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Chapter 16 Mankiw/Taylor, Economics

True/False
Indicate whether the sentence or statement is true or false.

1. An oligopoly is a market structure in which many firms sell products that are
similar but not identical.

ANSWER: F
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2. The market for crude oil is an example of an oligopolistic market.

ANSWER: T
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3. The unique feature of an oligopoly market is that the actions of one seller have a
significant impact on the profits of all of the other sellers in the market.

ANSWER: T
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4. When firms cooperate with one another, it is generally good for society as a whole.

ANSWER: F
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5. When firms cooperate with one another, it is generally good for the cooperating
firms.

ANSWER: T
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6. When oligopolists collude and form a cartel, the outcome in the market is similar to
that generated by a perfectly competitive market.

ANSWER: F
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 7. The price and quantity generated by a Nash equilibrium is closer to the competitive
solution than the price and quantity generated by a cartel.

ANSWER: T
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8. The greater the number of firms in the oligopoly, the more the outcome of the
market looks like that generated by a monopoly.

ANSWER: F
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9. Cooperation is easily maintained in an oligopoly because cooperation maximizes

each individual firm's profits.

ANSWER: F
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10. The prisoners' dilemma demonstrates why it is difficult to maintain cooperation

even when cooperation is mutually beneficial.

ANSWER: T
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11. There is a constant tension in an oligopoly between cooperation and self-interest

because after an agreement to reduce production is reached, it is profitable for each
individual firm to cheat and produce more.

ANSWER: T
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12. The dominant strategy for an oligopolist is to cooperate with the group and
maintain low production regardless of what the other oligopolists do.

ANSWER: F
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13. Antitrust laws require manufacturers to engage in resale price maintenance or fair
trade.

ANSWER: F
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 14. Predatory pricing occurs when a firm cuts prices with the intention of driving
competitors out of the market so that the firm can become a monopolist and later
raise prices.

ANSWER: T
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15. If a prisoners' dilemma game is repeated, the participants are more likely to
independently maximize their profits and reach a Nash equilibrium.

ANSWER: F
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Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

16. The market for hand tools (such as hammers and screwdrivers) is dominated by
Draper, Stanley, and Craftsman. This market is best described as
a. monopolistically competitive.
b. a monopoly.
c. an oligopoly.
d. competitive.

ANSWER: C
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17. A market structure in which many firms sell products that are similar but not
identical is known as
a. monopolistic competition.
b. monopoly.
c. perfect competition.
d. oligopoly.

ANSWER: A
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18. If oligopolists engage in collusion and successfully form a cartel, the market
outcome is
a. the same as if it were served by competitive firms.
b. efficient because cooperation improves efficiency.
c. the same as if it were served by a monopoly.
d. known as a Nash equilibrium.

ANSWER: C
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19. Suppose an oligopolist individually maximizes its profits. When calculating profits,
if the output effect exceeds the price effect on the marginal unit of production, then
the oligopolist
a. should produce more units.
b. has maximized profits.
c. is in a Nash equilibrium.
d. should produce fewer units.
e. should exit the industry.

ANSWER: A
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20. As the number of sellers in an oligopoly grows larger, an oligopolistic market looks
more like
a. monopoly.
b. a competitive market.
c. monopolistic competition.
d. a collusion solution.

ANSWER: B
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21. When an oligopolist individually chooses its level of production to maximize its
profits, it produces an output that is
a. more than the level produced by a monopoly and less than the level
produced by a competitive market.
b. less than the level produced by a monopoly and more than the level
produced by a competitive market.
c. less than the level produce by either monopoly or a competitive market.
d. more than the level produced by either monopoly or a competitive market.

ANSWER: A
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22. When an oligopolist individually chooses its level of production to maximize its
profits, it charges a price that is
a. more than the price charged by either monopoly or a competitive market.
b. less than the price charged by either monopoly or a competitive market.
c. more than the price charged by a monopoly and less than the price charged
by a competitive market.
d. less than the price charged by a monopoly and more than the price charged
by a competitive market.
 ANSWER: D
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23. As the number of sellers in an oligopoly increases,

a. output in the market tends to fall because each firm must cut back on
production.
b. the price in the market moves further from marginal cost.
c. collusion is more likely to occur because a larger number of firms can place
pressure on any firm that defects.
d. the price in the market moves closer to marginal cost.

ANSWER: D
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24. A situation in which oligopolists interacting with one another each choose their best
strategy given the strategies that all the other oligopolists have chosen is known as a
a. Nash equilibrium.
b. dominant strategy.
c. cartel.
d. collusion solution.

