question

Sticky prices

answer

Prices that are resistant to change.

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Monopolistic competition

answer

A market structure with many producers selling products that are not identical but are close substitutes and with no barriers to entry.

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antitrust

answer

Government intervention to alter market structure or prevent abuse of market power.

question

barriers to entry

answer

Obstacles such as patents that make it difficult or impossible for would-be producers to enter a particular market.

question

cartel

answer

A group of firms with an explicit, formal agreement to fix prices and output shares in a particular market.

question

concentration ratio

answer

The proportion of total industry output produced by the largest firms (usually the four largest).

question

contestable market

answer

An imperfectly competitive industry subject to potential entry if prices or profits increase.

question

game theory

answer

The study of decision making in situations where strategic interaction (moves and countermoves) occurs between rivals

question

Herfindahl-Hirshman Index (HHI)

answer

Measure of industry concentration that accounts for number of firms and size of each.

question

market failure

answer

An imperfection in the market mechanism that prevents optimal outcomes

question

market share

answer

The percentage of total market output produced by a single firm.

question

market structure

answer

The number and relative size of firms in an industry.

question

oligopolist

answer

One of the dominant firms in an oligopoly.

question

oligopoly

answer

A market in which a few firms produce all or most of the market supply of a particular good or service.

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payoff matrix

answer

A table showing the risks and rewards of alternative decision options.

question

predatory pricing

answer

Temporary price reductions designed to alter market shares or drive out competition.

question

price-fixing

answer

Explicit agreements among producers regarding the price(s) at which a good is to be sold.

question

price leadership

answer

An oligopolistic pricing pattern that allows one firm to establish the (market) price for all firms in the industry.

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product differentiation

answer

Features that make one product appear different from competing products in the same market.

question

1. In which of the following market structures does a firm produce a unique product for which there are no close substitutes?

answer

monopoly

question

2. In which of the following market structures are entry barriers the highest?

answer

monopoly

question

3. There are many wheat farmers, each of whom produces the same product. The wheat market can best be classified as:

answer

Perfect competition

question

4. Which of the following market structures is characterized by many firms?

answer

Monopolistic competition.

question

5. Which market structure is characterized by a few interdependent firms?

answer

Oligopoly.

question

6. The only market structure in which there is significant interdependence among firms with regard to their pricing and output decisions is:

answer

`Oligopoly.

question

7. The number of firms in an oligopoly must be:

answer

Small enough so that one firm's decisions have a significant impact on the decisions of the other firms in the industry.

question

8. Which of the following may characterize an oligopoly?

answer

A) A few firms. B) High barriers to entry. C) Significant market power

question

9. It is most difficult for new firms to enter into .

answer

An oligopolistic market.

question

11. Which of the following is a determinant of market power?

answer

A) Number of producers. B) Barriers to entry. C) Availability of substitutes.

question

13. The correct ranking of degree of market power (from highest to lowest) is:

answer

Monopoly, oligopoly, monopolistic competition, perfect competition.

question

14. The correct ranking of barriers to entry (from highest to lowest) in the market is:

answer

A) Monopoly, oligopoly, monopolistic competition, perfect competition.

question

15. A similarity of an oligopoly and a monopoly is:

answer

The existence of market power.

question

17. A contestable market is:

answer

B) An imperfectly competitive situation that is subject to entry.

question

19. The measure of market power found by adding together the market shares of the largest four firms is:

answer

The concentration ratio.

question

20. Which of the following is the best indication of high market power?

answer

A concentration ratio of 90 percent.

question

21. Which of the following is the best indication of high market power?

answer

A small firm with a market share of 80 percent.

question

23. Concentration ratios tend to overstate the power of some corporations to influence economic outcomes because they measure output:

answer

Only for domestic production, when the true market boundaries are international for some markets.

question

24. A nationwide concentration ratio is likely to understate market power when:

answer

The true markets are local and small.

question

25. Which of the following industries is likely to have the highest concentration ratio?

answer

B) Video game systems.

question

26. Which of the following industries has the highest concentration ratio?

answer

Soft drinks.

question

The market share of a monopolist is:

answer

100 percent.

question

28. Market share can be computed by dividing:

answer

The amount sold by a single firm by the total sold in the market.

question

32. Which of the following may characterize oligopolistic behavior?

answer

A) Price leadership. B) Collusion. C) Retaliation.

question

33. Which of the following is evidence of the interdependence which characterizes the relationship among oligopolists?

answer

A) Retaliation. B) Price wars. C) Gamesmanship.

