Question 1

Tom and Jack are the only two local gas stations. Although they have different constant marginal costs, they both survive continued competition. Tom and Jack do NOT constitute a:
A) Sweezy oligopoly.
B) Cournot oligopoly.
C) Stackelberg oligopoly.
D) Bertrand oligopoly.

Accepted Answer

Tom and Jack are competing in terms of price, which is characteristic of a Bertrand oligopoly. The other options involve either quantity competition (Cournot and Stackelberg) or mutual interdependence of firms with pricing strategies that take into account how rivals will react (Sweezy).

Question 2

Which of the following is a profit-maximizing condition for a Cournot oligopolist? A) MR = MC. B) Q₁ = Q₂ = ... = Q_n. C) P = MR. D) All of the statements associated with this question are correct.

Accepted Answer

The profit-maximizing condition for a Cournot oligopolist is to produce at the quantity where marginal revenue (MR) equals marginal cost (MC). Therefore, option A is the correct choice. Option B is incorrect because it is a representation of the equilibrium quantity for each firm, not the profit-maximizing quantity. Option C is also incorrect as it only states that price is equal to marginal revenue, but it does not provide any guidance on how much quantity the firms should produce to maximize profits. Option D is incorrect as options B and C are not correct.

Question 3

If firms compete in a Cournot fashion, then each firm views the:
A) output of rivals as given.
B) prices of rivals as given.
C) profits of rivals as given.
D) All of the statements associated with this question are correct.

Accepted Answer

In a Cournot competition, each firm determines its output level based on the assumption that its rivals will keep their output level constant. Therefore, each firm views the output of its rivals as given. However, firms do not view the prices or profits of rivals as given; they are determined endogenously based on the output decisions of all firms in the market.

Question 4

The Bertrand model of oligopoly reveals that:
A) capacity constraints are not important in determining market performance.
B) perfectly competitive prices can arise in markets with only a few firms.
C) changes in marginal cost do not affect prices.
D) All of the statements associated with this question are true.

Accepted Answer

The Bertrand model of oligopoly shows that with only a few firms, the competition can lead to perfectly competitive prices. This is because each firm will tend to price at the marginal cost level in order to gain market share. Capacity constraints and changes in marginal cost do play a role in this model.

Question 5

A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $20. What will the new price be should the three firms coexist after the entry?
A) $25
B) $20
C) $15
D) None of the answers is correct.

Accepted Answer

The new firm will enter the market and charge a price of $20, which is the same as the price charged by the incumbent firms. This is because the new firm will not be able to charge a higher price than the incumbent firms, as customers will simply buy from the incumbent firms instead. The new firm will also not be able to charge a lower price than the incumbent firms, as this would not be profitable. Therefore, the new firm will charge the same price as the incumbent firms, and the market price will remain at $20.

Question 6

The Cournot theory of oligopoly assumes rivals will:
A) keep their output constant.
B) increase their output whenever a firm increases its output.
C) decrease output whenever a firm increases its output.
D) follow the learning curve.

Accepted Answer

The Cournot theory of oligopoly assumes that rivals will keep their output constant. This means that firms will not immediately react to changes in the output of their competitors, but rather will base their own output decision on their own costs and market demand.

Question 7

Which of the following are quantity-setting oligopoly models?
A) Stackelberg.
B) Cournot.
C) Bertrand.
D) Stackelberg and Cournot.

Accepted Answer

The answer of Which of the following are quantity-setting oligopoly...

Question 8

Which of the following are price-setting oligopoly models?
A) Stackelberg.
B) Cournot.
C) Bertrand.
D) Cournot and Stackelberg.

Accepted Answer

The answer of Which of the following are price-setting oligopoly...

Question 9

Which of the following is NOT a feature of Sweezy oligopoly?
A) There are few firms in the market serving many consumers.
B) The firms produce homogeneous products.
C) Each firm believes that rivals will cut their prices in response to a price reduction, but will not raise their prices in response to a price increase.
D) Barriers to entry exist.

Accepted Answer

Sweezy oligopoly assumes that firms produce differentiated products. Therefore, option B, which states that firms produce homogeneous products, is not a feature of Sweezy oligopoly.

Question 10

"An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it is." This statement is:
A) true.
B) false.
C) true of homogeneous product industries.
D) None of the answers is correct.

Accepted Answer

Different types of oligopolies can behave differently depending on factors such as the level of barriers to entry, number of firms, and product differentiation. For example, a differentiated oligopoly may engage in more aggressive advertising and marketing strategies compared to a homogeneous oligopoly where firms compete mainly on price. Therefore, firms do not necessarily behave the same way in all types of oligopolies.

Question 11

Both firms in a Cournot duopoly would enjoy higher profits if:
A) the firms simultaneously reduced output below the Nash equilibrium level.
B) each firm simultaneously increased output above the Nash equilibrium level.
C) one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output.
D) the firms simultaneously reduced output below the Nash equilibrium level and one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output.

Accepted Answer

The answer of Both firms in a Cournot duopoly would...

