module 64 Introduction to Oligopoly 643
Section 12 Market Structures: Imperfect Competition
Tackle the Test: Multiple-Choice Questions
- When firms cooperate to raise their joint profits, they are
necessarily
a. colluding.
b. in a cartel.
c. a monopoly.
d. in a duopoly.
e. in a competitive industry. - Use the information in the table below on market shares in the
search engine industry and measures of market power (defined
in Section 10) to determine which of the following statements
are correct.
Search Engine Market share
Google 44%
Yahoo 29
MSN 13
AOL 6
Ask 5
Other 3
I. The 4-firm concentration ratio is 92.
II. The Herfindahl-Hirschman index is 3,016.
III. The industry is likely to be an oligopoly.
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III
3. An agreement among several producers to restrict output
and increase profit is necessary for
a. cooperation.
b. collusion.
c. monopolization.
d. a cartel.
e. competition.
4. Oligopolists engage in which of the following types of
behavior?
I. quantity competition
II. price competition
III. cooperative behavior
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III
5. Which of the following will make it easier for firms in an
industry to maintain positive economic profit?
a. a ban on cartels
b. a small number of firms in the industry
c. a lack of product differentiation
d. low start-up costs for new firms
e. the assumption by firms that other firms have variable
output levels
Tackle the Test: Free-Response Questions
- Refer to the table provided to answer the following questions.
Assume that marginal cost is zero.
Demand Schedule
Price Quantity
$24 0
22 1
20 2
18 3
16 4
14 5
12 6
10 7
88
69
410
211
012
a. If the market is perfectly competitive, what will the market
equilibrium price and quantity be in the long run? Explain.
b. If the market is a duopoly and the firms collude to maximize
joint profits, what will market price and quantity be? Explain.
c. If the market is a duopoly and the firms collude to maximize
joint profits, what is each firm’s total revenue if the firms
split the market equally?
Answer (7 points)
1 point:If the market is perfectly competitive, price will be zero.
1 point:If the market is perfectly competitive, quantity will be 12.
1 point:Price equals marginal cost in the long-run equilibrium of a perfectly
competitive market, so price will be zero, at which price the quantity is 12.
1 point:If the market is a duopoly, price will be $12.
1 point:If the market is a duopoly, quantity will be 6.
1 point:In order to maximize joint profits, the two firms would act as a
monopoly, setting marginal revenue equal to marginal cost and finding price on
the demand curve above the profit-maximizing quantity. Marginal revenue
passes through zero (going from 2 to −2) after the 6thunit, making 6 the
profit-maximizing quantity. The most consumers would pay for 6 units is $12, so
that is the profit-maximizing price.
1 point:Total revenue is $12 × 6 =$72. By dividing this equally, each firm
receives $36.- a. What are the two major reasons we don’t see cartels among
oligopolistic industries in the United States?
b. Explain the difference between behavior under the Cournot
model and behavior under the Bertrand model.