Question 1

Which of the following best explains why oligopolies exist in certain industries?

Accepted Answer

Oligopolies exist because barriers to entry, such as economies of scale, ownership of key inputs, and government-imposed restrictions, prevent new firms from entering the market.

Question 2

Suppose the four-firm concentration ratio in an industry is 60%. What does this indicate about the market structure?

Accepted Answer

The industry is likely an oligopoly.

Question 3

Which of the following is an example of a government-imposed barrier to entry that can lead to an oligopoly?

Accepted Answer

Patent protection for a new drug

Question 4

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

Accepted Answer

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

Question 5

Consider the following payoff matrix for two firms, Netflix and Max, each choosing between charging $$19.99 or 15.99. $$Both firms have a dominant strategy to charge $15.99. What is the Nash equilibrium in this game?

Accepted Answer

Both firms charge $15.99.

Question 6

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

Accepted Answer

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

Question 7

Which of the following best describes a noncooperative equilibrium?

Accepted Answer

An equilibrium where each firm pursues its own self-interest, given the strategies of other firms.

Question 8

In the classic prisoner's dilemma, what is the outcome when both players pursue their dominant strategies?

Accepted Answer

Both players are worse off than if they had cooperated.

Question 9

A price match guarantee is an example of which of the following in oligopoly markets?

Accepted Answer

An enforcement mechanism to avoid price competition and maintain higher prices.

Question 10

Which of the following is true about cartels such as OPEC?

Accepted Answer

Cartels often struggle to maintain collusion because individual members have incentives to cheat.

Question 11

In a sequential game, why might a firm choose to set a low price before a potential entrant decides whether to enter the market?

Accepted Answer

To deter entry by making the market less attractive to the potential entrant.

Question 12

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 13

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

Accepted Answer

Bargaining power of government regulators

Question 14

Which of the following scenarios best illustrates the threat from substitute goods or services?

Accepted Answer

Digital cameras replace film cameras, causing film camera manufacturers to lose business.

Question 15

Suppose a large retailer like Walmart can force suppliers to keep prices low. Which of Porter’s five forces does this illustrate?

Accepted Answer

Bargaining power of buyers

Question 16

If a firm’s long-run average cost curve is minimized only at a very large scale of output, what is the likely market structure?

Accepted Answer

Oligopoly

Question 17

Which of the following is a limitation of the four-firm concentration ratio as a measure of market power?

Accepted Answer

It may not accurately reflect local market competition.

Question 18

A firm threatens to reject a low offer in a bargaining game, but the threat is not credible. What concept does this illustrate?

Accepted Answer

Subgame-perfect equilibrium

Question 19

Which of the following best describes implicit collusion?

Accepted Answer

Firms independently match each other’s price changes without explicit agreement.

Question 20

Suppose the profit function for a firm is $$ \pi = TR - TC $$, where $$ TR  is $$total revenue and $$ TC  is $$total cost. If a firm in an oligopoly increases output and total revenue rises by $$100, but total cost rises by 120$$, what happens to profit?

Accepted Answer

Profit decreases by $20.

Oligopoly: Firms in Less Competitive Markets – Study Notes

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