Baye 9e Chapter 09 TB

Chapter 09 - Basic Oligopoly Models
Chapter 09
Basic Oligopoly Models
Multiple Choice Questions
1. The Cournot theory of oligopoly assumes rivals will:

A. keep their output constant.
B. increase their output whenever a firm increases its output.
C. decrease output whenever a firm increases its output.
D. follow the learning curve.
Answer: A
Learning Objective: 09-02
Topic: Profit Maximization in Four Oligopoly Settings
Blooms: Remember
AACSB: Knowledge Application
Difficulty: 01 Easy
2. Which of the following is true?

A. In Bertrand oligopoly each firm believes that its 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 effect on output or price.
D. None of the preceding answers is correct.
Answer: D
Blooms: Understand
Difficulty: 02 Medium
3. In a Sweezy Oligopoly, a decrease in a firm's marginal cost generally leads to:
A. reduced output and a higher price.
B. increased output and a lower price.
C. higher output and a higher price.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
9-1
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4. The Bertrand model of oligopoly reveals that:
A. capacity constraints are not important in determining market performance.
B. perfectly competitive prices can arise in markets with only a few firms.
C. changes in marginal cost do not affect prices.
D. All of the statements associated with this question are true.
Answer: B
Blooms: Remember
Difficulty: 01 Easy
5. Which of the following are quantity-setting oligopoly models?

A. Stackelberg.
B. Cournot.
C. Bertrand.
D. Stackelberg and Cournot.
Answer: D
Topic: Comparing Oligopoly Models
Blooms: Remember
Difficulty: 01 Easy
6. Which of the following are price-setting oligopoly models?

A. Stackelberg.
B. Cournot.
C. Bertrand.
D. Cournot and Stackelberg.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
7. 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. the firms simultaneously reduced output below the Nash equilibrium level and one firm
reduced output below the Cournot Nash equilibrium level, while the other firm continued to
produce its Cournot Nash equilibrium output.
9-2
Answer: A
Blooms: Analyze
AACSB: Analytical Thinking
Difficulty: 03 Hard
8. Which of the following is NOT a feature of Sweezy oligopoly?

A. There are few firms in the market serving many consumers.
B. The firms produce homogeneous products.
C. Each firm believes that rivals will cut their prices in response to a price reduction, but will
not raise their prices in response to a price increase.
D. Barriers to entry exist.
Answer: B
Blooms: Understand
9. Which of the following is a profit-maximizing condition for a Cournot oligopolist?

A. MR = MC.
B. Q1 = Q2 = ... = Qn.
C. P = MR.
D. All of the statements associated with this question are correct.
Answer: A
Blooms: Apply
10. A new firm enters a market which is initially serviced by a Bertrand duopoly charging a
price of $20. What will the new price be should the three firms coexist after the entry?
A. $25
B. $20
C. $15
Answer: B
Blooms: Analyze
Difficulty: 03 Hard
9-3
11. "An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it
is." This statement is:
A. true.
B. false.
C. true of homogeneous product industries.
Answer: B
Blooms: Understand
12. Tom and Jack are the only two local gas stations. Although they have different constant
marginal costs, they both survive continued competition. Tom and Jack do NOT constitute a:
A. Sweezy oligopoly.
B. Cournot oligopoly.
C. Stackelberg oligopoly.
D. Bertrand oligopoly.
Answer: D
Blooms: Understand
13. A market is NOT contestable if:

A. all producers have access to the same technology.
B. consumers respond quickly to a price change.
C. existing firms cannot respond quickly to entry by lowering their price.
D. there are sunk costs.
Answer: D
Topic: Contestable Markets
Blooms: Understand
Difficulty: 01 Easy
14. Firm A has a higher marginal cost than firm B. They compete in a homogeneous product
Cournot duopoly. Which of the following results will NOT occur?
A. QA < QB
B. ProfitA < ProfitB
C. Revenue of firm A < Revenue of firm B
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D. PriceA < PriceB
Answer: D
Blooms: Analyze
Difficulty: 01 Easy
15. If firms compete in a Cournot fashion, then each firm views the:
A. output of rivals as given.
B. prices of rivals as given.
C. profits of rivals as given.
Answer: A
Blooms: Understand
16. Two firms compete in a Stackelberg fashion. If firm 2 is the leader, then:

A. firm 1 views the output of firm 2 as given.
B. firm 2 views the output of firm 1 as given.
C. Both A and B are correct.
Answer: A
Blooms: Apply
Difficulty: 03 Hard
17. With linear demand and constant marginal cost, a Stackelberg leader's profits are
___________ the follower.
A. less than
B. equal to
C. greater than
D. either less than or greater than
Answer: C
Blooms: Understand
9-5
18. An oligopolist faces a demand curve that is steeper at higher prices than at lower prices.
Which of the following is most likely?
A. The firm competes with others in the Cournot fashion.
B. Other firms match price increases but do not match price reductions.
C. Other firms match price reductions but do not match price changes.
D. The firm competes with others in the Bertrand fashion.
Answer: B
Topic: The Roles of Beliefs and Strategic Interaction
Blooms: Understand
19. When firm 1 enjoys a first-mover advantage in a Stackelberg duopoly, it will produce:

A. more output and charge a lower price than firm 2.
B. more output and charge the same price as firm 2.
C. less output and charge the same price as firm 2.
D. less output and charge a higher price than firm 2.
Answer: B
Blooms: Analyze
Difficulty: 03 Hard
20. A slight increase in the marginal cost of a firm definitely leads to a reduction in its output
if the firm competes in the:
A. Sweezy fashion.
B. Cournot fashion.
C. Bertrand fashion.
D. Cournot fashion and Bertrand fashion.
Answer: D
Blooms: Analyze
Difficulty: 03 Hard
21. The market demand in a Bertrand duopoly is P = 10 − 3Q, and the marginal costs are $1.
Fixed costs are zero for both firms. Which of the following statement(s) is/are true?
A. P = $1.
B. Profits of firm 1 = profits of firm 2.
C. Producer's surplus of firm 1 = producer's surplus of firm 2.
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Answer: D
Blooms: Understand
22. 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
Blooms: Understand
23. A firm's isoprofit curve is defined as the combinations of outputs produced by:
A. a firm that earns it the same level of profits.
B. all firms that yield the firm the same level of profit.
C. all firms that make total industry profits constant.
Answer: B
Blooms: Remember
Difficulty: 01 Easy
24. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 −
2Q. The cost function for each firm is C(Q) = 4Q. The equilibrium output of each firm is:
A. 8.
B. 16.
C. 32.
D. 36.
Answer: B
Blooms: Apply
9-7
2Q. The cost function for each firm is C(Q) = 4Q. Each firm earns equilibrium profits of:
A. $1,024.
B. $2,048.
C. $4,096.
D. $512.
Answer: D
Blooms: Apply
2Q. The cost function for each firm is C(Q) = 4Q. In equilibrium, the deadweight loss is:
A. $128.
B. $256.
C. $384.
D. $512.
Answer: B
Blooms: Analyze
Difficulty: 03 Hard
27. Which of the following statements is NOT a condition for a Stackelberg oligopoly?

