Sample Questions for Monopoly and Oligopoly

Monopoly

  1. Monopoly power refers to the
  1. Ability to control the quantity produced
  2. Ability to control the price in the market
  3. Ability to shift the demand curve
  4. None of the above
  1. The source of monopoly power is barriers to entry.
  1. True
  2. False
  1. Barriers to entry into an industry can exist due to
  1. Government created barriers
  2. Predatory practices of firms
  3. High fixed cost (natural monopoly)
  4. All the above
  1. The marginal revenue for a firm with monopoly power
  1. Is equal to the price.
  2. Is greater than the price.
  3. Is less than the price.
  4. None of the above

Answer questions 5 – 9 using the monopoly graph below.

  1. The quantity produced by a monopolist is
  1. Q1
  2. Q2
  3. Q3
  4. None of the above
  1. The price charged by the monopolist is
  1. P1
  2. P2
  3. P3
  4. None of the above
  1. The quantity that would have gotten produced in a competitive market is
  1. Q1
  2. Q2
  3. Q3
  4. None of the above
  1. The price that would exist under competition is
  1. P1
  2. P2
  3. P3
  4. None of the above
  1. The deadweight loss due to monopoly power is given by the area
  1. A+C
  2. D+B
  3. C+D
  4. B+D+E
  1. Compared to perfect competition, the monopoly
  1. Has a higher price
  2. Lower quantity
  3. Deadweight loss
  4. All the above
  1. A natural monopoly is when
  1. The monopolist drives other firms out of business.
  2. The government uses its power to create a monopoly
  3. Only one firm can profitably exist because fixed costs are high compared to the size of the market.
  4. None of the above
  1. The government can solve the problem of a natural monopoly by
  1. Regulating the price to equal marginal cost
  2. Owning the natural monopoly
  3. Doing nothing
  4. All the above

Oligopoly

  1. An oligopoly is an industry with only a few firms.
  1. True
  2. False
  1. Because an oligopoly has only a few firms, each firm must choose its strategy for production and pricing taking into consideration the behavior of other firms in the industry. This is called
  1. Competition
  2. Monopoly power
  3. Strategic interaction
  4. None of the above
  1. An equilibrium in which each firm takes into account the behavior of the other firms is called the
  1. Market equilibrium
  2. Nash equilibrium
  3. Monopoly equilibrium
  4. None of the above
  1. If firms in an oligopoly compete, it does not take many firms to get close to the competitive outcome.
  1. True
  2. False
  1. When firms in an oligopoly collude (cooperate), then the outcome is the same as the monopolist outcome.
  1. True
  2. False
  1. The cooperative result in game theory can be achieved when there is a way to punish someone for breaking the agreement. Which of the following allows for punishment?
  1. Repeated games
  2. Contracts
  3. Reputation effects
  4. All the above

Game Theory: This section is not multiple choice questions, but a series of fill in the blanks. It is meant to help you understand how to find the nash equilibrium.

Consider the following duopoly game with the following payoff matrix

Firm A’s Decision

  1. If firm B cooperates, then firm A should ______.
  2. If firm B does not cooperate, then firm A should ______.
  3. The dominant strategy of firm A is to ______.

Firm B’s Decision

  1. If firm A cooperates, then firm B should ______.
  2. If firm A does not cooperate, then firm B should ______.
  3. The dominant strategy of firm B is to ______
  1. The Nash equilibrium is for firms A and B to ______.
  1. What is the optimal outcome for both firms?

Suppose now that each firm has the power to punish the other firm when they do not cooperate, and this lowers the non-cooperating firm’s pay off by 30. In this case the payoff matrix becomes

Firm A’s Decision

  1. If firm B cooperates, then firm A should ______.
  2. If firm B does not cooperate, then firm A should ______.
  3. The dominant strategy of firm A is to ______.

Firm B’s Decision

  1. If firm A cooperates, then firm B should ______.
  2. If firm A does not cooperate, then firm B should ______.
  3. The dominant strategy of firm B is to ______
  1. The Nash equilibrium is for firms A and B to ______.
  1. What is the optimal outcome for both firms?

Comment on the how the ability to punish the other player can force commitment to the cooperative solution.

SOLUTIONS BELOW

Solutions to Multiple Choice

1. b / 7. b / 13. a
2. a / 8. b / 14. c
3. d / 9.c / 15. b
4. c / 10. d / 16. a
5. a / 11. c / 17. a
6. a / 12. d / 18. d

Game Theory: This section is not multiple choice questions, but a series of fill in the blanks. It is meant to help you understand how to find the nash equilibrium.

Consider the following duopoly game with the following payoff matrix

Firm A’s Decision

  1. If firm B cooperates, then firm A should not cooperate
  2. If firm B does not cooperate, then firm A should not cooperate
  3. The dominant strategy of firm A is to not cooperate

Firm B’s Decision

  1. If firm A cooperates, then firm B should not cooperate.
  2. If firm A does not cooperate, then firm B should not cooperate.
  3. The dominant strategy of firm B is to not cooperate
  1. The Nash equilibrium is for firms A and B to not cooperate.
  1. What is the optimal outcome for both firms? To cooperate. Hence the Nash equilibrium is not optimal for firms A and B.

Suppose now that each firm has the power to punish the other firm when they do not cooperate, and this lowers the non-cooperating firm’s pay off by 30. In this case the payoff matrix becomes

Firm A’s Decision

  1. If firm B cooperates, then firm A should cooperate.
  2. If firm B does not cooperate, then firm A should cooperate
  3. The dominant strategy of firm A is to cooperate

Firm B’s Decision

  1. If firm A cooperates, then firm B should cooperate.
  2. If firm A does not cooperate, then firm B should cooperate.
  3. The dominant strategy of firm B is to cooperate
  1. The Nash equilibrium is for firms A and B to cooperate
  1. What is the optimal outcome for both firms? To cooperate. Hence with punishment the Nash equilibrium is optimal.

Comment on the how the ability to punish the other player can force commitment to the cooperative solution.

The players tend not to cooperate because when one player does cooperate it is in the self-interest of the other to not cooperate. However, when each firm does not cooperate both firms are worse off compared to the case when they do cooperate. So both firms would like to be able to commit to cooperation. This can be achieved if each firm has the ability to punish the other player enough when they do not cooperate so that it is always in their self-interest to cooperate.

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