ECON102

PRACTICE QUESTIONS FROM CHAPTER 26 (OLIGOPOLY)

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Which of the following is a characteristic of oligopoly?
A) Easy entry and exit
B) Strategic dependence
C) Many firms
D) None of the above

1)

2) The measurement of industry concentration which calculates the percentage of all sales
contributed by a specific number of leading firms is called the
A) P/E ratio.
B) Herfindahl-Hirschman Index.
C) concentration ratio.
D) producer price index.

2)

3) Strategic behavior and game theory are features of which market structure?
A) Oligopoly
B) Monopoly
C) Perfect competition
D) Monopolistic competition

3)

4) In oligopoly, any action by one firm to change price, output, or quality causes
A) a reaction by other firms.
B) a profit gain for the other firms.
C) loss of market share by the acting firm.
D) no reaction from the other firms.

4)

5) Which of the following is NOT a characteristic of oligopoly firms?

A) Perfectly elastic demand curves
B) few firms
C) Strategic dependence
D) Product differentiation

5)

6) Which one of the following industries could be classified as an oligopoly?

A) Retailing
B) Tobacco production
C) Farming
D) Fast food restaurants

6)

7) Which of the following is most likely to be sold in an oligopoly market?

A) Cell phone service
B) Pizza
C) Electricity
D) Computer software

7)

8) Which of the following is NOT a necessary condition for oligopoly?

A) Strategic dependence of firms
B) Barriers to entry
C) Differentiated products
D) A small number of firms

8)

9) Managers in oligopoly firms must

A) establish many varieties of their products to cover the spectrum of consumer tastes.
B) eliminate any barriers to entry if they hope to make short-run profits.
C) advertise heavily in order to differentiate their product.
D) anticipate the reaction of rival firms.

9)

10) In an oligopolistic market, each firm

A) faces a perfectly elastic demand function.
B) must consider the reaction of rival firms when making a pricing or output decision.
C) produces at minimum average cost in the long run.
D) has a constant marginal cost.

10)

11) An oligopoly is a market situation in which

A) there are very few sellers and they recognize their strategic dependence on one another.
B) there are many firms producing differentiated products.
C) all the sellers act independently of the others.
D) there is a single firm producing several varieties of a product.

11)

Four-Firm Concentration Ratios

Industry
W
X
Y
Z

Ratio (percent)
72
30
84
55

12) The most competitive industry of those presented in the above table is likely to be industry
A) X.
B) Z.
C) W.
D) Y.

12)

13) The most oligopolistic industry of those presented in the above table is likely to be industry
A) Y.
B) W.
C) X.
D) Z.

13)

14) Suppose an industry has total sales of $25 million per year. The two largest firms have sales of $6
million each, the third largest firm has sales of $2 million, and the fourth largest firm has sales of
$1 million. The four-firm concentration ratio for this industry is
A) 36 percent.
B) 60 percent.
C) 25 percent.
D) 50 percent.

14)

15) Suppose a ten firm industry has total sales of $35 million per year. The largest firm have sales of
$10 million, the third largest firm has sales of $4 million, and the fourth largest firm has sales of
$2 million. If fifth through tenth largest firms combined have annual sales of $12 million, the
four-firm concentration ratio for this industry is
A) 80 percent.
B) 65.7 percent.
C) 45.7 percent.
D) none fo the above.

15)

16) Suppose a ten firm industry has total sales of $35 million per year. The largest firm have sales of
$10 million, the third largest firm has sales of $4 million, and the fourth largest firm has sales of
$2 million. If the rest of the industry has annual sales of $12 million, the second largest firm has
sales of
A) $7 million.
B) $8 million.
C) $4 million.
D) none fo the above.

16)

17) Suppose that an industry consists of 100 firms, and the top 4 firms have annual sales of $1
million, $1.5 million, $2 million, and $2.5 million, respectively. If the entire industry has annual
sales of $8.5 million, the four-firm concentration ratio is approximately
A) 50 percent.
B) 82 percent.
C) 70 percent.
D) 94 percent.

17)

Firm
A
B
C
D
E
F

Annual Sales
$1000
900
120
75
50
40

Firm
G
H
I
J
K
L

Annual Sales
$800
1200
1050
90
75
600

18) According to the above table, the four-firm concentration ratio of this industry is
A) 69.2 percent.
B) 67.5 percent.
C) 66.7 percent.
D) 35.1 percent.

18)

19) There are 30 firms in an industry. What happens to that industry's four-firm concentration when
the third- and fourth-largest firms merge?
A) Nothing, because their shares are already included in the concentration calculation.
B) The industry's concentration ratio will increase.
C) It is impossible to know without more information.
D) The industry's concentration ratio will fall.

19)

20) Suppose that Industry X has two firms with equal market shares, and Industry Y has three firms
with 65 percent, 30 percent, and 5 percent market shares, respectively. Which of the following is
true?
A) The HHI for Industry X is 100 higher than the HHI for Industry Y.
B) The HHI for Industry X is 50 higher than the HHI for Industry Y.
C) The HHI is the same between Industry X and Industry Y.
D) The HHI for Industry X is 150 lower than the HHI for Industry Y.

20)

21) Suppose there are four firms in an industry. The market shares of the four firms are 5 percent, 20
percent, 35 percent, and 40 percent. The Herfindahl-Hirschman index for that industry is
A) 6,650.
B) 100.
C) 3,250.
D) 1,250.

21)

22) Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff
matrix for the two firms giving the payoff associated with different pricing strategies. What is
the best strategy for Greenco if Ajax decides on charging a high price?
A) High price
B) Low price
C) There is no best strategy.
D) Not enough information is given to determine the best strategy.

22)

23) Refer to above figure, which represents a duopoly industry. What would be the likely total
industry payoff or profit?
A) $14 million
B) $10 million
C) zero
D) $8 million
E) $9 million

23)

24) The payoff matrix shows all of the following EXCEPT

24)

A) if one chooses a low price and the other doesn't, the low priced firm will make $8 million.
B) if they both choose a low price, each makes $4 million.
C) if one oligopolist chooses a high price and the other doesn't, the high-priced firm makes
$8 million.
D) if both oligopolists choose a high price, each makes $6 million.

Answer Key
Testname: CHAPTER 26 PRACTICE QUESTIONS

1) B
2) C
3) A
4) A
5) A
6) B
7) A
8) C
9) D
10) B
11) A
12) A
13) A
14) B
15) B
16) A
17) B
18) A
19) B
20) D
21) C
22) B
23) D
24) C