King: Economics

Chapter 11: Oligopoly

Correct answers are marked with an asterisk*

Type: multiple choice question

Title: Chapter 11 - Question 01
01) Which one of the following is not a characteristic of an oligopolistic firm?
*a. Firms produce only differentiated products.
Feedback: This is the correct answer as firms also produce homogeneous goods in
oligopoly and not only differentiated goods.
Page reference: 220
b. There is interdependence amongst firms.
Feedback: This is not the correct answer as there is interdependence amongst firms in
oligopoly. Firms’ prices and output decisions are made by taking into account the actions
or reactions of rival firms.
Page reference: 220
c. The industry is dominated by a few large firms.
Feedback: This is not the right answer as the industry is dominated by a few large firms.
Page reference: 220
d. High levels of advertising and branding takes place.
Feedback: This is not the correct answer since there is advertising and branding in
oligopoly.
Page reference: 220

Type: multiple choice question

Title: Chapter 11 - Question 02
02) Which one of the following is correct?
a. In accordance with the Cournot model, each oligopolistic firm sets its price bearing in
mind the price it expects its rival will set.
Feedback: This is not correct as it is not the price that is set by a firm in the Cournot
model when it is thinking about its rival behaviour.
Page reference: 222-228
b. In the Bertrand model each firm sets its output bearing in mind the output that it expects
its rival will set.
Feedback: No, in the Bertrand model it is not the rival’s output that a firm thinks about
when it sets its output, it is the price of the rival that the firm thinks about.
Page reference: 222-228
*c. The Cournot and Stackelberg models are similar in the sense that the firm sets its
output bearing in mind the rival’s behaviour except that in the latter there is a leader-
follower behaviour.
Feedback: This is the right answer since in both the Cournot and Stackelberg models the
firm sets its output bearing in mind what output it expects the rival firm will set. However in
the Stackelberg model there is a leader-follower relationship and the leader sees the
output first.
Page reference: 222-228
d. In the Stackelberg model the firm sets its output bearing in mind the price that it expects
its rival will set.
Feedback: This is not correct as in the Stackelberg model a choice of output is made by
each firm but this is not dependent on the price it expects the rival firm to fix.
Page reference: 222-228

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 King: Economics
Chapter 11: Oligopoly

Type: multiple choice question

Title: Chapter 11 - Question 03
03) Suppose that Ricky gets 50 utils from going to the football match or 25 utils from going
on a holiday in Cornwall whilst Sanjay gets 25 utils from going to the football match or 50
utils from going to Cornwall. Given these strategies which one of the following is Nash
equilibrium?
a. Ricky goes to Cornwall and Sanjay goes to the football match.
Feedback: No, this is not correct as both Ricky and Sanjay can choose better options to
improve their benefits so this is not Nash equilibrium.
Page reference: 229
*b. Ricky goes to the football match and Sanjay goes to Cornwall.
Feedback: This is correct since Ricky chooses his best strategy and Sanjay also chooses
his best strategy. They both get 50 utils each so this is Nash equilibrium.
Page reference: 229
c. Both Ricky and Sanjay go to the football match.
Feedback: This is not Nash equilibrium as Sanjay is not maximizing his benefits by going
to the football match.
Page reference: 229
d. Both Sanjay and Ricky go to Cornwall.
Feedback: No, this is not Nash equilibrium. Ricky is not maximizing his benefits as he has
not taken the best strategy.
Page reference: 229

Type: multiple choice question

Title: Chapter 11 - Question 04
04) With Carlos and Maryam being players in the prisoner’s dilemma which one of the
following is the dominant strategy?
a. Carlos confesses and Maryam does not confess to the crime.
Feedback: No, this is incorrect because if Carlos confesses and Maryam does not, then
Carlos goes free and Maryam gets a very high sentence.
Page reference: 230
b. Maryam confesses and Carlos does not confess to the crime.
Feedback: This is incorrect, because if Maryam confesses and Carlos does not, then
Maryam goes free and Carlos gets a very high sentence.
Page reference: 230
*c. Both Carlos and Maryam confess to the crime.
Feedback: This is correct since if both confess, then they both get light sentences each
and this is the best strategy given their options.
Page reference: 230
d. Both Carlos and Maryam don’t confess to the crime.
Feedback: This is incorrect as if they both chose not to confess they both would get the
lightest sentence but each one not confessing is dependent on the other doing the same
which is taking a high risk. No, this is not Nash equilibrium.
Page reference: 230

Type: multiple choice question

Title: Chapter 11 - Question 05
05) A cartel is formed:

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 King: Economics
Chapter 11: Oligopoly

a. when firms do not openly cooperate on prices.