A. The market is contestable.
B. Barriers to entry exist.
C. A single firm (the leader) selects an output before all other firms choose their outputs.
D. The firms produce either differentiated or homogeneous products.
Answer: A
Blooms: Remember
Difficulty: 01 Easy
28. With a linear inverse demand function and the same constant marginal costs for both firms
in a homogeneous product Stackelberg duopoly, which of the following will result?
A. Profits of leader > Profits of follower.
9-8
B. QL = 2QF.
C. PL > PF.
D. Profits of leader > Profits of follower and QL = 2QF.
Answer: D
Blooms: Apply
29. Suppose that the duopolists competing in Cournot fashion agree to produce the collusive
output. Given that firm 2 commits to this collusive output, it pays firm 1 to:
A. cheat by producing a higher level of output.
B. cheat by producing a lower level of output.
C. cheat by raising prices.
Answer: A
Blooms: Understand
30. Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 − 3Q. The
cost function for each firm is C(Q) = 4Q. The outputs of the two firms are:
A. QL = 16; QF = 8.
B. QL = 24; QF = 12.
C. QL = 12; QF = 8.
D. QL = 20; QF = 15.
Answer: A
Blooms: Apply
31. Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 − 3Q. The
cost function for each firm is C(Q) = 4Q. The profits of the two firms are:
A. L = $384; F = $192.
B. L = $192; F = $91.
C. L = $56; F = −$28.
D. L = $56; F = $28.
Answer: A
9-9
Blooms: Apply
Difficulty: 03 Hard
32. From a consumer's point of view, which type of oligopoly is most desirable?

A. Sweezy
B. Cournot
C. Stackelberg
D. Bertrand
Answer: D
Blooms: Understand
33. Collusion in oligopoly is difficult to achieve because:

A. it is prohibited by law.
B. every firm has an incentive to cheat given that others follow the agreement.
C. firms usually take care of consumers' interests as a decision priority.
D. it is prohibited by law and every firm has an incentive to cheat given that others follow the
agreement.
Answer: D
Blooms: Understand
34. Since the end of the war in the Persian Gulf, the world price of oil has fallen. But in some
areas, consumers have seen little relief at the pump. This phenomenon can be explained by the
theory of:
A. perfect competition.
B. monopolistic competition.
C. oligopoly.
D. monopoly.
Answer: C
Blooms: Understand
35. The spirit of equating marginal cost with marginal revenue is NOT held by:
A. perfectly competitive firms.
9-10
B. oligopolistic firms.
C. perfectly competitive firms and oligopolistic firms.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
36. MCI announced a price discount plan for small firms. Their stock immediately fell in
price. This shows that:
A. MCI is probably competing in a Bertrand oligopolistic industry.
B. stockholders are sometimes not rational.
C. there is increased demand for MCI's stock.
D. AT&T sold out its stock of MCI just after the announcement.
Answer: A
Blooms: Understand
37. An oligopolist has a marginal revenue curve that jumps down at 500 units of output. What
kind of oligopoly does the firm most likely belong to?
A. Sweezy
B. Cournot
C. Stackelberg
D. Bertrand
Answer: A
Blooms: Understand
38. 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. beliefs play an important role in oligopolistic competition and oligopoly is the most
complicated type of market structure.
Answer: D
9-11
Blooms: Remember
Difficulty: 01 Easy
39. Which of the following is NOT a type of market structure?

A. Monopolistic competition
B. Perfect competition
C. Monopolistic oligopoly
D. Monopoly
Answer: C
Topic: Introduction
Blooms: Remember
Difficulty: 01 Easy
40. Ed just finished an empirical study of oligopoly. He found the following result: "In the
examined industry, a firm's demand curve is such that other firms match price increases but
do not match price reductions." What kind of oligopoly is the examined industry?
A. Sweezy model
B. Cournot model
C. Stackelberg model
Answer: D
Blooms: Understand

A. If there are only two firms in a market, prices must be above marginal cost.
B. If there is only one firm in a market, prices must be above marginal cost.
C. Both A and B are correct.
Answer: D
Blooms: Analyze
Difficulty: 03 Hard
42. Which firm would you expect to make the lowest profits, other things equal?
A. Bertrand oligopolist
9-12
B. Cournot oligopolist
C. Sweezy oligopolist
D. Stackelberg leader
Answer: A
Blooms: Understand
43. Which would you expect to make the highest profits, other things equal?
A. Bertrand oligopolist
B. Cournot oligopolist
C. Stackelberg leader
D. Stackelberg follower
Answer: C
Blooms: Understand
44. When firm 1 acts as a Stackelberg leader:

A. Firm 2 produces the monopoly output.
B. Firm 1's profit is less than its profit if they compete in a Cournot fashion.
C. Firm 2 will earn more than if they compete in a Cournot fashion.
Answer: D
Blooms: Analyze
Difficulty: 03 Hard
45. Firm 1 and firm 2 compete as a Cournot oligopoly. There is an increase in marginal cost
for firm 1. Which of the following is NOT true?
A. Firm 1 will produce less.
B. Firm 2 will produce more.
C. Both firm 1’s and firm 2's reaction functions are shifted.
D. Profits of firm 1 will decrease.
Answer: C
Blooms: Understand
9-13
46. Two firms produce different goods. Firm 1 has a positive-sloped reaction function. This
can be explained best by:
A. homogeneous product Cournot oligopoly.
B. homogeneous product Bertrand oligopoly.
C. heterogeneous product Bertrand oligopoly.
Answer: C
Blooms: Analyze
Difficulty: 03 Hard
47. A duopoly in which both firms have a Lerner index of monopoly power equal to 0 is
probably a:
Answer: D
Blooms: Understand
48. The inverse demand in a Cournot duopoly is P = a − b(Q1 + Q2), and costs are C1(Q1) =
c1Q1 and C2(Q2) = c2Q2. The government has imposed a per-unit tax of $t on each unit sold by
each firm. The equilibrium output of each firm is the same as a situation where each firm's:
A. demand increases by t.
B. demand decreases by t.
C. marginal cost increases by t.
D. marginal cost decreases by t.
Answer: C
Blooms: Analyze
Difficulty: 03 Hard
9-14
49. The inverse demand in a Cournot duopoly is P = a − b(Q1 + Q2), and costs are C1(Q1) =
c1Q1 and C2(Q2) = c2Q2. The government has imposed a per-unit tax of $t on each unit sold by
each firm. The tax revenue is:
A. t times the total output of the two firms should there be no sales tax.
B. less than t times the total output of the two firms should there be no sales tax.
C. greater than t times the total output of the two firms should there be no sales tax.
Answer: B
Blooms: Analyze
50. The producer's surplus of all firms in an oligopoly is usually the least in the case of a:
Answer: D
Blooms: Remember
Difficulty: 01 Easy
51. The Bertrand theory of oligopoly assumes:

