Question 1

Relative to the non-cartelized market outcome,if the member of a cartel cheats and sells more than the agreed upon output:

Accepted Answer

The answer of Relative to the non-cartelized market outcome,if the...

Question 2

The price that is set by a cartel is most likely to be:

Accepted Answer

Cartels typically aim to achieve a monopoly price, which is higher than the competitive price and may exceed the marginal cost. Therefore, the best choice is D - equal to the monopoly price.

Question 3

The output of a cartel that maximizes profits is closest to the equilibrium output of:

Accepted Answer

The output of a cartel is similar to that of a monopoly because both have the ability to restrict output to raise prices and increase profits. In a monopolistic market, a single firm has complete control over the market and can charge a high price for its product due to the absence of competition. Similarly, in a cartel, a group of firms act like a single entity and restrict output to maintain a high price. Therefore, the output of a cartel that maximizes profits is closest to the equilibrium output of a monopoly.

Question 4

In an industry with a small number of equal-sized firms where none of the firms have superior knowledge,the _____ is most likely to apply.

Accepted Answer

The Cournot model of oligopoly is most applicable in a scenario where there are a few firms of equal size and none possesses superior knowledge. This model assumes that firms choose quantities simultaneously and are interdependent, fitting the described industry structure.

Question 5

Suppose ABC Concrete is the dominant firm in a market consisting of five firms.ABC's market share is 40% of the market.The elasticity of market demand is 0.8 and the elasticity of
Supply for the remaining firms is 6.What is the elasticity of demand for ABC's product?

Accepted Answer

The elasticity of demand for the dominant firm's product can be calculated using the formula: Ed = Emd / (1 - S) + Es * S / (1 - S), where Ed is the elasticity of demand for the dominant firm's product, Emd is the market demand elasticity, Es is the supply elasticity of the fringe firms, and S is the market share of the dominant firm. Plugging in the values: Ed = 0.8 / (1 - 0.4) + 6 * 0.4 / (1 - 0.4) = 11.

Question 6

A single firm serves a large part of the market.The rest of the market is served by a large number of competitive firms.Which market model is best applicable to this type of industry?

Accepted Answer

The dominant firm model is the most applicable market model in this scenario as it involves a single dominant firm that sets the price and output level, while the other competitive firms adjust their output levels to the dominant firm's output. This model is commonly observed in the telecommunications and transportation industries.

Question 7

How does the Stackelberg model of oligopoly differ from the dominant firm model?

Accepted Answer

In the dominant firm model, the fringe firms are competitive and take the price set by the dominant firm as given. In the Stackelberg model, the follower firms react to the leader's output decision, displaying Cournot behavior.

Question 8

Which of the following the best example of a cartel?

Accepted Answer

A labor union restricting the supply of labor in order to raise wages above the competitive level is a classic example of a cartel behavior. The labor union acts as a coordinating entity that restricts competition among its members, just like a cartel restricts competition among firms.

A) An association of tobacco companies attempting to influence anti-tobacco legislation might be an example of collective lobbying, but it is not a cartel. 
C) A group of countries that sign an agreement to lower trade barriers and exchange goods and services can be an example of regional integration, but it is not a cartel unless the countries coordinate to restrict competition among their firms. 
D) Firms registering their headquarters in tax havens to evade taxes might be an example of tax avoidance or tax planning, but it is not a cartel.

Question 9

In the dominant firm model,if the elasticity of market demand is 0.75,the dominant firm's market share is 0.25,and the elasticity of supply of the competitive fringe is 2,then the dominant firm's elasticity of demand is _____.

Accepted Answer

The answer of In the dominant firm model,if the elasticity...

Question 10

How is total output determined in the dominant firm model?

Accepted Answer

In the dominant firm model, the dominant firm produces at the level where marginal cost equals marginal revenue, and the fringe firms produce at the level where marginal cost equals market price. As a result, the total output is determined by the dominant firm's level of output, which is determined by its marginal cost and marginal revenue. Therefore, choice C is the best answer.

Question 11

Which of the following will determine the elasticity of a dominant firm's demand curve?

Accepted Answer

The elasticity of a dominant firm's demand curve is influenced by the supply elasticity of the fringe firms because it affects how much the fringe firms can increase their output in response to price changes, thereby impacting the dominant firm's market power and demand elasticity.

Question 12

Consider a dominant firm model in which the elasticity of market demand is 1,the dominant firm's market share is 0.5,and the elasticity of supply of the competitive fringe firms is 4.What would be the dominant firm's elasticity of demand?

Accepted Answer

The dominant firm's elasticity of demand is related to its market share and the elasticity of supply of the competitive fringe firms as follows:
ED = (1/(1-s))*(Es)
where ED is the dominant firm's elasticity of demand, s is the dominant firm's market share, and Es is the elasticity of supply of the competitive fringe firms. Plugging in the given values, we get:
ED = (1/(1-0.5))*(4) = 2/(0.5) = 4
Therefore, the dominant firm's elasticity of demand is 4.

