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Chapter 9: Test Bank Multiple Choice Questions 1. The Cournot theory of oligopoly assumes a) rivals will keep their output constant. b) rivals will increase their output whenever a firm increases its output. c) rivals will decrease output whenever a firm increases its output . d) rivals will follow the learning curve. Answer: A Difficulty: Easy 2. 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 3. In a Sweezy Oligopoly, a decrease in a firm's marginal cost generally: a) leads to reduced output and a higher price. b) leads to increased output and a lower price. c) leads to higher output and a higher price. d) none of the above. Answer: D Difficulty: Easy 4. Bertrand model of oligopoly reveals that a) capacity constraints are not important in determining market performance. b) perfectly competitive prices can arise in markets with only a few firms. c) changes in marginal cost do not affect prices. d) all of the above. Answer: B Difficulty: Easy 5. Which of the following are quantity setting oligopoly models? a) Stackelberg. b) Cournot. c) Bertrand. d) a and b. Answer: D Difficulty: Easy

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6. Which of the following are price setting oligopoly models? a) Stackelberg. b) Cournot. c) Bertrand. d) a and b. Answer: C Difficulty: Easy 7. 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 8. Which of the following is not a feature of Sweezy oligopoly? a) There are two firms in the market serving many consumers. b) The firms produce homogenous products. c) Each firm believes that rivals will cut their prices in response to a price reduction, but will not raise their prices in response to a price increase. d) Barriers to entry exist. Answer: B Difficulty: Med 9. Which of the following is a profit-maximizing condition for a Cournot oligopolist? a) MR = MC. b) Q1 = Q2 = ... = Qn. c) P = MR. d) all of the above. Answer: A Difficulty: Med 10. A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $20. What will the new price be should the three firms co-exist after the entry? a) $25. b) $20. c) $15. d) none of the above. Answer: B Difficulty: Hard 11. "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

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12. "Tom and Jack are two local gas stations. Although they have different constant marginal costs, they both survive continued competition." Tom and Jack do not constitute: a) a Sweezy oligopoly. b) a Cournot oligopoly. c) a Stackelberg oligopoly. d) a Bertrand oligopoly. Answer: D Difficulty: Med 13. A market is not contestable if: a) all producers have access to the same technology. b) consumers respond quickly to a price change. c) existing firms cannot respond quickly to entry by lowering their price. d) there are sunk costs. Answer: D Difficulty: Easy 14. Firm A has a higher marginal cost than firm B's. They compete in a homogeneous product Cournot duopoly. Which of the following results will not occur? a) QA < QB b) ProfitA < ProfitB c) Revenue of firm A < Revenue of firm B d) PriceA < PriceB Answer: D Difficulty: Easy 15. If firms compete in a Cournot fashion, then a) each firm views the output of the rival as given. b) each firm views the prices of rivals as given. c) each firm views the profits of rivals as given. d) all of the above Answer: A Difficulty: Med 16. Two firms compete in a Stackelberg fashion and firm two is the leader, then a) firm one views the output of firm two as given. b) firm two views the output of firm one as given. c) all of the above d) none of the above Answer: A Difficulty: Hard 17. With linear demand and constant marginal cost, a Stackelberg leader's profits are ___________ the follower. a) less than. b) equal to. c) greater than. Answer: C Difficulty: Hard