A. firms set prices.
B. rivals will increase their output whenever a firm increases its output.
C. rivals will decrease output whenever a firm decreases its output.
D. rivals will follow the learning curve.
Answer: A
Blooms: Remember
Difficulty: 01 Easy

A. In Bertrand oligopoly each firm reacts optimally to price changes.
B. In Cournot oligopoly firms engage in quantity competition.
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C. In Sweezy oligopoly a change in marginal cost may not have an effect on output or price.
Answer: D
Blooms: Understand
53. In a Cournot oligopoly, a decrease in a firm's marginal cost leads to:

A. reduced output and a higher price.
B. reduced output and a lower price.
C. higher output and a higher price.
D. higher output and a lower price.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
54. The Sweezy model of oligopoly reveals that:

A. capacity constraints are not important in determining market performance.
B. perfectly competitive prices can arise in markets with only a few firms.
C. changes in marginal cost may not affect prices.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
55. Which of the following is NOT a quantity-setting oligopoly model?

A. Stackelberg
B. Cournot
C. Bertrand
D. All of the choices are quantity-setting models.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
9-16
56. In the presence of large sunk costs, which of the following market structures generally
leads to the highest price?
A. Stackelberg
B. Cournot
C. Bertrand
D. Monopoly
Answer: D
Blooms: Remember
Difficulty: 01 Easy
57. Both firms in a Cournot duopoly would experience lower profits if:

A. there was an increase in marginal production costs.
D. there was an increase in marginal production costs and one firm reduced output below the
Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash
equilibrium output.
Answer: A
Blooms: Analyze
Difficulty: 03 Hard
58. Which of the following is a feature of a contestable market?

A. There are several firms in the market serving many consumers.
B. There is a single firm in the market serving many consumers.
C. The market price is equal to marginal cost.
D. There is a single firm in the market serving many consumers and the market price is equal
to marginal cost.
Answer: D
Blooms: Understand
9-17
59. Which of the following is true of a perfectly contestable market?

A. P = MC
B. P > MC
C. P < ATC
D. P > MC and P < ATC
Answer: A
Blooms: Understand
60. A new firm enters a market which is initially serviced by a Cournot duopoly charging a
price of $20. What will the new market price be should the three firms coexist after the entry?
A. $20
B. Below $20
C. Above $20
Answer: B
Blooms: Analyze
Difficulty: 03 Hard
61. "An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it
is." This statement is true of:
A. Bertrand and Cournot oligopolies.
B. Cournot and Stackelberg oligopolies.
C. Bertrand and Stackelberg oligopolies.
Answer: D
Blooms: Understand
62. Sue and Jane own two local gas stations. They have identical constant marginal costs, but
earn zero economic profits. Sue and Jane constitute:
A. a Sweezy oligopoly.
9-18
B. a Cournot oligopoly.
C. a Bertrand oligopoly.
Answer: C
Blooms: Understand
63. The profits of the leader in a Stackelberg duopoly:

A. are greater than those of the follower.
B. equal those of the follower.
C. are less than those of the follower.
D. are greater than those of a Sweezy oligopolist.
Answer: A
Blooms: Understand
Difficulty: 03 Hard
64. An important condition for a contestable market is:

A. all producers have different technologies.
B. there are high transaction costs.
C. existing firms cannot respond quickly to entry by lowering their price.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
65. The Cournot theory of oligopoly is based on the assumption that each firm believes that
rivals will:
A. keep their output constant if it changes its output.
B. increase their output whenever it increases its output.
C. decrease their output whenever it increases its output.
D. randomly change output whenever it changes its output.
Answer: A
Blooms: Remember
9-19
Difficulty: 01 Easy

A. In Bertrand oligopoly markets, each firm believes that its rivals will hold their output
constant if it changes its output.
B. In Cournot oligopoly markets, firms produce an identical product at a constant marginal
cost and engage in price competition.
C. In Sweezy oligopoly markets, each firm believes rivals will cut their prices in response to a
price reduction, but will not raise prices in response to price increases.
D. In oligopoly markets, a change in marginal cost never has an effect on output or price.
Answer: C
Blooms: Understand
67. Which of the following is/are NOT price-setting oligopoly models?

A. Stackelberg
B. Cournot
C. Bertrand
D. Stackelberg and Cournot
Answer: D
Blooms: Remember
Difficulty: 01 Easy
68. A new firm enters a market which is initially serviced by a Bertrand duopoly charging a
price of $30. Assuming that the new firm is equally as efficient as the incumbent firms, what
will the new price be should the three firms coexist after the entry?
A. Above $30
B. Below $30
C. Equal to $30
D. Unable to tell given the information provided.
Answer: C
Blooms: Understand
9-20
69. One of the characteristics of a contestable market is that:

A. all firms have different productive technology.
B. consumers react quickly to a price change.
C. existing firms respond quickly to entry by lowering their price.
Answer: B
Blooms: Remember
Difficulty: 01 Easy
Cournot duopoly. Which of the following results will NOT occur?
A. QA > QB
D. PriceA = PriceB
Answer: A
Blooms: Understand
Fixed costs are zero for both firms. Which of the following statement(s) is/are true?
A. P = $3
B. P = $10
C. P = $15
Answer: A
Blooms: Apply
Difficulty: 01 Easy
72. Two identical firms compete as a Cournot duopoly. The inverse market demand they face
is P = 80 − 4Q. The cost function for each firm is C(Q) = 8Q. The price charged in this market
will be:
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A. $12.
B. $32.
C. $48.
D. $56.
Answer: B
Blooms: Apply
73. Two firms compete as a Stackelberg duopoly. The inverse market demand they face is P =
62 − 4.5Q. The cost function for each firm is C(Q) = 8Q. The outputs of the two firms are:
A. QL = 48; QF = 24.
B. QL = 35; QF = 6.
C. QL = 6; QF = 3.
Answer: C
Blooms: Apply
74. Which of the following is NOT a feature of Sweezy oligopoly?