Question 12

A slight increase in the marginal cost of a firm definitely leads to a reduction in its output if the firm competes in the:
A) Sweezy fashion.
B) Cournot fashion.
C) Bertrand fashion.
D) Cournot fashion and Bertrand fashion.

Accepted Answer

The answer of A slight increase in the marginal cost...

Question 13

Two firms compete in a Stackelberg fashion. If firm 2 is the leader, then:
A) firm 1 views the output of firm 2 as given.
B) firm 2 views the output of firm 1 as given.
C) Both firm 1 views the output of firm 2 as given and firm 2 views the output of firm 1 as given are correct.
D) None of the answers is correct.

Accepted Answer

In a Stackelberg competition, the leader (firm 2) commits to an output level first, and the follower (firm 1) then chooses its output level based on the leader's decision. Thus, firm 1 views the output of firm 2 as given.

Question 14

An oligopolist faces a demand curve that is steeper at higher prices than at lower prices. Which of the following is most likely?
A) The firm competes with others in the Cournot fashion.
B) Other firms match price increases but do not match price reductions.
C) Other firms match price reductions but do not match price changes.
D) The firm competes with others in the Bertrand fashion.

Accepted Answer

The answer of An oligopolist faces a demand curve that...

Question 15

Firm A has a higher marginal cost than firm B. They compete in a homogeneous product Cournot duopoly. Which of the following results will NOT occur? A) Q_A < Q_B B) Profit_A < Profit_B C) Revenue of firm A < Revenue of firm B D) Price_A < Price_B

Accepted Answer

In a homogeneous product Cournot duopoly, both firms charge the same price for the product.

Question 16

A market is NOT contestable if:
A) all producers have access to the same technology.
B) consumers respond quickly to a price change.
C) existing firms cannot respond quickly to entry by lowering their price.
D) there are sunk costs.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered if a firm decides to exit the market. Therefore, if there are sunk costs, existing firms are unlikely to lower their prices and compete aggressively with potential entrants, making the market less contestable.

Question 17

When firm 1 enjoys a first-mover advantage in a Stackelberg duopoly, it will produce:
A) more output and charge a lower price than firm 2.
B) more output and charge the same price as firm 2.
C) less output and charge the same price as firm 2.
D) less output and charge a higher price than firm 2.

Accepted Answer

The answer of When firm 1 enjoys a first-mover advantage...

Question 18

With linear demand and constant marginal cost, a Stackelberg leader's profits are ___________ the follower.
A) less than
B) equal to
C) greater than
D) either less than or greater than

Accepted Answer

A Stackelberg leader has the ability to set the quantity that the follower produces, allowing the leader to choose a quantity that maximizes their own profits. With constant marginal cost, the leader will set a higher quantity than the follower, which will result in higher profits for the leader. Therefore, a Stackelberg leader's profits are greater than the followers.

Question 19

Which of the following is true?
A) In Bertrand oligopoly each firm believes that its rivals will hold their output constant if it changes its output.
B) In Cournot oligopoly firms produce an identical product at a constant marginal cost and engage in price competition.
C) In oligopoly a change in marginal cost never has an effect on output or price.
D) None of the answers is correct.

Accepted Answer

In a Bertrand oligopoly, firms compete by setting prices, not output. In a Cournot oligopoly, firms compete by setting quantities, not prices. Changes in marginal cost can affect output and price in an oligopoly.

Question 20

In a Sweezy Oligopoly, a decrease in a firm's marginal cost generally leads to:
A) reduced output and a higher price.
B) increased output and a lower price.
C) higher output and a higher price.
D) None of the answers is correct.

Accepted Answer

The answer of In a Sweezy Oligopoly, a decrease in...

Quiz 9: Basic Oligopoly Models

Tom and Jack are the only two local gas stations. Although they have different constant marginal costs, they both survive continued competition. Tom and Jack do NOT constitute a:

Which of the following is a profit-maximizing condition for a Cournot oligopolist?

If firms compete in a Cournot fashion, then each firm views the:

The Bertrand model of oligopoly reveals that:

A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $20. What will the new price be should the three firms coexist after the entry?

The Cournot theory of oligopoly assumes rivals will:

Which of the following are quantity-setting oligopoly models?

Which of the following are price-setting oligopoly models?

Which of the following is NOT a feature of Sweezy oligopoly?

"An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it is." This statement is:

Both firms in a Cournot duopoly would enjoy higher profits if:

A slight increase in the marginal cost of a firm definitely leads to a reduction in its output if the firm competes in the:

Two firms compete in a Stackelberg fashion. If firm 2 is the leader, then:

An oligopolist faces a demand curve that is steeper at higher prices than at lower prices. Which of the following is most likely?

Firm A has a higher marginal cost than firm B. They compete in a homogeneous product Cournot duopoly. Which of the following results will NOT occur?

A market is NOT contestable if:

When firm 1 enjoys a first-mover advantage in a Stackelberg duopoly, it will produce:

With linear demand and constant marginal cost, a Stackelberg leader's profits are ___________ the follower.

Which of the following is true?

In a Sweezy Oligopoly, a decrease in a firm's marginal cost generally leads to: