Question 1

An oligopoly is characterised by having:

Accepted Answer

An oligopoly is characterized by a high-concentration ratio and a few large independent firms that dominate the market.

Question 2

Oligopolies are characterised by:

Accepted Answer

Oligopolies are characterised by mutual interdependence, meaning the actions of one firm affect the others in the market. This is because there are only a small number of firms in the market, so each firm's actions have a significant impact on the overall market outcomes. Homogeneous products (A) refer to a market where all products are essentially the same, while differentiated products (B) refer to a market where products differ from one another in some way. Independence (C) implies that firms in the market are not influenced by the actions of other firms, which is not the case in an oligopoly.

Question 3

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

Offering a significant rebate like $2000 on new truck sales by Ford could lead to an immediate competitive response from GM and Dodge to retain their market share, possibly through similar discounts or other promotions.

Question 4

A major characteristic of the theory of oligopoly is:

Accepted Answer

Oligopoly theory assumes that firms are interdependent in their decisions, meaning that the actions of one firm will have an effect on the others. This is a key characteristic of oligopoly behavior. Choices A and C are incorrect as there are real-world examples of oligopolies, and while individual firms within oligopolies may come and go, the oligopoly as a whole can survive for long periods of time. Choice D is also incorrect, as the assumption of interdependence is a central part of the theory.

Question 5

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 a limited number of firms that dominate the market, leading to strategic interactions among them. Each firm's pricing and output decisions can affect the profits and market share of other firms, making it more complicated to determine pricing and output levels. This is not necessarily affected by brand loyalty, advertising, or concentration ratios.

Question 6

Under oligopoly, firms produce:

Accepted Answer

Under oligopoly, firms may produce either a homogeneous product (such as steel or cement) or a differentiated product (such as automobiles or soft drinks). The choice of whether to produce a homogenous or differentiated product depends on the firm's strategy and the nature of the market. Therefore, option (C) correctly states that firms under oligopoly can produce either a homogeneous or differentiated product.

Question 7

Oligopoly is a market structure characterised by:

Accepted Answer

Oligopoly is a market structure where a few large firms dominate the market, which makes it difficult for new firms to enter. This creates barriers to entry. In addition, the firms in an oligopoly are mutually interdependent, which means that their decisions affect each other's profits. This creates an environment where firms engage in strategic decision-making to gain a competitive advantage. The other options do not accurately describe the characteristics of an oligopoly.

Question 8

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 9

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

Accepted Answer

According to the kinked demand theory, when one firm raises its price, other firms will refuse to follow because they fear losing market share to the firm that did not raise its price. This leads to a situation where the demand curve for the firm that raised its price becomes relatively elastic above the kink point and relatively inelastic below it. As a result, the firm will not be able to increase its revenue by further raising its price, as demand is too sensitive to any price increase.

Question 10

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

Accepted Answer

The kinked demand curve theory suggests that if an oligopolist raises its price above the current price, other firms will not follow suit, as they fear losing market share. However, if the oligopolist cuts its price, other firms may follow suit in order to avoid losing market share. Therefore, the oligopolist may be more likely to follow price reductions than price increases, leading to a kink in the demand curve.

Question 11

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

Accepted Answer

The kinked demand curve implies that competitors will not follow price increases but will follow price decreases. As a result, the demand curve will be more elastic to the left of the kink and more inelastic to the right of the kink. This means that the firm will perceive the demand as being more inelastic to the right of the kink where price changes will have less impact on the quantity demanded.

Question 12

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

Accepted Answer

The oligopoly market structure is characterized by few sellers, which means there are only a handful of dominant firms in the market. The product may be either homogeneous or differentiated, which means it may either be the same or differentiated to attract different customer segments. However, many small sellers are not a characteristic of an oligopoly market structure.

Question 13

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 an oligopoly, there are only a few large firms in the market, and each firm's output and pricing decisions directly affect the other firms in the market. Therefore, firms must consider the possible reactions of their rivals before making any price or output decisions. In a monopoly, the firm has no rivals, so there are no reactions to consider. In perfect competition, there are many small firms, and each firm has no influence over the market price, so there are also no reactions to consider. A cartel is a group of firms that agree on prices and output levels, so they do not have to consider the reactions of their rivals either.

Question 14

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

Accepted Answer

A kinked demand curve implies that there are different levels of price elasticity of demand above and below the existing price. Therefore, firms have reached a point where any change in price would result in a significant loss of market share. Thus, the firm would be inclined to keep the price stable at the kink point, and this is where the demand curve would be cut. Therefore, the price would settle down at the kink point.

Question 15

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

Accepted Answer

In an oligopoly market structure, 'a few sellers' implies that a small number of firms dominate the market, leading to a high concentration ratio. This does not specify an exact number of firms but indicates significant market power is concentrated among a few entities.

Question 16

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

Accepted Answer

Economies of scale refer to the cost advantages that a firm experiences as its production level increases. In an oligopolistic market, firms often have significant economies of scale, which make it difficult or expensive for new firms to enter the market and compete effectively. Therefore, the most common barrier to entry in an oligopolistic market is economies of scale.

Question 17

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

Accepted Answer

Oligopolists are a small group of firms that dominate a market. As a result, their actions have a significant impact on the market. Oligopolists know that their actions will affect their rivals. Therefore, they take into consideration the probable reaction of others before making any decisions. This mutual interdependence characteristic of oligopolistic industries results in strategic behavior by firms.

Question 18

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

Accepted Answer

In this situation, the dominant firm sets the price for the industry, but there are still competitive fringe firms that follow the price leadership of the dominant firm. This is known as price leadership with competitive fringes. It differs from a cartel because the fringe firms are not colluding to set prices together, and it differs from a kinked demand curve because there is a clear leader in setting the price. Non-price competition may still occur, but it is not necessarily the defining characteristic of the oligopoly.

Question 19

Mutual interdependence means that:

Accepted Answer

Mutual interdependence means that firms in an oligopoly must consider the actions of the other firms when making strategic decisions in order to maximize their own profits. This is because the actions of one firm can have a significant impact on the market and the profits of other firms. It does not necessarily mean that firms always work together, need the help of other firms, or that collusion always occurs.

Question 20

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 a situation where the actions of one firm affect the behavior of its rivals. In this case, Pepsi's decision to increase its price will have an impact on Coke's pricing strategy. If Pepsi hikes its price, Coke may choose to follow suit to maintain its market share. Therefore, Pepsi needs to consider the potential reaction of Coke before deciding on a price increase, highlighting the mutual interdependence of the two firms.

Quiz 10: Monopolistic Competition and Oligopoly