A. There are a few firms in the market serving many consumers.
B. The firms produce differentiated products.
C. Each firm believes that rivals will cut their prices in response to a price reduction, but will
not raise their prices in response to a price increase.
D. Free entry and exit occurs in the market.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
75. The profits of the follower in a Stackelberg duopoly:

A. are greater than those of the leader.
B. equal those of the leader.
C. are less than those of the leader.
D. All the statements associated with this question are correct.
Answer: C
9-22
Blooms: Remember
Difficulty: 01 Easy
76. If firms are in Cournot equilibrium, they could increase profits by:
A. jointly increasing output.
B. jointly reducing output.
C. unilaterally increasing prices.
D. unilaterally reducing prices.
Answer: B
Blooms: Understand
77. There are many different models of oligopoly because:

A. beliefs are not incorporated in oligopolistic competition.
B. firms do not maximize profits in oligopolistic competition.
C. oligopoly is the most complicated type of market structure.
D. beliefs are not incorporated in oligopolistic competition and oligopoly is the most
complicated type of market structure.
Answer: C
Blooms: Remember
Difficulty: 01 Easy
78. Consider a Cournot duopoly with the following inverse demand function: P = 100 − 2Q1 −
2Q2. The firms' marginal costs are identical and are given by MCi(Qi) = 2Qi. Based on this
information, firm 1 and 2's marginal revenue functions are:
A. MR1(Q1,Q2) = 100 − 2Q1 − Q2 and MR2(Q1,Q2) = 100 − Q1 − 2Q2.
B. MR1(Q1,Q2) = 100 − 4Q1 − 2Q2 and MR2(Q1,Q2) = 100 − 2Q1 − 4Q2.
C. MR1(Q1,Q2) = 100 − 2Q1 − 4Q2 and MR2(Q1,Q2) = 100 − 4Q1 − 2Q2.
D. MR1(Q1,Q2) = 24.5 − 0.5Q2 and MR2(Q1,Q2) = 24.5 − 0.5Q1.
Answer: B
Blooms: Apply
9-23
2Q2. The firms' marginal costs are identical and are given by MCi(Qi) = 2Qi. Based on this
information, firm 1 and 2's reaction functions are:
A. r1(Q2) = 24.5 − 0.5Q1 and r2(Q1) = 24.5 − 0.5Q2.
B. r1(Q2) = 24.5 − 0.5Q2 and r2(Q1) = 24.5 − 0.5Q1.
C. Q1 = 49 − 0.5Q2 and Q2 = 49 − 0.5Q1.
D. Q1 = 49 − 0.25Q2 and Q2 = 49 − 0.25Q1.
Answer: B
Blooms: Apply
2Q2. The firms' marginal costs are identical and are given by MCi = 2. Based on this
information, consumer surplus in this market is:
A. $16.33.
B. $32.67.
C. $1,067.11.
D. $2,134.22.
Answer: C
Blooms: Analyze
Difficulty: 03 Hard
81. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 −
2Q1 − 2Q2. The firms' marginal costs are identical and are given by MCi = 2. Based on this
information, the Stackelberg leader's marginal revenue function is:
A. MR(QL) = 50 − 2QL + c1/2.
B. MR(QL) = 50 − 2QL + c2/2.
C. MR(QF) = 100 − 2QF + c1/2.
D. MR(QF) = 100 − QF + c2/2.
Answer: B
Blooms: Apply
9-24
Difficulty: 03 Hard
information, the Stackelberg follower's marginal revenue function is:
A. MRF(QL,QF) = 100 − 2QL − 4QF.
B. MRF(QL,QF) = 100 − 4QL − 2QF.
C. MRF(QL,QF) = 100 − 2QL − QF.
D. MRF(QL,QF) = 100 − QL − 2QF.
Answer: A
Blooms: Apply
information, the Stackelberg follower's reaction function is:
A. QF = 24.5 − 0.25QL.
B. QF = 49 − 0.25QF.
C. QF = 24.5 − 0.5QL.
D. QF = 24.5 − QL.
Answer: C
Blooms: Apply
information, the Stackelberg leader's reaction function is:
A. QL = 24.5 − 0.5QF.
B. QL = 50 − 0.5QF.
C. QL = 49 − 0.5QF.
Answer: D
Blooms: Apply
9-25
information, the consumer surplus in this market is:
A. $36.75.
B. $73.50.
C. $1,352.40.
D. $2,704.80.
Answer: C
Blooms: Analyze
Difficulty: 03 Hard
86. Consider two firms competing to sell a homogeneous product by setting price. The inverse
demand curve is given by P = 6 − Q. If each firm’s cost function is Ci(Qi) = 6 + 2Qi, then each
firm will symmetrically produce _________ units of output and earn ___________.
A. 4 units; profits of $6.
B. 2 units; profits of $2.
C. 4 units; losses of $2.
D. 2 units; losses of $6.
Answer: D
Blooms: Apply
demand curve is given by P = 6 − Q. If each firm’s cost function is Ci(Qi) = 2Qi, then
consumer surplus in this market is:
A. $2.
B. $4.
C. $8.
D. There is insufficient information to determine consumer surplus in this market.
Answer: C
Blooms: Analyze
9-26
demand curve is given by P = 15 − Q. Firm 1 has MC1(Q1) = 1 and firm 2 has MC2(Q2) =
1.05. Based on this information, we can conclude that the market price will be:
A. $1 and each firm will produce 7 units.
B. $1.05 and each firm will produce 6.975 units.
C. $1.04 and firm 1 will produce 13.96 units and firm 2 will produce 0 units.
D. $1 and firm 1 will produce 14 units and firm 2 will produce 0 units.
Answer: C
Blooms: Apply
Difficulty: 03 Hard
89. An increase in firm 2's marginal cost will cause:

A. a downward shift in firm 1's reaction function, resulting in a new Cournot equilibrium
where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity.
B. an upward shift in firm 1's reaction function, resulting in a new Cournot equilibrium where
firm 1 is producing a higher quantity and firm 2 is producing a lower quantity.
C. a downward shift in firm 2's reaction function, resulting in a new Cournot equilibrium
where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity.
D. an upward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where
firm 1 is producing a lower quantity and firm 2 is producing a higher quantity.
Answer: C
Blooms: Analyze
Difficulty: 03 Hard
90. A decrease in firm 1's marginal cost will cause:

A. a downward shift in firm 1's reaction function, resulting in a new Cournot equilibrium
B. an upward shift in firm 1's reaction function, resulting in a new Cournot equilibrium where
C. a downward shift in firm 2's reaction function, resulting in a new Cournot equilibrium
D. an upward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where
9-27
Answer: B
Blooms: Analyze
Difficulty: 03 Hard
91. Consider a market consisting of two firms where the inverse demand curve is given by P =
500 − 2Q1 − 2Q2. Each firm has a marginal cost of $50. Based on this information, we can
conclude that consumer surplus in the different equilibrium oligopoly models will follow
which of the following orderings?
A. CSCollusion > CSStackelberg > CSCournot > CSBertrand
B. CSBertrand > CSStackelberg > CSCournot > CSCollusion
C. CSBertrand > CSCournot > CSStackelberg > CSCollusion
D. CSStackelberg > CSBertrand > CSCournot > CSCollusion
Answer: B
Blooms: Understand
conclude that aggregate quantity in the different equilibrium oligopoly models will follow
A. QCollusion < QStackelberg < QCournot < QBertrand
B. QCollusion < QCournot < QStackelberg < QBertrand
C. QBertrand < QCollusion < QCournot < QStackelberg
D. QBertrand < QStackelberg < QCournot < QCollusion
Answer: B
Blooms: Understand
conclude that equilibrium price in the different oligopoly models will follow which of the
following orderings?
A. PBertrand < PStackelberg < PCournot < PCollusion
B. PStackelberg < PCollusion < PCournot < PBertrand
C. PCollusion < PCournot < PStackelberg < PBertrand
D. PBertrand < PCournot < PStackelberg < PCollusion
9-28
Answer: A
Blooms: Understand
conclude that aggregate profits in the different equilibrium oligopoly models will follow
A. Bertand > Collusion > Stackelberg > Cournot
B. Collusion > Cournot > Stackelberg > Bertand
C. Collusion > Stackelberg > Cournot > Bertand
Answer: B
Blooms: Understand