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18. An oligopolist faces a demand curve that is steeper at higher prices than at lower prices. Which of the following is most likely? a) The firm competes with others in the Cournot fashion. b) Other firms match price increases but do not match price reductions. c) Other firms match price reductions but do not match price changes. d) The firm competes with others in the Bertrand fashion. Answer: B Difficulty: Med 19. When the home country enjoys a first-mover advantage, a quota placed below the existing level of importation generally: a) reduces the output of both foreign and domestic firms. b) reduces the output of foreign firms but increases the output of domestic firms. c) reduces the output of foreign firms but has unclear effects on the domestic firms. d) none of the above Answer: A Difficulty: Med 20. A slight increase in the marginal cost of a firm definitely leads to a reduction in its output if the firm competes in: a) the Sweezy fashion. b) the Cournot fashion. c) the Bertrand fashion. d) both b and c Answer: D Difficulty: Hard 21. The market demand in a Bertrand duopoly is P = 10 - 3Q, and the marginal costs are $1. Fixed costs are zero for both firms. Which of the following statement(s) is/are true? a) P = $1 b) profits of Firm One = profits of Firm Two c) producer's surplus of Firm One = producer's surplus of Firm Two d) all of the above. Answer: D Difficulty: Easy 22. If firms are in Cournot equilibrium: a) Each firm could increase profits by unilaterally increasing output. b) Each firm could increase profits by unilaterally decreasing output. c) Firms could increase profits by jointly increasing output. d) Firms could increase profits by jointly reducing output. Answer: D Difficulty: Easy

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Michael R. Baye

23. A firm's isoprofit curve is defined as: a) the combinations of outputs produced by a firm that earns it the same level of profits. b) the combinations of outputs produced by all firms that yield the firm the same level of profit. c) the combinations of outputs produced by all firms that makes total industry profits constant. d) none of the above Answer: B Difficulty: Easy 24. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 2Q. The cost function for each firm is C(Q) = 4Q. The equilibrium output of each firm is: a) 8 b) 16 c) 32 d) 36 Answer: B Difficulty: Med 25. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 2Q. The cost function for each firm is C(Q) = 4Q. Each firm earns equilibrium profits of: a) $1,024. b) $2,048. c) $4,096. d) $512. Answer: D Difficulty: Med 26. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 2Q. The cost function for each firm is C(Q) = 4Q. In equilibrium, the deadweight loss is: a) $128. b) $256. c) $384. d) $512. Answer: B Difficulty: Hard 27. Which of the following statements is not a condition for a Stackelberg oligopoly? a) The market is contestable. b) Barriers to entry exist. c) A single firm (the leader) selects an output before all other firms choose their outputs. d) The firms produce either differentiated or homogeneous products. Answer: A Difficulty: Easy

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28. With a linear inverse demand function and the same constant marginal costs for both firms in a homogeneous product Stackelberg duopoly, which of the following will result? a) Profits of leader > Profits of follower. b) QL = 2QF. c) PL > PF. d) both (a) and (b). Answer: D Difficulty: Med 29. 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 30. Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 - 3Q. The cost function for each firm is C(Q) = 4Q. The outputs of the two firms are: a) QL = 16; QF = 8. b) QL = 24; QF = 12. c) QL = 12; QF = 8. d) QL = 20; QF = 15. Answer: A Difficulty: Med 31. Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 - 3Q. The cost function for each firm is C(Q) = 4Q. The profits of the two firms are: a) QL = $384; QF = $192. b) QL = $192; QF = $91. c) QL = $56; QF = -$28. d) QL = $56; QF = $28. Answer: A Difficulty: Hard 32. From a consumer's point of view, which type of oligopoly is most desirable? a) Sweezy. b) Cournot. c) Stackelberg. d) Bertrand. Answer: D Difficulty: Easy 33. Collusion in oligopoly is difficult to achieve because: a) it is prohibited by law. b) every firm has an incentive to cheat given that others follow the agreement. c) firms usually take care of consumers' interests as a decision priority. d) both a and b. Answer: D Difficulty: Med

