Sample MCQs for Chapters 9, 10 and 11 1. "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 above. Answer: B Difficulty: Med 2. 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) a. and c. Answer: A Difficulty: Hard 3. a) b) c) d) The Cournot theory of oligopoly assumes rivals will keep their output constant. rivals will increase their output whenever a firm increases its output. rivals will decrease output whenever a firm increases its output . rivals will follow the learning curve.

Answer: A Difficulty: Easy 4. Which of the following is true? a) In Bertrand oligopoly each firm believes that their 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 affect on output or price. d) None of the above are true. Answer: D Difficulty: Med 5. a) b) c) d) If firms compete in a Cournot fashion, then each firm views the output of the rival as given. each firm views the prices of rivals as given. each firm views the profits of rivals as given. all of the above

Answer: A Difficulty: Med

6. a) b) c) d)

Two firms compete in a Stackelberg fashion and firm two is the leader, then firm one views the output of firm two as given. firm two views the output of firm one as given. all of the above none of the above

Answer: A Difficulty: Hard 7. a) b) c) d) There are many different models of oligopoly because: beliefs play an important role in oligopolistic competition. firms do not maximize profits in oligopolistic competition. oligopoly is the most complicated type of market structure. both a and c.

Answer: D Difficulty: Easy 8. Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. Given that firm two commits to this collusive output, it pays firm one to a) cheat by producing a higher level of output. b) cheat by producing a lower level of output. c) cheat by raising prices. d) none of the above. Answer: A Difficulty: Med 9. a) b) c) d) If firms are in Cournot equilibrium: Each firm could increase profits by unilaterally increasing output. Each firm could increase profits by unilaterally decreasing output. Firms could increase profits by jointly increasing output. Firms could increase profits by jointly reducing output.

Answer: D Difficulty: Easy 10. When firm one acts as a Stackelberg leader: a) Firm two produces the monopoly output. b) Firm one's profit is less than its profit if they compete in a Cournot fashion. c) Firm two will earn more than if they compete in a Cournot fashion. d) None of the above. Answer: D Difficulty: Hard 11. Sue and Jane own two local petrol stations. They have identical constant marginal costs, but earn zero economic profits. Sue and Jane constitute a) a Sweezy oligopoly. b) a Cournot oligopoly. c) a Bertrand oligopoly. d) none of the above. Answer: C Difficulty: Med

12. The profits of the leader in a Stackelberg duopoly a) are greater than those of the follower. b) equal those of the follower. c) are less than those of the follower. d) are greater than those of a Bertrand oligopolist. Answer: A Difficulty: Hard 13. "Tom and Jack are two local petrol stations. Although they have different constant marginal costs, they both survive continued competition." Tom and Jack do not constitute: a) a monopolistically competitive industry. b) a Cournot oligopoly. c) a Stackelberg oligopoly. d) a Bertrand oligopoly. Answer: D Difficulty: Med 14. Which of the following is true? a) In a one-shot game, a collusive strategy always represents a Nash equilibrium. b) A perfect equilibrium occurs when each player is doing the best he can regardless of what the other player is doing. c) Each Nash equilibrium is a perfect equilibrium. d) Every perfect equilibrium is a Nash equilibrium. e) none of the above Answer: D Difficulty: Med 15. Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn $1 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is a) For each firm to advertise. b) For neither firm to advertise. c) For your firm to advertise and the other not to advertise. d) None of the above. Answer: A Difficulty: Med 16. Which of the following is true for a Nash equilibrium of a two-player game? a) The joint payoffs of the two players are highest compared to other strategy pairs. b) Given another player's strategy stipulated in that Nash equilibrium, a player cannot improve his welfare by changing his strategy. c) A Nash equilibrium is always unique in real world problems. d) b and c Answer: B Difficulty: Med

17. Which of the following is true? a) In an infinitely repeated game, collusion is always a Nash equilibrium. b) In a finitely repeated game with a certain end period, collusion is unlikely because effective punishments cannot be used during any time period. c) all of the above d) none of the above Answer: B Difficulty: Easy 18. Which of the following is true? a) For a finitely repeated game, the game is played enough times to effectively punish cheaters and therefore collusion is likely. b) In an infinitely repeated game with a low interest rate, collusion is unlikely because the game unravels so that effective punishment cannot be used during any time period. c) A secure strategy is the optimal strategy for a player no matter what the opponent does. d) none of the above Answer: D Difficulty: Med 19. Economists use game theory to predict the behavior of oligopolists. Which of the following is crucial for the success of the analysis? a) Make sure the payoffs reflect the true payoffs of the oligopolists. b) Make sure whether the oligopolists move simultaneously or sequentially. c) Make sure the problem considered is of a one-shot or repeated nature. d) All of the above. Answer: D Difficulty: Med 20. It is easier to sustain tacit collusion in an infinitely repeated game if: a) the present value of cheating is higher. b) there are more players in the game. c) the interest rate is lower. d) both a and c. Answer: C Difficulty: Med 21. A finitely repeated game differs from an infinitely repeated game in that: a) The former needs a lower interest rate to support collusion than the latter needs. b) There is an "end-of-period" problem for the former. c) A collusive outcome can usually be sustained in the former but not the latter. d) All of the above. Answer: B Difficulty: Hard

