A Quiz On Oligopoly In Microeconomics For Intellectuals

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A Quiz On Oligopoly In Microeconomics For Intellectuals - Quiz

An oligopoly is a type of market in which the competition is often limited and there are a limited number of consumers and sellers. Over the past week, we have been able to cover much about this type of market and below is a quiz on oligopoly in microeconomics for intellectuals. Give it a try and get to review all that you have learned so far. All the best!


Questions and Answers
  • 1. 

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

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    An oligopoly is a market structure in which only a few firms sell products that are similar but not identical. This means that there are a limited number of sellers in the market, and each firm has some degree of control over the price and quantity of their product. In contrast, a market structure where many firms sell similar products is known as monopolistic competition. Therefore, the given statement is false as it incorrectly states that many firms are involved in an oligopoly.

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  • 2. 

    The market for crude oil is an example of an oligopolistic market

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The market for crude oil is an example of an oligopolistic market because it is dominated by a few large producers who have significant control over the supply and pricing of oil. These producers often engage in strategic behavior, such as collusion or price fixing, to maintain their market power. Additionally, barriers to entry, such as high capital requirements and technological expertise, make it difficult for new competitors to enter the market. As a result, the market for crude oil exhibits characteristics of an oligopoly, where a small number of firms have substantial influence over the market dynamics.

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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

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In an oligopoly market, there are only a few sellers who dominate the market. The unique feature of this market structure is that the actions of one seller can greatly affect the profits of all the other sellers. This is because the limited number of sellers means that each one has a significant market share, and any change in price, production, or marketing strategy by one seller can cause a ripple effect on the entire market. Therefore, the statement "the actions of one seller have a significant impact on the profits of all of the other sellers in the market" is true in an oligopoly market.

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  • 4. 

    When firms cooperate with one another, it is generally good for society as a whole

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    Cooperation between firms can lead to various benefits such as increased efficiency, innovation, and economies of scale. However, it is not always good for society as a whole. Cooperation can also lead to anti-competitive behavior, monopolies, and reduced consumer choice. Additionally, firms may prioritize their own interests over societal welfare, leading to negative consequences such as higher prices or lower quality products. Therefore, while cooperation can have positive effects, it is not always beneficial for society as a whole.

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  • 5. 

    When firms cooperate with one another, it is generally good for the cooperating firms

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Cooperating with other firms can be beneficial for several reasons. Firstly, it allows firms to pool their resources and expertise, leading to increased efficiency and productivity. Collaboration can also lead to the development of new ideas, products, or services that may not have been possible individually. Additionally, cooperating with other firms can help in sharing risks and costs, allowing firms to expand their operations and reach new markets. Overall, by working together, firms can leverage each other's strengths and create mutually beneficial outcomes, making it generally good for the cooperating firms.

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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

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    When oligopolists collude and form a cartel, the outcome in the market is not similar to that generated by a perfectly competitive market. In a perfectly competitive market, there are many small firms that compete with each other, resulting in low prices and high levels of production. However, when oligopolists collude and form a cartel, they work together to reduce competition and control prices, leading to higher prices and lower levels of production. This behavior is against the principles of perfect competition, making the statement false.

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  • 7. 

    The price and quantity generated by a Nash equilibrium are closer to the competitive solution than the price and quantity generated by a cartel

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In a Nash equilibrium, each player in a game chooses their strategy independently, considering the strategies chosen by others. In the context of pricing, this means that each firm sets its price based on its own costs and market conditions, without coordinating with other firms. This leads to a more competitive outcome where prices are lower and quantities are higher compared to a cartel, where firms collude to set prices and restrict output to maximize their joint profits. Therefore, the statement is true as the price and quantity generated by a Nash equilibrium are closer to the competitive solution.

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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 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement is false because in an oligopoly, there are a few firms that dominate the market. Each firm has a significant market share and can influence the market outcome. However, unlike a monopoly where there is only one firm, an oligopoly allows for some level of competition among the firms. Therefore, the more firms there are in an oligopoly, the less likely it is for the market outcome to resemble that of a monopoly.

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  • 9. 

    Cooperation is easily maintained in an oligopoly because cooperation maximizes each individual firm's profits

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    In an oligopoly, there are only a few firms in the market, which gives them the opportunity to collude and cooperate with each other to maximize their profits. However, cooperation is not easily maintained in an oligopoly because each firm has an incentive to cheat and gain a competitive advantage over the others. This leads to a situation where firms often engage in price wars and aggressive competition, rather than cooperating. Therefore, the statement that cooperation maximizes each individual firm's profits is false.

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  • 10. 