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34. Since the end of the war in the Persian Gulf, the world price of oil has fallen. But in some areas, consumers have seen little relief at the pump. This phenomenon can be explained by the theory of: a) perfect competition. b) monopolistic competition. c) oligopoly. d) monopoly. Answer: C Difficulty: Med 35. The spirit of equating marginal cost with marginal revenue is not held by a) perfectly competitive firms. b) oligopolistic firms. c) both (a) and (b). d) none of the above. Answer: D Difficulty: Easy 36. MCI announced a price discount plan for small firms. Their stock immediately fell in price. This shows that: a) MCI is probably competing in a Bertrand oligopolistic industry. b) stockholders are sometimes not rational. c) there is increased demand for MCI's stock. d) AT&T sold out its stock of MCI just after the announcement. Answer: A Difficulty: Easy 37. An oligopolist has a marginal revenue curve that jumps down at 500 units of output. What kind of oligopoly does the firm most likely belong to? a) Sweezy. b) Cournot. c) Stackelberg. d) Bertrand. Answer: A Difficulty: Easy 38. There are many different models of oligopoly because: a) beliefs play an important role in oligopolistic competition. b) firms do not maximize profits in oligopolistic competition. c) oligopoly is the most complicated type of market structure. d) both a and c. Answer: D Difficulty: Easy 39. Which of the following is not a type of market structure? a) monopolistic competition. b) perfect competition. c) monopolistic oligopoly. d) monopoly. Answer: C Difficulty: Easy

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40. Ed just finished an empirical study of oligopoly. He found the following result: "In the examined industry, a firm's demand curve is such that other firm's match price increases but do not match price reductions." What kind of oligopoly is the examined industry? a) Sweezy model. b) Cournot model. c) Stackelberg model. d) none of the above. Answer: D Difficulty: Med 41. Which of the following is true: a) If there are only two firms in a market, prices must be above marginal cost. b) If there is only one firm in a market, prices must be above marginal cost. c) all of the above. d) none of the above. Answer: D Difficulty: Hard 42. Which firm would you expect to make the lowest profits, other things equal: a) Bertrand oligopolist. b) Cournot oligopolist. c) Sweezy oligopolist. d) Stackelberg leader. Answer: A Difficulty: Med 43. Which would you expect to make the highest profits, other things equal? a) Bertrand oligopolist. b) Cournot oligopolist. c) Stackelberg leader. d) Stackelberg follower. Answer: C Difficulty: Med 44. 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 45. Firm one and firm two compete as a Cournot oligopoly. There is an increase in marginal cost for firm one. Which of the following is not true? a) Firm one will produce less. b) Firm two will produce more. c) Both firm one's and firm two's reaction functions are shifted. d) Profits of firm one will decrease. Answer: C Difficulty: Med

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46. Two firms produce different goods. Firm one has a positive-sloped reaction function. This can be explained best by a) homogeneous product Cournot oligopoly. b) homogeneous product Bertrand oligopoly. c) heterogeneous product Bertrand oligopoly. d) none of the above. Answer: C Difficulty: Hard 47. A duopoly in which both firms have a Lerner index of monopoly power equal to 0 is probably a: a) Sweezy oligopoly. b) Cournot oligopoly. c) Stackelberg oligopoly. d) Bertrand oligopoly. Answer: D Difficulty: Med 48. The inverse demand in a Cournot duopoly is P = a - b (Q1 + Q2), and costs are C1(Q1) = c1Q1 and C2(Q2) = c2Q2. The government has imposed a per unit tax of $t on each unit sold by each firm. The equilibrium output of each firm is the same as a situation where: a) each firm’s demand increases by t. b) each firm’s demand decreases by t. c) each firm’s marginal cost increases by t. d) each firm’s marginal cost decreases by t. Answer: C Difficulty: Hard 49. The inverse demand in a Cournot duopoly is P = a - b (Q1 + Q2), and costs are C1(Q1) = c1Q1 and C2(Q2) = c2Q2. The Government has imposed a per unit tax of $t on each unit sold by each firm. The tax revenue is: a) t times the total output of the two firms should there be no sales tax. b) less than t times the total output of the two firms should there be no sales tax. c) greater than t times the total output of the two firms should there be no sales tax. d) none of the above. Answer: B Difficulty: Med 50. The producer's surplus of all firms in an oligopoly is usually the least in the case of a: a) Sweezy oligopoly. b) Cournot oligopoly. c) Stackelberg oligopoly. d) Bertrand oligopoly. Answer: D Difficulty: Easy 51. The Bertrand theory of oligopoly assumes a) firms set prices. b) rivals will increase their output whenever a firm increases its output. c) rivals will decrease output whenever a firm decreases its output. d) rivals will follow the learning curve. Answer: A Difficulty: Easy 52. Which of the following is true? a) In Bertrand oligopoly each firm reacts optimally to price changes. Managerial Economics and Business Strategy, 5e

