Sample MCQ’s for Chapters 9, 10 and 11

2. 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

3. 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

4. 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

1. If a few large firms dominate an industry the market is known as:

a) Monopolistic competition
b) Competitively monopolistic
c) Duopoly
d) Oligopoly

2. In a cartel, member firms may be given a fixed amount to

produce. This amount is called a:

a) Limitless
b) Factor
c) Quota
 d) Quotient

3. In the Kinked Demand Curve theory it is assumed that:

a) An increase in price by the firm is not followed by

others
b) An increase in price by the firm is followed by others
c) A decrease in price by the firm is not followed by
others
d) Firms collude to fix the price

4. The Kinked Demand Curve theory assumes:

a) Firms co-operate
b) Firms act as part of a cartel
c) Firms are competitive with each other
d) Firms are not profit maximizers

5. In Game Theory:

a) Firms are always assumed to act independently

b) Firms are always assumed to cooperate with each
other
c) Firms always collude as part of a cartel
d) Firms consider the actions of others before deciding
what to do

6. In the Kinked Demand Curve theory:

a) The marginal revenue curve is perfectly horizontal

b) Demand is always price inelastic
c) Demand is always price elastic
d) Non price competition is likely

7. In oligopoly:
 a) The largest four firms are likely to have a small market
share
b) The price is likely to equal marginal revenue
c) Firms will continue to produce in the long run if price is
less than average cost
d) Firms may collude or compete depending on their
assumptions about their competitors

8. A model of Game Theory of oligopoly is known as the:

a) Prisoner's Dilemma
b) Monopoly Cell
c) Jailhouse Sentence
d) Jury Box

9. In a cartel:

a) Firms compete against each other

b) Price wars are common
c) Firms use price to win market share from competitors
d) Firms collude

10. In cartels:

a) Each individual firm profit maximizes

b) There may be an incentive to cheat
c) The industry as a whole is loss making
d) There is no need to police agreements
7. 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

8. 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

9. 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

11. Sue and Jane own two local petrol 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

14. Which of the following is true?

a) In a one-shot game, a collusive strategy always represents a Nash equilibrium.
b) A perfect equilibrium occurs when each player is doing the best he can regardless
of what the other player is doing.
c) Each Nash equilibrium is a perfect equilibrium.
d) Every perfect equilibrium is a Nash equilibrium.
e) none of the above

Answer: D Difficulty: Med

19. Economists use game theory to predict the behavior of oligopolists. Which of the
following is crucial for the success of the analysis?
a) Make sure the payoffs reflect the true payoffs of the oligopolists.
b) Make sure whether the oligopolists move simultaneously or sequentially.
c) Make sure the problem considered is of a one-shot or repeated nature.
d) All of the above.

Answer: D Difficulty: Med

28. Which of the following pricing strategies does not usually enhance the profits of
firms with market power?
a) price matching.
b) cross-subsidies.
c) two-part pricing.
d) marginal cost pricing.

Answer: D Difficulty: Med

29. Which of the following statements is true?

a) The more elastic the demand, the higher is the profit-maximizing markup.
b) The more elastic the demand, the lower is the profit-maximizing markup.
c) The higher the marginal cost, the lower the profit-maximizing price.
d) The higher the average cost, the lower the profit-maximizing price.

Answer: B Difficulty: Easy