Question 13

In the dominant firm model of oligopoly,the dominant firm assumes that the other firms in the market:

Accepted Answer

In the dominant firm model of oligopoly, the dominant firm assumes that the other firms in the market behave like competitive firms. This means that the dominant firm assumes that the other firms will produce the same quantity of output as they would in a perfectly competitive market, and charge the competitive price. The dominant firm sets its price and quantity so as to maximize its profits, taking into account the behavior of the other firms in the market.

Question 14

Consider a dominant firm model where the elasticity of market demand is 2,the elasticity of supply of the competitive fringe is 4,and the elasticity of the dominant firm's demand is 10.Calculate the dominant firm's market share.

Accepted Answer

The answer of Consider a dominant firm model where the...

Question 15

The Organization of the Petroleum Exporting Countries [OPEC] serves the global oil market.Suppose Saudi Arabia,an OPEC member country,produces 50% of the oil supplied to this market.The elasticity of market demand is 0.4 and the elasticity of supply for the other eleven OPEC countries is 1.What is the elasticity of demand for oil produced by Saudi Arabia?

Accepted Answer

The elasticity of demand for Saudi Arabia's oil can be calculated using the formula for the elasticity of demand for a dominant firm: Ed = (Em - Es)/(1 - S), where Em is the market demand elasticity (0.4), Es is the supply elasticity of other producers (1), and S is the market share of the dominant firm (0.5). Plugging in the values: Ed = (0.4 - 1)/(1 - 0.5) = -0.6/0.5 = -1.2. The absolute value is 1.8.

Question 16

How does the Cournot model of oligopoly differ from the Stackelberg model?

Accepted Answer

The Cournot model and the Stackelberg model are both models of oligopoly, but they differ in how they model the behavior of firms. In the Cournot model, firms assume that their competitors' output is fixed and therefore do not react to changes in output by other firms. This leads to a situation where each firm produces a quantity of output that is a function of the quantity produced by its competitors. In contrast, the Stackelberg model assumes that one firm is the leader and sets its output first, and the other firms react to this output by setting their own output levels. This leads to a situation where the equilibrium output in the Stackelberg model is relatively higher than the Cournot model.

Question 17

In the dominant firm model of oligopoly,the dominant firm maximizes profits by producing at the point where:

Accepted Answer

In the dominant firm model of oligopoly, the dominant firm sets a quantity that it produces to maximize its profits. This quantity is chosen such that the marginal revenue generated by this output level is equal to the dominant firm's marginal cost of production. Therefore, the dominant firm produces where its marginal cost curve intersects its marginal revenue curve, which is equivalent to choice A.

Question 18

In the dominant firm model of oligopoly,the rival firms will:

Accepted Answer

In the dominant firm model, rival firms are price takers and will equate their marginal cost with the price set by the dominant firm.

Question 19

In the dominant firm model,if the dominant firm's market share is 3/7,its elasticity of demand is 10 and the elasticity of supply of the competitive fringe firms is 4,then the elasticity of market demand must be _____.

Accepted Answer

The elasticity of market demand in the dominant firm model can be calculated using the formula: $E_m = \frac{E_d \times E_s}{E_d + E_s - E_d \times E_s}$, where $E_m$ is the market demand elasticity, $E_d$ is the demand elasticity of the dominant firm, and $E_s$ is the supply elasticity of the competitive fringe. Substituting the given values ($E_d = 10$ and $E_s = 4$) into the formula gives $E_m = \frac{10 \times 4}{10 + 4 - 10 \times 4} = \frac{40}{14 - 40} = \frac{40}{-26} = -\frac{20}{13}$. However, the absolute value is considered for elasticity, making the correct answer $E_m = \frac{20}{13}$, which is not directly one of the options given. The calculation provided does not directly lead to the correct choice based on the options given, indicating a mistake in the explanation. The correct approach involves understanding how the market share and elasticities interact, but without the correct formula or values, the explanation provided is incorrect. The correct calculation should consider how the dominant firm's market share and the elasticities of demand and supply influence the overall market demand elasticity, typically involving the weighted contributions of the dominant firm and the fringe firms to the market demand elasticity.

Question 20

In an industry where one firm with a high market share uses the reaction curves of other firms to set output,the _____ model is most applicable.

Accepted Answer

The Stackelberg model is most applicable in this scenario because it involves a leader firm (with a high market share) setting its output first, taking into account the reaction of the follower firms in the market. This model captures the strategic advantage of the leading firm in setting its output level while anticipating the responses of its competitors.

Quiz 13: Monopolistic Competition and Oligopoly