95. Industry profits are maximized in the figure below:
r1
QM2
r2
QM1 Q1
A. only at point QM1.

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B. only at point QM2.
C. on the line segment joining points QM1 and QM2.
D. at the point where r1 = r2.
Answer: C
Blooms: Understand
96. In a market where two firms compete by setting quantity, the Cournot equilibrium has
which of the following characteristics?
A. The two firms' reaction functions intersect.
B. There is no incentive for the two firms to collude.
C. The two firms' isoprofit curves intersect one another at the highest point.
D. The two firms' reaction functions intersect at the highest point where the two firms'
isoprofit curves intersect one another.
Answer: D
Blooms: Remember
Difficulty: 01 Easy
97. The peak of the isoprofit curve has which of the following characteristics?
A. It is the point at which monopoly profits are always achieved.
B. It is the point at which the isoprofit curve crosses the reaction function.
C. It is the point on the isoprofit curves associated with the highest profit.
D. It is the point on the isoprofit curves where Cournot competitors can efficiently achieve
collusion profits.
Answer: B
Blooms: Remember
Difficulty: 01 Easy
98. Profits are higher as isoprofit curves move closer to the:

A. monopoly output, QM.
B. Cournot output, QCournot.
C. Bertrand output, QBertrand.
D. peak of each isoprofit curve.
Answer: A
9-30
Blooms: Remember
Difficulty: 01 Easy
500 − 2(Q1 + Q2). If the Stackelberg leader's and follower's marginal costs are zero, the
leader's marginal revenue is:
A. MR(QL, QF) = 125 − QL + 0.5QF.
B. MR(QL) = 250 − 2QL.
C. MR(QF) = 250 − 2QF.
D. MR(QL, QF) = 125 − 0.5QL + QF.
Answer: B
Blooms: Apply
Bertrand duopoly. Which of the following results will NOT occur?
A. QA < QB
D. PriceA < PriceB
Answer: D
Blooms: Understand
102. Firm A has a strictly higher marginal cost than firm B. They compete in a homogeneous
product Bertrand duopoly. Which of the following results will NOT occur?
A. QA < QB
B. ProfitA = 0 < ProfitB
D. PriceA < PriceB
Answer: D
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Blooms: Understand
103. Consider a Cournot duopoly with the following inverse demand function: P = 50 − 0.2Q1
− 0.2Q2. The firms' marginal costs are identical and are given by MCi(Qi) = 2. Based on this
A. r1(Q2) = 120 − 0.5Q1 and r2(Q1) = 120 − 0.5Q2.
B. r1(Q2) = 120 − 0.5Q2 and r1(Q2) = 120 − 0.5Q1.
C. Q1 = 240 − 0.75Q2 and Q2 = 240 − 0.75Q1.
D. Q1 = 240 − 0.5Q2 and Q2 = 240 − 0.5Q1.
Answer: B
Blooms: Apply
104. Consider a Cournot duopoly with the following inverse demand function: P = 10 − 0.5Q1
− 0.5Q2. The firms' marginal costs are identical and are given by MCi(Qi) = 3. Based on this
A. r1(Q2) = 7 − 0.5Q1 and r2(Q1) = 7 − 0.5Q2.
B. r1(Q2) = 14 − 0.25Q2 and r1(Q2) = 14 − 0.25Q1.
C. Q1 = 7 − 0.5Q2 and Q2 = 7 − 0.5Q1.
D. Q1 = 14 − 0.25Q2 and Q2 = 14 − 0.25Q1.
Answer: C
Blooms: Apply
2Q1 − 2Q2. The firms' marginal costs are identical and are given by MCi(Qi) = 2. Based on this
information, the follower's reaction function is:
A. rF(QL) = 24.5 − 0.5QF.
B. QL = 49 − 0.5QF.
C. rF(QL) = 24.5 − 0.5QL.
D. QF = 49 − 0.25QL.
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Answer: C
Blooms: Apply
2Q1 − 2Q2. The firms' marginal costs are identical and are given by MCi(Qi) = 2. Based on this
information, the leader's reaction function is:
A. r1(Q2) = 24.5 − 0.5Q1 and r2(Q1) = 24.5 − 0.5Q2.
B. r1(Q2) = 24.5 − 0.5Q2 and r1(Q2) = 24.5 − 0.5Q1.
C. Q1 = 49 − 0.5Q2 and Q2 = 49 − 0.5Q1.
D. The Stackelberg leader does not react to the output decision of its rival.
Answer: D
Blooms: Apply
107. Which of the following is true about a differentiated-product Bertrand duopoly?

A. Firm 1 and firm 2's reaction functions are downward sloping.
B. Firm 1 and firm 2's reaction functions are upward sloping.
C. Firm 1's reaction function is downward sloping but firm 2's reaction function is upward
sloping.
D. In a differentiated-product Bertrand duopoly neither firm has a reaction function.
Answer: B
Blooms: Analyze
Difficulty: 03 Hard
108. Which of the following is true about a differentiated-product Bertrand duopoly?

A. Firm 1 and firm 2's prices will exceed marginal cost.
B. Firm 1 and firm 2's prices will equal marginal cost.
C. Firm 1's price will always be above marginal cost, while firm 2's price will be equal to
marginal cost.
D. Firms in a differentiated-product Bertrand duopoly cannot earn positive economic profits
in the long run.
9-33
Answer: A
Blooms: Analyze
Difficulty: 03 Hard
109. Which of the following is true about a Sweezy oligopoly?

A. The marginal cost function has a downward "jump" or "discontinuity."
B. The marginal revenue function has a downward "jump" or "discontinuity."
C. The marginal cost function has an upward "jump" or "discontinuity."
D. The marginal revenue function has an upward "jump" or "discontinuity."
Answer: B
Blooms: Remember
Difficulty: 01 Easy
Fixed costs are zero for both firms. Based on this information we can conclude that:
A. P = $7 and firm 1 will sell 7 units of output.
B. P = $1 and firms 1 and 2 will each sell 7 units of output.
C. P = $1 and firms 1 and 2 will each sell 1.5 units of output.
D. P = $1.5 and firms 1 and 2 will each sell 10 units of output.
Answer: C
Blooms: Apply
111. Consider two firms competing to sell a homogeneous product by setting price. The
inverse demand curve is given by P = 20 − Q. Firm 1 has MC1(Q1) = 2 and firm 2 has
MC2(Q2) = 2.25. Based on this information, we can conclude that the market price will be:
A. $2 and each firm will produce 9 units.
B. $2.25 and each firm will produce 8.875 units.
C. $2.24 and firm 1 will produce 17.76 units and firm 2 will produce 0 units.
D. $2 and firm 1 will produce 18 units and firm 2 will produce 0 units.
Answer: C
9-34
Blooms: Apply
Difficulty: 03 Hard
112. A decrease in firm 2's marginal cost will cause:

