choose a low price, it typically leads to a price war, which reduces the profit margins for both companies. This scenario often results in a lower combined industry profit than if the firms had maintained higher prices, either through collusion or independent decision-making aimed at maximizing profits.

Question 6

-In Exhibit L-5, if Southwest knows that Delta is planning to charge a high price, in the short run it should

Accepted Answer

If Delta charges a high price, Southwest can capitalize by charging a low price to attract more customers and increase its market share, thus increasing output in the short run.

Question 7

If both airlines are aware of the information in Exhibit L-5 and act accordingly, then their behavior reflects all of the following except

Accepted Answer

Exhibit L-5 likely describes a situation where airlines are making strategic decisions based on the actions of their competitors, which reflects mutual interdependence (A), game theory strategy (B), the prisoner's dilemma (D), and reactions to other firm's actions (E). However, monopolistic competition (C) is characterized by many firms selling products that are substitutes but not identical, with some degree of market power due to differentiation. This choice does not necessarily align with a scenario focused on strategic interdependence and decision-making based on a competitor's actions.

Question 8

Prices do not necessarily tend toward equilibrium and are subject to fits of change when a market is

Accepted Answer

The answer of Prices do not necessarily tend toward equilibrium...

Question 9

Recall the Added Perspective on the prisoner's dilemma. When there is a prisoner's dilemma,

Accepted Answer

In a prisoner's dilemma, the essence of the dilemma is that each prisoner must make a decision without knowing what the other will decide, and this decision is typically presented as a one-time choice without the opportunity for negotiation or revision based on the other's actions.

Question 10

The reason why weaker firms accept price leadership is that they

Accepted Answer

Weaker firms accept price leadership primarily because it protects them from price competition. By following the price set by the leader, they avoid engaging in potentially damaging price wars that could erode profits or force them out of the market.

Question 11

One of the theories that explains oligopoly behavior is the kinked demand curve theory. The kinked demand curve

Accepted Answer

The answer of One of the theories that explains oligopoly...

Question 12

Consider the relationship between a kinked demand curve and the corresponding marginal revenue curve. Below the point where the kinked demand curve has its characteristic kink, the marginal revenue curve is

Accepted Answer

The marginal revenue curve corresponding to a kinked demand curve is discontinuous below the kink. This discontinuity arises because the slope of the demand curve changes at the kink, leading to a sudden jump in marginal revenue at that point.

Question 13

Assume that an oligopolist faces a kinked demand curve. Suppose that the marginal cost curve passes through the gap in the marginal revenue curve. Price and output will be determined

Accepted Answer

The kinked demand curve model for oligopolies suggests that price and output will be stable at the kink, where the marginal cost curve intersects the discontinuity in the marginal revenue curve, regardless of fluctuations in marginal cost within the gap.

Question 14

If an increase in production costs (say, an increase in the wage rate) results in an upward shift in the MC curve, but the MC curve still passes through the MR gap created by the kinked demand curve, then the oligopolist will respond to that increase in production costs by

Accepted Answer

In the context of the kinked demand curve model for oligopolies, if the marginal cost (MC) curve shifts but still intersects the marginal revenue (MR) curve within the vertical gap (the MR gap) created by the kink in the demand curve, the firm will not change its price or output. This is because the firm's profit-maximizing condition—where MC equals MR—remains satisfied despite the shift in MC, as long as the new MC curve intersects the MR within the same gap.

Question 15

Price discrimination by an oligopolist is an attempt to

Accepted Answer

Price discrimination aims to capture consumer surplus by charging different prices to different consumers or groups of consumers, thereby increasing the firm's economic profit. This strategy does not primarily focus on lowering production costs, increasing efficiency, increasing market share, or creating uniform pricing.

Question 16

A concentration ratio is the ratio of

Accepted Answer

A concentration ratio is a measure of the total output produced in an industry by a given number of firms. The most common form of the concentration ratio is the ratio of the total sales of the leading firms (usually the top 3, 4, or 5 firms) to the total sales in the industry, which is what option D describes.

Question 17

If an industry has 16 firms of equal size, and each produces and sells the same quantity of output at the same price, what is the four-firm concentration ratio of this industry?

Accepted Answer

The four-firm concentration ratio is calculated by taking the output of the largest four firms in the industry and dividing it by the total output of the industry. Since all 16 firms are of equal size and produce the same quantity, the largest four firms would account for 4/16 or 1/4 of the total industry output, which is 25 percent.

Question 18

Suppose there are 100 firms in an industry. If the leading firm has a 50 percent market share, the second largest firm has a market share of half the leader's, the third has a market share of half the second's, and the fourth largest has a market share of half the third's, what is the four-firm concentration ratio?

Accepted Answer

The leading firm has a 50% market share. The second largest firm has half of that, which is 25%. The third largest firm has half of the second's, which is 12.5%. The fourth largest has half of the third's, which is 6.25%. Adding these together gives a four-firm concentration ratio of 93.75%.

Question 19

Suppose there are 100 firms in an industry. If the leading firm has a 60 percent market share, the second largest firm has a market share of half the leader's, the third has a market share of half the second's, and the fourth largest has a market share of half the third's, what is the four-firm concentration ratio?

Accepted Answer

The answer of Suppose there are 100 firms in an...

Question 20

Suppose there are 8 firms in an industry, and each has a different market share. If the largest firm has twice the market share of the second largest, which has twice the market share of the third largest (and so on to the eighth firm), what is the approximate four-firm concentration ratio?

Accepted Answer

The four-firm concentration ratio is the sum of the market shares of the four largest firms in an industry. In this case, the largest firm has twice the market share of the second largest, which has twice the market share of the third largest, and so on. So, the market share of the largest firm is 2x, the market share of the second largest firm is x, the market share of the third largest firm is x/2, and so on. The four-firm concentration ratio is therefore 2x + x + x/2 + x/4 = 11x/4. Since there are 8 firms in the industry, the total market share is 100%. So, the four-firm concentration ratio is 11x/4 / 100% = 11x/400. Since x is unknown, we cannot calculate the exact four-firm concentration ratio. However, we can approximate it by assuming that x is equal to 10%. In this case, the four-firm concentration ratio would be 11x/400 = 11(10%)/400 = 2.75%.

Quiz 12: Price and Output Determination Under Oligopoly