Feedback: This is incorrect as a cartel is not formed from collusion being hidden.
Page reference: 231, 232
*b. when firms in an industry openly collude on prices and output.
Feedback: This is true as a cartel is formed when the firms in an industry are openly
involved in collusion over prices and output. However cartels are illegal in the EU.
Page reference: 231, 232
c. when a group of firms openly compete with each other.
Feedback: This is incorrect since a cartel is not formed when firms are competing with
each other.
Page reference: 205, 231, 232
d. There is no agreement amongst firms about the price they will charge.
Feedback: No, in a cartel formation there are some agreements on prices.
Page reference: 231, 232

Type: multiple choice question

Title: Chapter 11 - Question 06
06) Under which conditions will a cartel be successful?
a. Where sellers are few and there are major differences in average costs of production.
Feedback: No, it is not correct as huge differences in costs of production are not
favourable factors to gain success in a cartel.
Page reference: 231, 232
b. Where few firms sell differentiated goods but there are low barriers to entry.
Feedback: No, selling differentiated goods and low barriers to entry are not congenial to
the success of a cartel.
Page reference: 231, 232
c. Where the average costs of production are low and the good is differentiated. There are
also a large number of sellers in the industry.
Feedback: This is incorrect as differentiated goods and a large number of sellers are not
factors that would contribute to the success of a cartel.
Page reference: 231, 232
*d. Where costs of production are similar and the good is undifferentiated. Where firms
are few and entry barriers are high.
Feedback: This is correct since a cartel would gain success when all of the above exist in
an industry.
Page reference: 231, 232

Type: multiple choice question

Title: Chapter 11 - Question 07
07) The barometric price leader in tacit collusion refers to:
a. the case where the biggest firm is the barometric leader.
Feedback: Yes, this is incorrect as a barometric leader is not the biggest firm.
Page reference: 236
b. the case where the firm with the lowest cost of production is the barometric leader.
Feedback: No, this is not correct, as a barometric leader is not the one with the lowest
cost of production.
Page reference: 236
*c. the case where the barometric price leader is the most respected since he has
greatest knowledge of that market.

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 King: Economics
Chapter 11: Oligopoly

Feedback: This is correct as if the barometric price leader is the most respected firm in
the industry they are not necessarily the biggest firm.
Page reference: 236
d. the case where the barometric price leader is the one who spends the most on
advertising.
Feedback: This is incorrect because a barometric leader is not the one with the highest
advertising cost.
Page reference: 236

Type: multiple choice question

Title: Chapter 11 - Question 08
08) Which one of the following applies to the kinked demand curve analysis in oligopoly?
a. When firms raise price, rivals also do the same to increase profits.
Feedback: No, this is incorrect as in the kinked demand curve analysis rivals do not
match a price rise by another firm.
Page reference: 226, 227
b. When a firm lowers its prices, rivals are likely to leave their prices unchanged.
Feedback: This is incorrect as in the kinked demand curve analysis rivals do react to a
price cut by another firm in the industry.
Page reference: 226, 227
*c. Rivals are likely to follow a price cut when a firm cuts its price in the industry but do not
follow a price increase when a firm raises its price.
Feedback: Yes, this is correct as rivals are likely to follow a price cut by a firm as rivals
may lose sales to the firm that has cut its price. However a price increase by a firm is not
likely to be followed by rivals and the firm loses sales as the firm moves up the more
elastic part of the curve. The kinked demand curve is part elastic and part inelastic.
Page reference: 226, 227
d. Rivals raise their prices when a firm lowers its price.
Feedback: No, this is incorrect since this is not the likely behaviour of firms in oligopoly
and it does not explain the kinked demand curve.
Page reference: 226, 227

Type: multiple choice question

Title: Chapter 11 - Question 09
09) Which one of the following applies to the dominant firm price leadership in oligopoly?
*a. The dominant firm price leader in the industry is the largest firm.
Feedback: Yes, this is correct as the biggest firm in the industry is the price leader.
Page reference: 234
b. The dominant firm price leader in the industry is openly decided by all firms in the
industry.
Feedback: This is not right as the dominant firm price leadership occurs under tacit
collusion where cooperation amongst firms are hidden.
Page reference: 234
c. The dominant firm price leader is the firm that gives the biggest discounts to customers.
Feedback: No, this is not correct as the dominant firm price leader is not the one who
gives the biggest discounts to customers.
Page reference: 234
d. The dominant firm price leader is always the most efficient firm in the industry.

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 King: Economics
Chapter 11: Oligopoly

Feedback: No, this is not correct as the dominant firm may not necessarily be the most
efficient firm in the industry.
Page reference: 234

Type: multiple choice question

Title: Chapter 11 - Question 10
10) Which one of the following explains the maximin strategy?
a. Choosing the worst out of the best possible payoff.
Feedback: This is not correct as the rmaximin strategy is not where the worst of the best
strategy is chosen.
Page reference: 237, 238
b. Selecting a maximin strategy is selecting the highest price.
Feedback: No, it is not correct as it is somewhat vague and does not explain the maximin
strategy.
Page reference: 237, 238
c. The maximin strategy is not possible.
Feedback: No, it is not correct, the maximin strategy is possible.
Page reference: 237, 238
*d. Selecting the best out of the worst possible outcomes.
Feedback: This is correct as in the maximin decision is made by choosing the best out of
all the worst possible outcomes.
Page reference: 237, 238

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