ANSWER: A
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25. Figure 16-1

The table shows the demand schedule for tickets to watch amateur
football matches in a medium sized town. The local council provides
the stadium, and the players play for free so the marginal cost of
providing games is zero. The council has authorized two companies to
provide football matches in two stadiums and the public considers the
games in each stadium to be equivalent.
Price Quantity
€6 0
5 1000
4 2000
3 3000
2 4000
1 5000
0 6000

Refer to Figure 16-1. Under competition, the price and quantity in this market
would be
a. €1; 5000.
b. €2; 4000.
 c. €4; 2000.
d. €0; 6000.
e. €3; 3000.

ANSWER: D
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26. Figure 16-1

The table shows the demand schedule for tickets to watch amateur
football matches in a medium sized town. The local council provides
the stadium, and the players play for free so the marginal cost of
providing games is zero. The council has authorized two companies to
provide football matches in two stadiums and the public considers the
games in each stadium to be equivalent.
Price Quantity
€6 0
5 1000
4 2000
3 3000
2 4000
1 5000
0 6000

Refer to Figure 16-1. If the duopolists in this football market collude and
successfully form a cartel, what is the price that each should charge in order to
maximize profits?
a. €5
b. €4
c. €3
d. €1
e. €2

ANSWER: C
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27. Figure 16-1

The table shows the demand schedule for tickets to watch amateur
football matches in a medium sized town. The local council provides
the stadium, and the players play for free so the marginal cost of
providing games is zero. The council has authorized two companies to
provide football matches in two stadiums and the public considers the
games in each stadium to be equivalent.
Price Quantity
 €6 0
5 1000
4 2000
3 3000
2 4000
1 5000
0 6000

Refer to Figure 16-1. If the duopolists in this baseball market collude and
successfully form a cartel, how much profit will each earn?
a. €4,500
b. €4,000
c. €1,500
d. €9,000
e. €3,000

ANSWER: A
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28. Figure 16-1

The table shows the demand schedule for tickets to watch amateur
football matches in a medium sized town. The local council provides
the stadium, and the players play for free so the marginal cost of
providing games is zero. The council has authorized two companies to
provide football matches in two stadiums and the public considers the
games in each stadium to be equivalent.
Price Quantity
€6 0
5 1000
4 2000
3 3000
2 4000
1 5000
0 6000

Refer to Figure 16-1. If the duopolists are unable to collude, how much profit will
each earn when the market reaches a Nash equilibrium?
a. €8,000
b. €9,000
c. €2,500
d. €4,000
e. €4,500
 ANSWER: D
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29. Many economists argue that resale price maintenance

a. has a legitimate purpose of stopping discount retailers from free riding on
the services provided by full service retailers.
b. is price fixing and, therefore, is prohibited by law.
c. is price fixing and, therefore, is prohibited by law and enhances the market
power of the producer.
d. enhances the market power of the producer.

ANSWER: A
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30. Collusion is difficult for an oligopoly to maintain

a. all of these answers.
b. if additional firms enter of the oligopoly.
c. because antitrust laws (also known as competition laws) make collusion
illegal.
d. because, in the case of oligopoly, self-interest is in conflict with
cooperation.

ANSWER: A
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31. Suppose that ABC Publishing sells an economics textbook and accompanying study
guide. Roberto is willing to pay €75 for the text and €15 for the study guide. Marie
is willing to spend €60 for the text and €25 for the study guide. Suppose both the
book and study guide have a zero marginal cost of production. If ABC Publishing
charges separate prices for both products, its best strategy is to charge prices that,
when combined, total
a. €85.
b. €75.
c. €80.
d. €60.
e. €90.

ANSWER: B
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32. Suppose that ABC Publishing sells an economics textbook and accompanying study
guide. Roberto is willing to pay €75 for the text and €15 for the study guide. Marie
is willing to spend €60 for the text and €25 for the study guide. Suppose both the
book and study guide have a zero marginal cost of production. If ABC Publishing
engages in tying the two products, its best strategy is to charge a combined price of
 a. €60.
b. €90.
c. €85.
d. €75.
e. €80.

ANSWER: C
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33. Laws that make it illegal for firms to conspire to raise prices or reduce production
are known as
a. antimonopoly laws.
b. all of these answers.
c. anti-collusion laws.
d. pro-competition laws.
e. antitrust laws.

ANSWER: E
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