A. an upward shift in firm 1's reaction function, resulting in a new Cournot equilibrium where
B. a downward shift in firm 1's reaction function, resulting in a new Cournot equilibrium
C. an upward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where
D. a downward shift in firm 2's reaction function, resulting in a new Cournot equilibrium
Answer: C
Blooms: Analyze
Difficulty: 03 Hard
113. An increase in firm 1's marginal cost will cause:

A. an upward shift in firm 1's reaction function, resulting in a new Cournot equilibrium where
B. a downward shift in firm 1's reaction function, resulting in a new Cournot equilibrium
C. an upward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where
D. a downward shift in firm 2's reaction function, resulting in a new Cournot equilibrium
Answer: B
Blooms: Analyze
Difficulty: 03 Hard
114. The profits of the leader in a Stackelberg duopoly:

A. are less than those of the follower.
B. equal those of the follower.
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C. are greater than those of the follower.
D. are less than those of a Sweezy oligopolist.
Answer: A
Blooms: Understand
Difficulty: 03 Hard
2Q1 − 2Q2. The firms' marginal costs are identical and are given by MCi(Qi) = ciQi. Based on
this information, the Stackelberg leader's marginal revenue function is:
A. MR(QL) = 50 − 2QL – 0.5cL.
B. MR(QL) = 50 − 2QL – 0.5cF.
C. MR(QF) = 100 − 2QF – 0.5cF.
D. MR(QF) = 100 − QF – 0.5cF.
Answer: B
Blooms: Apply
Difficulty: 03 Hard
116. Which of the following is NOT true about a differentiated-product Bertrand duopoly?

A. Firm 1 and firm 2's prices will be equal to marginal cost.
B. Firm 1's price will always be above marginal cost, while firm 2's price will be less than
marginal cost.
C. Firm 1's price will always be less than marginal cost, while firm 2's price will be above
marginal cost.
Answer: D
Blooms: Analyze
Difficulty: 03 Hard
117. A new firm enters a market which is initially serviced by a Cournot duopoly charging a
price of $10. What will the new market price be should the three firms coexist after the entry?
A. $10
B. Below $10
C. Above $10
Answer: B
9-36
Blooms: Analyze
Difficulty: 03 Hard
118. Two firms compete as a Stackelberg duopoly. The demand they face is P = 40 − Q. The
A. L = $162; F = $81.
B. L = $81; F = $40.5.
C. L = $81; F = −$40.5.
D. L = $162; F = $40.5.
Answer: A
Blooms: Apply
Difficulty: 03 Hard
119. Two firms compete as a Stackelberg duopoly. The demand they face is P = 24 − Q. The
A. L = $100; F = $50.
B. L = $50; F = $25.
C. L = $25; F = $12.5.
D. L = $20; F = $10.
Answer: B
Blooms: Apply
Difficulty: 03 Hard
120. Both firms in a Cournot duopoly would enjoy lower profits if:

A. the firms simultaneously reduced output below the Nash equilibrium level.
Answer: B
Blooms: Analyze
9-37
Difficulty: 03 Hard
Essay Questions
121. In Gelate, Pennsylvania, the market for compact discs has evolved as follows: There are
two firms that each use a marquee to post the price they charge for compact discs. Each firm
buys CDs from the same supplier at a cost of $5.00 per disc. The inverse market demand in
their area is given by P = 10 – 2Q, where Q is the total output produced by the two firms.
a. Solve for the Bertrand equilibrium price and market output.
b. Would your answer differ if the products were not perfect substitutes? Explain.
Answer:
a. P = MC = $5. To find industry output, we find Q such that P = 5 = 10 − 2Q. Solving for Q gives us industry
output of 2.5 units.
b. When goods are perfect substitutes, firms are forced to charge a price equal to marginal cost, otherwise they
sell nothing. However, if consumers view the goods as heterogeneous (differentiated products) a firm does not
lose the entire market if it prices above another firm's price.
Blooms: Analyze
122. Suppose you are the manager of a medium-sized firm that operates in an industry that
has a four-firm concentration ratio of 100 percent. All firms in the industry are of equal size.
In order to determine your firm's optimal output and price, you must obtain information about
how rivals would respond to changes in your decisions. If you were the manager, how would
you obtain this information?
Answer:
One method would be to study the history of how rivals responded to changes in your past pricing policies.
Blooms: Understand
Difficulty: 01 Easy
123. You are the manager of a firm operating in a differentiated-product oligopoly. Show

graphically your optimal response to an increase in marginal cost if
a. You believe rivals will follow price reductions but not price increases.
b. You believe rivals will hold output constant if you decrease output.
c. You believe rivals will follow price increases but not price decreases.
Answer:
a. In this case, the demand function for a Sweezy oligopolist is given by the figure shown, and the marginal
revenue curve is ADEF. So long as marginal cost changes by a small amount, your output will remain at Q. For
large increases in MC, the profit-maximizing level of output will fall.
9-38
Price
A
B MC*
MC
E C
Q Quantity
F
b. In this case, the initial Cournot equilibrium is given by point A in the figure shown. An increase in firm 1's
marginal cost results in a new Cournot equilibrium at point B. Thus, the manager of firm 1 should reduce output
to maximize profits.
Q2
1' s initial reaction function
1' s new reaction function
B A
2' s reaction function
Q1
c. In this case, the demand curve is ABC in the figure shown, while MR is ADEF. An increase in marginal cost
from MC to MC* leads to a reduction in the profit-maximizing level of output.
Price 9-39
A
MC*
MC
E C
D
Chapter 09 - Basic Oligopoly Models F
Quantity

Blooms: Analyze
Difficulty: 03 Hard
124. The (inverse) demand in a Cournot duopoly is P = a – b (Q1 + Q2), and costs are C1(Q1)
= c1Q1 and C2(Q2) = c2Q2.
Show that the Cournot equilibrium levels of output are
and .
Answer:
Equating MR = MC for firm 1 yields a − b(Q1 + Q2) − bQ1 = c1. This yields a reaction function for firm 1 of
.

Similarly, equating MR = MC for firm 2 yields a − b(Q1 + Q2) − bQ2 = c2, so 2’s reaction function is
.