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b) In Cournot oligopoly firms engage in quantity competition. c) In Sweezy oligopoly a change in marginal cost may not have an effect on output or price. d) All of the above are true. Answer: D Difficulty: Med 53. In a Cournot oligopoly, a decrease in a firm's marginal cost a) leads to reduced output and a higher price. b) leads to reduced output and a lower price. c) leads to higher output and a higher price. d) leads to higher output and a lower price. Answer: D Difficulty: Easy 54. The Sweezy model of oligopoly reveals that a) capacity constraints are not important in determining market performance. b) perfectly competitive prices can arise in markets with only a few firms. c) changes in marginal cost may not affect prices. d) all of the above. Answer: C Difficulty: Easy 55. Which of the following is not a quantity setting oligopoly model? a) Stackelberg. b) Cournot. c) Bertrand. d) All of the above are quantity setting models. Answer: C Difficulty: Easy 56. In the presence of large sunk costs, which of the following market structures generally leads to the highest price? a) Stackelberg. b) Cournot. c) Bertrand. d) Monopoly. Answer: D Difficulty: Easy 57. Both firms in a Cournot duopoly would experience lower profits if a) there was an increase in marginal production costs. 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

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58. Which of the following is a feature of a contestable market? a) There are several firms in the market serving many consumers. b) There is a single firm in the market serving many consumers. c) The market price is equal to marginal cost. d) b and c are both features of a perfectly contestable market. Answer: D Difficulty: Med 59. Which of the following is true of a perfectly contestable market? a) P = MC. b) P > MC. c) P < ATC. d) b and c. Answer: A Difficulty: Med 60. A new firm enters a market which is initially serviced by a Cournot duopoly charging a price of $20. What will the new market price be should the three firms co-exist after the entry? a) $20. b) below $20. c) above $20. d) none of the above. Answer: B Difficulty: Hard 61. "An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it is." This statement is: a) true of Bertrand and Cournot oligopolies. b) true of Cournot and Stackelberg oligopolies. c) true of Bertrand and Stackelberg oligopolies. d) none of the above. Answer: D Difficulty: Med 62. Sue and Jane own two local gas 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 63. 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 Sweezy oligopolist. Answer: A Difficulty: Hard

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64. An important condition for a contestable market is: a) all producers have different technologies. b) there are high transaction costs. c) existing firms cannot respond quickly to entry by lowering their price. d) there are sunk costs. Answer: C Difficulty: Easy 65. The Cournot theory of oligopoly is based on the assumption that each firm believes that rivals will a) keep their output constant if it changes its output. b) increase their output whenever it increases its output. c) decrease their output whenever it increases its output . d) randomly change output whenever it changes its output. Answer: A Difficulty: Easy 66. Which of the following is true? a) In Bertrand oligopoly markets each firm believes that their rivals will hold their output constant if it changes its output. b) In Cournot oligopoly market firms produce an identical product at a constant marginal cost and engage in price competition. c) In Sweezy oligopoly markets each firm believes rivals will cut their prices in response to a price reduction, but will not raise prices in response to price increases. d) In oligopoly market a change in marginal cost never has an affect on output or price. Answer: C Difficulty: Med 67. Which of the following are not price setting oligopoly models? a) Stackelberg. b) Cournot. c) Bertrand. d) a and b. Answer: D Difficulty: Easy 68. A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $30. Assuming that the new firm is equally as efficient as the incumbent firms, what will the new price be should the three firms co-exist after the entry? a) Above $30. b) Below $30. c) Equal to $30. d) Unable to tell given the information provided. Answer: C Difficulty: Easy 69. One of the characteristics of a contestable market is...