Question 1

Which of the following best describes an oligopoly?

Accepted Answer

A market structure in which a small number of interdependent firms compete, and barriers to entry prevent new firms from entering.

Question 2

Suppose the four-firm concentration ratio in an industry is 75%. What does this indicate about the market structure?

Accepted Answer

The industry is likely to be an oligopoly.

Question 3

Which of the following is a limitation of the four-firm concentration ratio?

Accepted Answer

It may not accurately reflect competition if the market definition is too narrow or too broad.

Question 4

Which of the following is the most important barrier to entry that can lead to the existence of an oligopoly?

Accepted Answer

Economies of scale

Question 5

In the context of game theory, what is a dominant strategy?

Accepted Answer

A strategy that is the best for a firm, no matter what strategies other firms use.

Question 6

Refer to the Spotify and Apple payoff matrix (first image). What is the Nash equilibrium in this game?

Accepted Answer

Both firms charge $9.99.

Question 7

Why might firms in an oligopoly be tempted to collude, even though it is illegal?

Accepted Answer

Collusion can allow firms to achieve higher profits than they would by acting independently.

Question 8

What is a noncooperative equilibrium?

Accepted Answer

An equilibrium in which players do not cooperate but pursue their own self-interest.

Question 9

In the context of the prisoner’s dilemma, what is the outcome when both players pursue their dominant strategies?

Accepted Answer

Both players end up worse off than if they had cooperated.

Question 10

Suppose Domino’s and Pizza Hut both advertise a price match guarantee. According to game theory, what is the likely effect on price competition?

Accepted Answer

Neither firm will have an incentive to cut prices, reducing price competition.

Question 11

What is a cartel?

Accepted Answer

A group of firms that collude by agreeing to restrict output to increase prices and profits.

Question 12

In a sequential game, how can a firm deter entry by a potential competitor?

Accepted Answer

By charging a low price, making entry unprofitable for the competitor.

Question 13

What is a subgame-perfect equilibrium?

Accepted Answer

An equilibrium where no player can improve their outcome by changing their decision at any decision node.

Question 14

According to Michael Porter’s Five Competitive Forces Model, which of the following is NOT one of the five forces?

Accepted Answer

Government regulation

Question 15

Which of the following is an example of government-imposed barriers to entry?

Accepted Answer

Patents and occupational licensing

Question 16

If a firm owns a key input required for production, what effect does this have on market structure?

Accepted Answer

It creates a barrier to entry, supporting the existence of an oligopoly.

Question 17

Suppose the long-run average cost curve is minimized only at a very large output. What is the likely market structure?

Accepted Answer

Oligopoly

Question 18

Which of the following best describes price leadership in an oligopoly?

Accepted Answer

A form of implicit collusion where one firm announces a price change and others match it.

Question 19

If a large buyer like Walmart can threaten to buy from competitors, which of Porter’s Five Forces does this illustrate?

Accepted Answer

Bargaining power of buyers

Question 20

Which of the following scenarios best illustrates the concept of a prisoner’s dilemma?

Accepted Answer

Two suspects both confess to a crime, resulting in longer sentences for both.

Oligopoly and Game Theory: Microeconomics Study Notes

Study Guide - Practice Questions