Solving these two equations simultaneously gives us the desired result.
Blooms: Apply
125. The market for widgets consists of two firms that produce identical products.
Competition in the market is such that each of the firms independently produces a quantity of
output, and these quantities are then sold in the market at a price that is determined by the
total amount produced by the two firms. Firm 2 is known to have a cost advantage over firm
9-40
1. A recent study found that the (inverse) market demand curve faced by the two firms is P =
280 – 2(Q1 + Q2), and costs are C1(Q1) = 3Q1 and C2(Q2) = 2Q2.
a. Determine the marginal revenue for each firm.
b. Determine the reaction function for each firm.
c. How much output will each firm produce in equilibrium?
d. What are the equilibrium profits for each firm?
Answer:
a. MR1 = 280 − 2Q2 − 4Q1 and MR2 = 280 − 2Q1 − 4Q2.
b. Firm 1 will produce such that MR1 = MC1, or 280 − 2Q2 − 4Q1 = 3. Thus, the reaction function of firm 1 is
r1(Q2) = 69.25 − .5Q2. Firm 2 will produce such that MR2 = MC2, or 280 − 2Q1 + 4Q2 = 2. The reaction function
for firm 2 is thus r2(Q1) = 69.5 − .5Q1.
c. Solving Q1 and Q2 from the two reaction functions, we have
d. π1 = 95(46) − 3(46) = $4,232; π2 = 95(46.5) − 2(46.5) = $4,324.5.

Blooms: Apply
Difficulty: 03 Hard
126. When MCI announced a price discount plan designed to induce small firms to use its
services, the price of its stock immediately declined. Why do you think the stock market
reacted negatively to MCI's plan to attract new customers?
Answer:
The most likely reason the market did not respond favorably to MCI's plan is that investors recognized the
market for long-distance services is oligopolistic; competitors like AT&T would likely react to MCI's plan by
changing their own pricing structures. In fact, this is precisely what did happen; six days after the MCI
announcement, AT&T followed with a similar plan. Effectively, MCI's action initiated a price war that parallels
our analysis of Bertrand competition.
Blooms: Analyze
127. The inverse demand curve for a Stackelberg duopoly is P = 10,000 – 6Q. The leader's
cost structure is CL(QL) = 15QL. The follower's cost structure is CF(QF) = 25QF.
a. Determine the reaction function for the follower.
b. Determine the equilibrium output levels for both the leader and the follower.
c. What are the profits for the leader? For the follower?
9-41
Answer:
a. The follower's reaction function is QF = 831.25 − .5QL.
b. The leader's output is

Similarly, QF = 831.25 − .5(832.9) = 414.8 units. Thus, the price of output is given by P = 10,000 − 6(832.9 +
414.8) = $2,513.8.
c. πL = 2,513.8(832.9) − 15(832.9) = $2,081,250.5; πF = $1,032,354.2.
Blooms: Apply
128. What real-world evidence would lead you to believe that firms were acting as Cournot
oligopolists? Stackelberg oligopolists? Bertrand oligopolists?
Answer:
Evidence of Cournot oligopoly would be a situation where firms make quantity-setting decisions. Evidence of
Stackelberg behavior includes one firm setting output prior to other firms in the market, who take the leader's
output as given. Evidence of Bertrand oligopoly would be severe price competition, with low prices and profits.
Blooms: Understand
129. Zelda Industries is the only firm of its kind in the world. Due largely to historical
accident, it began producing streganomas in 1985 in a vacant warehouse. Virtually anyone
with a degree in college chemistry could easily replicate the firm's formula, which is not
patent protected. Nonetheless, since 1985 Zelda has averaged accounting profits of 6 percent
on investment. This rate is comparable to the average interest rate that large banks paid on
deposits over the period. Do you think Zelda is earning monopoly profits? Why?
Answer:
No. In fact, Zelda could have invested funds over the period at 6 percent. Its accounting profits of 6 percent
translate into zero economic profits. Most likely, Zelda operates in a contestable market, and is disciplined by the
threat of entry by other firms. Therefore, Zelda cannot charge prices in excess of marginal cost.
Blooms: Analyze
AACSB: Analytic
130. You are the manager of a firm in a new industry. You have gotten the jump on the only
other producer in the market. You know what your competitor's cost function is, and it knows
yours. Your products, although different to experts, are indistinguishable to the average
consumer. Your marketing research team has provided you with the following market demand
9-42
curve: Q = 1,250 − .5P. Your cost function is CA(QA) = 8QA. Your competitor's cost function
is CB(QB) = 6QB. Your diligent effort will allow you to decide how much of your product to
provide and will allow you to place it on the market shortly before your competitor will be
able to make its product available for sale. What output level will you choose, and what price
will you charge? Explain.
Answer:
You are clearly a Stackelberg leader, and should set the Stackelberg output to maximize your profits. To use the
formulas in the text, you first need to convert the given demand equation (Q = 1,250 − .5P) into the
corresponding inverse demand function. To do this, solve the given demand equation for P to get P = 2,500 −
2Q. Based on this inverse demand function, use the formula in the text to solve for your Stackelberg output as
the leader. This is given by the formula QA = (a + cB − 2cA)/2b = [2,500 + 6 − 2(8)]/4 = 622.5 units. The follower
will produce QB = (a − cB)/2b − .5QA = [2500 − 6]/4 −.5(622.5) = 312.25 units. Thus, the price of output will be
P = 2,500 − 2(622.5 + 312.25) = $630.50.
Blooms: Analyze
Difficulty: 03 Hard
131. You are a potential entrant into a market that previously has had entry blocked by the
government. Your market research has estimated that the inverse market demand curve for
this industry is P = 22,500 – 75Q, where . You estimate that if you enter
the market, your own cost function will be Cy(Qy) = 15,300Qy . The government has invited
your firm to enter the industry, but it will require you to pay a one-time license fee of
$100,000. You do not know the cost functions of the firms currently in the market; however,
the price is now $16,000. Last year 87 units were sold by existing firms. Would you choose to
enter this market? Explain.
Answer:
In this case, your inverse demand function remains at P = 22,500 − 75(87) − 75Qy = 15,975 − 75Qy. Equating
MR = MC yields 15,975 − 150 Qy = 15,300. Solving for Qy yields the profit-maximizing output by the entrant,
assuming existing firms hold output constant: Qy = 4.5 units. The corresponding price is P = 22,500 − 75(87 +
4.5) = $15,637.5. Profits if you enter (net of the license fee) are $15,637.5(4.5) − 15,300(4.5) − 100,000 = $
−98,481.25. Thus, it would not pay to enter the industry if you expect rivals to maintain their present output.
Blooms: Evaluate
Difficulty: 03 Hard
132. Compare and contrast the output levels and profits for the Cournot, Stackelberg, and
Bertrand models. Use the following cost and demand conditions for your comparison, and
suppose there are two firms: P = 1,500 – 10Q. Each firm has a marginal cost of $20 and fixed
costs of zero.
Answer:
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Firm One's Firm Two's Firm One's Firm Two's

Output Output Profit Profit
Cournot 49.33 49.33 $24,338 $24,338
Stackelberg (leader) (follower)
74 37 $27,380 $13,690
Bertrand 74 74 $0 $0

