Purdue University North Central

Economics 251

Review Questions Chapter 25 (10) - Oligopoly

(1) The soft drink market is dominated by Coke, Pepsi, and very few other firms. The market can best be classified as:

(a) perfect competition.

(b) monopolistic competition.

(c) oligopoly.

(d) monopoly.

(2) The correct ranking of the degree of market power from highest to lowest is:

(a) monopoly; oligopoly; monopolistic competition; and perfect competition.

(b) monopoly; monopolistic competition; perfect competition; and oligopoly.

(c) monopoly; monopolistic competition; oligopoly; and perfect competition.

(d) oligopoly; monopoly; monopolistic competition; and perfect competition.

(3) The concentration ratio measures the:

(a) number of plants owned by an oligopoly.

(b) percentage of total profits made by a firm in a specific market.

(c) proportion of total output produced by the four largest producers in a specific market area.

(d) relative size of a firm in compared to other industries.

(4) While there are many newspapers in the U.S., each city tends to have only one or two. If newspapers are generally local markets, then newspapers are characterized by:

(a) a low national concentration and a high HHI at the local level.

(b) a low national concentration and a low HHI at the local level.

(c) a high national concentration and a high HHI at the local level.

(d) a high national concentration and a low HHI at the local level.

(5) Suppose there are only three firms in a market. The largest firm has sales of $250 million, the second largest has sales of $250 million, and the smallest has sales of $50 million. The market share of the largest firm is:

(a) 25 percent.

(b) 40 percent.

(c) 50 percent.

(d) 60 percent.

(6) The major firms in the U.S. soda pop market, with market shares are as follows: Coca-Cola – 44 percent; Pepsi-Cola – 32 percent; Cadbury-Schweppes (Dr. Pepper and Seven-Up) – 15 percent; Royal Crown – 3 percent; and Cott Beverages – 2 percent. The Herfindahl-Hirshman Index (HHI) of market concentration for this industry is:

(a) 96

(b) 100

(c) 3,198

(d) 4,000

(7) The pricing strategy in which one firm is allowed to establish the market price for all firms in the market is called:

(a) Price discrimination.

(b) The profit-maximizing rule.

(c) Price leadership.

(d) Marginal cost pricing.

(8) What is the most likely response by rivals when an oligopolist cuts its price to increase its sales?

(a) Raise their prices.

(b) Ignore the change.

(c) Cut their prices.

(d) Reduce their costs.

(9) The study of decision making in situations where strategic interaction between rivals occurs is known as:

(a) Oligopolistic theory.

(b) Market power theory.

(c) Game theory.

(d) Competitive theory.

(10) Tacit collusion is most easily and effectively accomplished in:

(a) Contestable markets.

(b) Markets with a large number of competitors.

(c) Competitive markets.

(d) Oligopolies.

(11) The kinked demand curve explains the observation that in oligopoly markets:

(a) rivals match price increases.

(b) rivals do not match price reductions.

(c) rivals match price reductions but not price increases.

(d) All of the above.

Consider Figure 1 in answering Question (12) below.

Figure 1

(12) In Figure 12, with marginal cost equal to MC(2), the profit maximizing rate of output occurs at a point:

(a) J.

(b) H.

(c) G.

(d) F.