question

34. When a business advertises that its product has unique features that make it superior to other similar products, it is engaging in:

answer

Product differentiation

question

35. Product differentiation is:

answer

Involves advertising unique product features.

question

36. The kinked-demand curve indicates:

answer

Why oligopoly prices might be sticky

question

37. The kinked-demand curve explains the observation that in oligopoly markets:

answer

Prices may not change even in the face of cost increases.

question

38. Which of the following is true about the kink in the demand curve?

answer

It occurs at the same rate of output as the vertical segment in the marginal revenue curve. ; It leads to an explanation of sticky prices. It is the result of the difference in rival responses to price increases and reductions.

question

39. The kinked-demand curve explains:

answer

The consequences of the interdependent behavior of oligopolists

question

41. Which of the following types of pricing by rivals is consistent with a kinked oligopoly demand curve?

answer

Matching price decreases only

question

42. If a firm is producing at the kink in its demand curve and it decides to increase its price, according to the kinked-demand model:

answer

It will lose market share to the firms that do not follow the price increase.

question

43. If a firm is producing at the kink in its demand curve and it decides to decrease its price, according to the kinked-demand model:

answer

Its market share will not be affected.

question

44. A kinked-demand curve indicates that rival oligopolists match all:

answer

Price reductions.

question

45. What is the most likely response by rivals when an oligopolist cuts its price to increase its sales?

answer

Cut their prices.

question

46. If an oligopolist is going to change its price or output, its initial concern is:

answer

The response of its competitors.

question

48. Game theory is:

answer

The study of how decisions are made when interdependence exists between firms.

question

49. The study of decision making in situations where strategic interaction between rivals occurs is known as:

answer

game theory

question

52. The goal of an oligopoly is to maximize:

answer

Market share to achieve long-run economic profit.

question

53. If a market changes from oligopoly to perfect competition, then as a result:

answer

Output should increase in the long run

question

54. Oligopolists will maximize total profits for all of the firms in the market at the rate of output where:

answer

MR = MC for the market. (Market Revenue=Market Cost Curve)

question

56. If one firm in an oligopoly market increases its advertising expenditures in an effort to increase market share, the most likely response by its competitors would be to:

answer

Keep the price of their products the same but increase advertising expenditures even if it means reducing profits.

question

57. In oligopoly markets sticky prices are the result of:

answer

The uncertainty of competitor responses to price changes.

question

58. As long as the marginal cost curve continues to intersect the gap in the marginal revenue curve for a kinked-demand curve, the oligopolist will:

answer

Maintain both production rates and prices.

question

61. A gap in the marginal revenue curve results from:

answer

A kinked demand curve

question

63. If the marginal cost curve shifts but remains in the gap in the marginal revenue curve, the result will be:

answer

No change in price or output.

question

65. Suppose costs for all oligopolists in an industry increase to such an extent that the marginal cost curve shifts out of the gap in the marginal revenue curve. Which of the following is the most probable response of oligopolists?

answer

One of the oligopolists would raise prices and the other firms would follow.

question

66. One reason why prices tend to be less flexible in oligopoly markets than in other market structures is because:

answer

According to the kinked-demand model, a firm will tend to become worse off if it increases or decreases its prices.

question

68. In an effort to maximize profits, oligopolists will participate in:

answer

Price leadership. B) Price fixing. C) Cartels.

question

69. The pricing strategy in which there is an explicit agreement among producers regarding price is called:

answer

Price fixing

question

71. When oligopolists coordinate price, the market demand curve will be:

answer

Strongly inelastic like a monopolist's.

question

72. Oligopolists have an incentive to coordinate price because with coordination:

answer

Each firm faces a relatively inelastic demand for its product.

question

73. Price leadership is a method by which oligopolies can:

answer

Increase prices without explicit price fixing

question

74. Price leadership:

answer

Helps achieve monopoly profit for the market.

question

76. The pricing strategy in which one firm is allowed to establish the market price for all firms in the market is called:

answer

Price leadership

question

78. Open and explicit agreements concerning pricing and output shares transform an oligopoly into a:

answer

Cartel

question

79. Temporary price reductions intended to drive out competition are referred to as:

answer

Predatory pricing

question

80. Which of the following may characterize oligopolistic behavior?

answer

A) Price leadership. B) Price fixing. C) Predatory pricing

question

81. Which of the following functions as a barrier to entry into an oligopoly market?

answer

A) Patents. B) The expense involved in nonprice competition. C) Control of distribution outlets.

