Question 1

Which of the following best describes an oligopoly?

Accepted Answer

A market structure in which only a few sellers offer similar or identical products.

Question 2

Why are firms in an oligopoly considered interdependent?

Accepted Answer

Because the actions of one firm can significantly impact the profits of other firms in the market.

Question 3

Which of the following is NOT a typical barrier to entry in an oligopoly?

Accepted Answer

Perfect information for all buyers and sellers.

Question 4

A market with only two firms is specifically called a:

Accepted Answer

Duopoly

Question 5

If firms in an oligopoly decide to coordinate their pricing and output decisions, what is this group called?

Accepted Answer

A cartel

Question 6

Which real-world organization is an example of a cartel?

Accepted Answer

OPEC (Organization of Petroleum Exporting Countries)

Question 7

What typically happens to price and industry output when firms in an oligopoly compete rather than cooperate?

Accepted Answer

Price and firm's profit fall, and industry output increases.

Question 8

Why is cooperation among cartel members difficult to achieve in practice?

Accepted Answer

Each member has an incentive to cheat to increase their own profit.

Question 9

In game theory, what is a dominant strategy?

Accepted Answer

An action that is the best choice under all circumstances.

Question 10

The Duopolist’s Dilemma describes a situation where:

Accepted Answer

Both firms would be better off choosing the high price, but each chooses the low price.

Question 11

Which strategy can help firms avoid the Duopolist’s Dilemma?

Accepted Answer

Guaranteed price matching

Question 12

Limit pricing is best defined as:

Accepted Answer

A scheme under which a monopolist accepts a price below the normal monopoly price to deter entry.

Question 13

Suppose Firm 1 is a monopolist and Firm 2 is a potential entrant. If Firm 2’s dominant strategy is to enter, what should Firm 1 do?

Accepted Answer

Choose a small quantity.

Question 14

In the context of advertising in oligopoly, what is the typical outcome when both firms have advertising as their dominant strategy?

Accepted Answer

Both firms advertise, even though they would be better off if neither advertised.

Question 15

Which of the following equations best represents the profit maximization condition for a monopolist?

Accepted Answer

$$MR = MC$$

Question 16

If a firm in an oligopoly faces substantial investment in advertising as a barrier to entry, what is the likely effect on new entrants?

Accepted Answer

New entrants are discouraged due to high initial costs.

Question 17

Which of the following is a real-world consequence of firms cheating in a cartel?

Accepted Answer

Market prices fall and industry output increases.

Question 18

In a price-fixing game, what is the rule for solving the game according to the study materials?

Accepted Answer

Eliminate rectangles that can only be reached if firms act irrationally.

Question 19

Which of the following is NOT a characteristic of a natural oligopoly?

Accepted Answer

Low economies of scale.

Question 20

If the tennis ball market in the US is dominated by four brands, which market structure does this illustrate?

Accepted Answer

Oligopoly

CHAPTER 12: Oligopoly and Strategic Behavior: Microeconomics Study Notes

Study Guide - Practice Questions