22. A Nash equilibrium with a non-credible threat as a component is: a) a perfect equilibrium. b) not a perfect equilibrium. c) a sequential equilibrium. d) a somewhat perfect equilibrium. Answer: B Difficulty: Med 23. Which of the following is a valid critique of the use of game theory in economics? a) Payoffs to players may be difficult to measure. b) Players may not have complete information about each other's payoffs. c) Game theory assumes rational players. d) All of the above. Answer: D Difficulty: Hard 24. When analyzing the behavior of oligopolists, which of the following is crucial for the success of game theoretic analysis? a) Payoffs do not need to reflect the true payoffs of the oligopolists, they just need to be greater than or equal to zero. b) Assume that oligopolists always move simultaneously. c) Do not construct the payoffs of the oligopolists to be interdependent, as the payoff of one player usually does not affect the payoff of the other players. d) Make sure the problem you are considering is of a one-shot or repeated nature, and you model it accordingly because the order in which players make decisions is important. Answer: D Difficulty: Med 25. You are the manager of a Mom and Pop store that can buy milk from a supplier at $3.00 per gallon. If you believe the elasticity of demand for milk by customers at your store is -4, then your profit-maximizing price is a) 2.00. b) 2.50. c) 4.00. d) 5.00. Answer: C Difficulty: Med

26. You are the manager of a gas station and your goal is to maximize profits. Based on your past experience, the elasticity of demand by Texans for a car wash is -4, while the elasticity of demand by non-Texans for a car wash is -6. If you charge Texans $20 for a car wash, how much should you charge a man with Oklahoma license plates for a car wash? a) 1.50. b) 15.00. c) 18.00. d) 20.00. Answer: C Difficulty: Hard 27. Cinemas sometimes give senior citizens discounts. What is the possible privately motivated purpose for them to do so? a) Purely because entrepreneurs are benevolent. b) Senior citizens have a more elastic demand for movies than ordinary citizens. c) Senior citizens lack recreational activities. d) None of the above. Answer: B Difficulty: Med 28. Which of the following pricing strategies does not usually enhance the profits of firms with market power? a) price matching. b) cross-subsidies. c) two-part pricing. d) marginal cost pricing. Answer: D Difficulty: Med 29. Which of the following statements is true? a) The more elastic the demand, the higher is the profit-maximizing markup. b) The more elastic the demand, the lower is the profit-maximizing markup. c) The higher the marginal cost, the lower the profit-maximizing price. d) The higher the average cost, the lower the profit-maximizing price. Answer: B Difficulty: Easy 30. Price matching strategies may fail to enhance profits when: a) firms cannot prevent customer's from deceptive claims. b) firms have different marginal costs. c) either a or b. d) none of the above. Answer: C Difficulty: Med

31. A Broadway theater sells weekday show tickets at a lower price than for a weekend show. This is an example of: a) price discrimination. b) peak-load pricing. c) all of the above. d) none of the above. Answer: C Difficulty: Med 32. Which of the following statements about a price matching strategy is incorrect? a) It may be applied in situations besides Bertrand oligopoly. b) It requires that the firms can monitor their rival's prices. c) It reduces the incentive for a rival firm to initiate a price war. d) It only guarantees to match prices that are advertised publicly. Answer: B Difficulty: Hard 33. Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a coat, and $50 for pants. Consumers of type B will pay $75 for a coat, and $75 for pants. The firm selling suits faces no competition and has a marginal cost of zero. If the firm sells coats and pants for $25 each, but offers a bundle containing both a coat and pants for $150, how many bundles will the firm sell? a) 0. b) 1. c) 2. d) insufficient information. Answer: A Difficulty: Med 34. Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a coat, and $50 for pants. Consumers of type B will pay $75 for a coat, and $75 for pants. The firm selling suits faces no competition and has a marginal cost of zero. The optimal commodity bundling strategy is: a) Charge $150 for a suit. b) Charge $75 for a suit. c) Charge $100 for a suit. d) Charge $125 for a suit. Answer: A Difficulty: Med 35. Firms will often implement randomized pricing in an attempt to reduce a) only competitor price information. b) only consumer price information. c) both customer and competitor information about price. d) Randomized pricing does not affect information available to consumers or competitors.

Answer: C Difficulty: Med