Blooms: Apply
133. Over the past 20 years, the 12 members of the Organization of Petroleum Exporting
Countries have made repeated attempts to restrict output in order to maintain high crude oil
prices. Between 1990 and 1995, however, crude oil prices dropped by about 20 percent, due
in part to increased production from the former Soviet Union, Latin America, Asia, and the
North Sea. In light of these increases in oil production from non-OPEC countries, what must
OPEC do to maintain the price of oil at its desired level? Do you think this will be easy for
OPEC to do? Explain.
Answer:
OPEC must decrease its total quantity of oil produced by the amount that non-OPEC countries increase their oil
production. This will be difficult for OPEC to do. As demand and cost conditions change, old collusive
agreements no long suit the new environment. Moreover, even in the absence of changing demand or cost
conditions, each firm has an incentive to cheat on collusive agreements, as shown in the text.
Blooms: Evaluate
134. In the late 1990s, Chrysler announced a new incentive program on its minivans that
included subsidized interest rates and cash allowances. Under the plan, consumers could
enjoy financing rates as low as 4.9 percent, as well as a $500 cash allowance toward the lease
or purchase of a new minivan. What changes in sales would you anticipate if you were the
manager of a Dodge/Plymouth franchise, the official dealer of Chrysler? Why?
Answer:
Other things equal, your sales would rise. However, given the oligopolistic nature of the industry, you should
9-44
anticipate that automakers like General Motors and Ford would likely counter with similar incentive programs,
which would mitigate to some extent the sales increase you otherwise would have enjoyed.
Blooms: Analyze
135. Orion and Zeda are the only producers of a unique product that is sold in a market where
the inverse demand curve is P = 200 – 2Q. The firms produce identical products and have
identical cost functions given by C(Qi) = 4Qi. The managers of each firm must decide on their
outputs on Monday morning and then bring products to market by noon.
a. What is each firm's marginal revenue? Marginal cost?
b. Equate each firm's marginal revenue to marginal cost.
c. Use your result in part (b) to solve for each firm's reaction function.
d. Use your results in part (c) to solve for the Cournot equilibrium levels of output for each
firm.
Answer:
a. MRO = 200 – 4qo – 2qz; MRz = 200 – 2qo – 4qz ; MCO = MCz = 4.
b. MRO = MCO, so 200 – 4qo – 2qz = 4; MRz = MCz, so 200 – 2qo – 4qz = 4.
200−4 2 200−4 2
q o =r o ( q z ) = − q z =49−. 5 q z q z =r z ( qo )= − q o=49−. 5 q o
c. 4 4 and 4 4 .
d. Substituting qz into qo from part (c) yields an equilibrium output for Orion of 32.7 units. Likewise, substituting
qo into qz from part (c), equilibrium output for Zeda is 32.7 units.
Blooms: Apply
136. You are the CEO of ClipIt, a paper clip manufacturer. Your company enjoys a patented
technology that allows it to produce paper clips faster and at a lower cost than your only rival,
FastenIt. Clipit uses this advantage to be the first to choose its profit-maximizing output level
in the market. The inverse demand function for paper clips is P = 500 – 2Q, ClipIt's costs are
CC(QC) = 2QC, and FastenIt's costs are CF(QF) = 4QF.
a. What is ClipIt's profit-maximizing output level? FastenIt's?
b. What is the market's equilibrium price?
c. How much profit does each firm earn?
9-45
d. Ignoring antitrust considerations, would it be profitable for your firm to merge with
FastenIt? If not, explain why not; if so, put together an offer that would permit you to
profitably complete the merger.
Answer:
a. Stackelberg leader's profit-maximizing quantity is 125 units; Stackelberg follower's profit-maximizing
quantity is 61.5 units.
b. P = $127.00.
c. πC = $15,625.00; πC = $7,564.50.
d. Assuming that the merged firms adopted ClipIt's patented technology that allows it to produce at a lower cost
of CC(QC) = 2QC, a merger would be profitable. Profits of the merged firm would be $31,000.50 compared to
joint (industry) profits of $23,189.50 when firms compete in a Stackelberg setting.
Blooms: Evaluate
Difficulty: 03 Hard
9-46

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Chapter 09 - Basic Oligopoly Models

Multiple Choice Questions

1. The Cournot theory of oligopoly assumes rivals will:

2. Which of the following is true?

5. Which of the following are quantity-setting oligopoly models?

6. Which of the following are price-setting oligopoly models?

7. Both firms in a Cournot duopoly would enjoy higher profits if:

8. Which of the following is NOT a feature of Sweezy oligopoly?

9. Which of the following is a profit-maximizing condition for a Cournot oligopolist?

13. A market is NOT contestable if:

16. Two firms compete in a Stackelberg fashion. If firm 2 is the leader, then:

19. When firm 1 enjoys a first-mover advantage in a Stackelberg duopoly, it will produce:

22. If firms are in Cournot equilibrium:

27. Which of the following statements is NOT a condition for a Stackelberg oligopoly?

32. From a consumer's point of view, which type of oligopoly is most desirable?

33. Collusion in oligopoly is difficult to achieve because:

38. There are many different models of oligopoly because:

39. Which of the following is NOT a type of market structure?

41. Which of the following is true?

44. When firm 1 acts as a Stackelberg leader:

51. The Bertrand theory of oligopoly assumes:

52. Which of the following is true?

53. In a Cournot oligopoly, a decrease in a firm's marginal cost leads to:

54. The Sweezy model of oligopoly reveals that:

55. Which of the following is NOT a quantity-setting oligopoly model?

57. Both firms in a Cournot duopoly would experience lower profits if:

58. Which of the following is a feature of a contestable market?

59. Which of the following is true of a perfectly contestable market?

63. The profits of the leader in a Stackelberg duopoly:

64. An important condition for a contestable market is:

66. Which of the following is true?

67. Which of the following is/are NOT price-setting oligopoly models?

69. One of the characteristics of a contestable market is that:

74. Which of the following is NOT a feature of Sweezy oligopoly?

75. The profits of the follower in a Stackelberg duopoly:

77. There are many different models of oligopoly because:

89. An increase in firm 2's marginal cost will cause:

90. A decrease in firm 1's marginal cost will cause:

A. only at point QM1.

98. Profits are higher as isoprofit curves move closer to the:

107. Which of the following is true about a differentiated-product Bertrand duopoly?

108. Which of the following is true about a differentiated-product Bertrand duopoly?

109. Which of the following is true about a Sweezy oligopoly?

112. A decrease in firm 2's marginal cost will cause:

113. An increase in firm 1's marginal cost will cause:

114. The profits of the leader in a Stackelberg duopoly:

116. Which of the following is NOT true about a differentiated-product Bertrand duopoly?

120. Both firms in a Cournot duopoly would enjoy lower profits if:

123. You are the manager of a firm operating in a differentiated-product oligopoly. Show

1' s new reaction function

Learning Objective: 09-01

Show that the Cournot equilibrium levels of output are

d. π1 = 95(46) − 3(46) = $4,232; π2 = 95(46.5) − 2(46.5) = $4,324.5.

Firm One's Firm Two's Firm One's Firm Two's

Learning Objective: 09-03

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