question

83. For an oligopoly, above-normal profits cannot be maintained in the long run unless:

answer

Barriers to entry exist

question

84. In the long run, an oligopolist is most likely to:

answer

Experience economic profits because of barriers to entry.

question

85. The most common form of nonprice competition is:

answer

Advertising

question

88. Market power leads to market failure when it results in:

answer

Decreased market outpuT; Increased market prices; Long lasting, above normal economic profits.

question

89. Collusion is undesirable and illegal because:

answer

Resources are misallocated and suboptimal outputs are produced.

question

Oligopolistic behavior includes:

answer

Tacit collusion

question

excludability

answer

the property of a good whereby a person can be prevented from using it

question

rivalry in consumption

answer

the property of a good whereby one person's use diminishes other people's use

question

private goods

answer

goods that are both excludable and rival in consumption

question

public goods

answer

goods that are neither excludable nor rival in consumption

question

common resources

answer

goods that are rival in consumption but not excludable

question

club goods

answer

goods that are excludable but not rival in consumption

question

free rider

answer

a person who receives the benefit of a good but avoids paying for it

question

cost-benefit analysis

answer

a study that compares the costs and benefits to society of providing a public good

question

Tragedy of the Commons

answer

a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

question

Monopoly

answer

A market with only one seller.

question

Limit pricing

answer

Setting the price lower than the monopoly price to keep competitors out.

question

Market power

answer

Ability to affect the price.

question

Price ceiling

answer

Maximum legal price that can be charged for a product or service.

question

Price discrimination

answer

Charging different prices to different customers.

question

Reservation price

answer

Maximum price a buyer is willing to pay.

question

Game theory

answer

The theory that studies decision making in situations in which one player anticipates the reactions of other players to its own actions. Firms are mutually interdependent.

question

Nash equilibrium

answer

A concept for solving games that states that each player has a set of strategies, and these strategies should be that no player can improve her utility by unilaterally changing her own strategy.

question

Oligopoly

answer

A market with only a few sellers.

question

Duopoly

answer

A market with only two sellers.

question

Sticky prices

answer

Prices that are resistant to change.

question

Monopolistic competition

answer

A market structure with many producers selling products that are not identical but are close substitutes and with no barriers to entry.

question

monopoly

answer

a firm that is the sole seller of a product without close substitutes *the firm = the industry

question

natural monopoly

answer

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms *occurs when the ATC of a single firm falls over such an extended range of output that 1 firm can produce the TOTAL QUANTITY sold at a LOWER ATC than could 2 firms *Examples: electricity, gas, water *Size of market - determines whether industry is a natural monopoly 1) small market - natural monopoly 2) large market - competitive market

question

price discrimination

answer

business practice of selling the same good at different prices to different customers *there are NO cost differences that account for the price differences Examples: Movie Tickets, Airline Prices, Discount Coupons, Financial Aid *who pays low/high - observe & separate customers based on willingness to pay

question

price searcher

answer

a firm that either sells a significant share of the market and/or sells a product differentiated from other firms in the industry *marginal revenue < price

question

5 Reasons Monopoly Arises

answer

*fundamental cause = barriers to entry 1) control over an input/resource 2) ownership of a patent 3) legal monopoly (Post Office, Ex: 1st Class) 4) natural monopoly 5) collusive monopoly - independent firms grouped together to gain the advantage of monopoly(cartel, Ex: OPEC)

question

Marginal Revenue (Monopoly)

answer

*monopoly marginal revenue is always LESS THAN the price of its good (MR < Price)

question

Total Revenue (Monopoly)

answer

*Effects on TR when a monopoly increases the amount it sells *Output effect = more output is old, so Quantity is higher, which INCREASES TR *Price effect = price falls, so price is lower, which DECREASES TR

question

Profit Maximization (Monopoly)

answer

monopoly profit maximization quantity output is determined by the intersection of the marginal revenue curve and the marginal-cost curve Price > MR = MC Profit = (P - ATC)*Q

question

collusion

answer

an agreement among firms in a market about quantities to produce or prices to charge.

question

prisoners dilemma

answer

a particular "game" between 2 captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.

question

dominant strategy

answer

a strategy that is best for a player in a game regardless of the strategies chosen by the other players.

question

tying

answer

sell two things for a single price.

ECO 202. Chapters 11, 15, 16 & 17. – Flashcards

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