    The prisoners' dilemma demonstrates why it is difficult to maintain cooperation even when cooperation is mutually beneficial 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The prisoners' dilemma is a game theory scenario where two individuals have to make a decision to either cooperate or betray each other. In this scenario, even though cooperation is mutually beneficial for both individuals, they often choose to betray each other due to the fear of the other person betraying them. This leads to a situation where both individuals end up worse off compared to if they had cooperated. Therefore, the prisoners' dilemma demonstrates the difficulty in maintaining cooperation when it is mutually beneficial.

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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

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In an oligopoly, where a small number of firms dominate the market, there is a constant tension between cooperation and self-interest. This is because when firms agree to reduce production in order to maintain higher prices and profits, it becomes profitable for each individual firm to cheat and produce more than agreed upon. By doing so, they can capture a larger market share and potentially earn higher profits at the expense of other firms. This creates a dilemma where firms are incentivized to act in their own self-interest rather than cooperate, leading to a constant struggle between cooperation and self-interest in oligopolistic markets.

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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

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The dominant strategy for an oligopolist is not to cooperate with the group and maintain low production regardless of what the other oligopolists do. In an oligopoly, where there are only a few firms in the market, each firm must carefully consider the actions of its competitors. The dominant strategy for an oligopolist is often to compete rather than cooperate, as this allows them to gain a larger market share and potentially increase their profits. Cooperation among oligopolists is difficult to achieve and maintain, as there is always a risk of one firm undercutting the others and gaining a competitive advantage.

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  • 13. 

    Antitrust laws require manufacturers to engage in resale price maintenance or fair trade

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    Antitrust laws do not require manufacturers to engage in resale price maintenance or fair trade. In fact, these laws are put in place to prevent anti-competitive practices, including price-fixing and collusion, which can harm competition and consumers. Resale price maintenance, where manufacturers dictate the minimum price at which their products can be sold, is often seen as anti-competitive behavior and is generally not allowed under antitrust laws. Fair trade, on the other hand, refers to a system that ensures fair prices for producers in developing countries, and it is not a requirement under antitrust laws.

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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 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Predatory pricing is a strategy employed by a firm to intentionally lower prices in order to eliminate competition and gain a monopoly position in the market. By undercutting competitors' prices, the firm aims to drive them out of business and subsequently increase prices once it becomes the sole provider. This practice is considered anti-competitive and is often regulated by authorities to protect fair market competition. Therefore, the statement "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" is true.

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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 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    In a repeated prisoners' dilemma game, participants are more likely to cooperate and reach a Nash equilibrium rather than independently maximizing their profits. This is because in a repeated game, participants have the opportunity to build trust and establish a reputation. By cooperating and choosing strategies that benefit both parties, they can create a mutually beneficial outcome over time. This cooperative behavior helps to avoid the negative consequences associated with always pursuing individual profit maximization. Therefore, the statement that participants are more likely to independently maximize their profits and reach a Nash equilibrium in a repeated prisoners' dilemma game is false.

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  • 16. 

    The market for hand tools (such as hammers and screwdrivers) is dominated by Black & Decker, Stanley, and Craftsman. This market is best described as

    • A.

      Competitive

    • B.

      A monopoly

    • C.

      An oligopoly

    • D.

      A duopoly

    Correct Answer
    C. An oligopoly
    Explanation
    The market for hand tools is best described as an oligopoly because it is dominated by a few large companies, namely Black & Decker, Stanley, and Craftsman. In an oligopoly, a small number of firms control the majority of the market share and have the ability to influence prices and competition. These three companies have a significant market presence and compete with each other for customers. Therefore, the hand tool market can be categorized as an oligopoly.

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  • 17. 

    A market structure in which many firms sell products that are similar but not identical is known as 

    • A.

      Perfect competition

    • B.

      Monopoly

    • C.

      Oligopoly

    • D.

      None of the above

    Correct Answer
    D. None of the above
    Explanation
    The given options do not include the correct answer, which is "monopolistic competition." In a monopolistic competition, there are many firms in the market, but their products are differentiated from each other, meaning they are similar but not identical. This market structure allows for some level of product differentiation and non-price competition among firms. Perfect competition refers to a market structure where there are many firms selling identical products, monopoly refers to a market structure with a single dominant firm, and oligopoly refers to a market structure with a few large firms dominating the market.

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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 a monopoly

    • B.

      The same as if it were served by competitive firms

    • C.

      Efficient because cooperation improves efficiency

    • D.

      Known as Nash equilibrium

    Correct Answer
    A. The same as if it were served by a monopoly
    Explanation
    If oligopolists engage in collusion and successfully form a cartel, they can effectively act as a monopoly by controlling the market. This means that they can collectively set prices and output levels, leading to a market outcome that is the same as if it were served by a monopoly. In this scenario, competition is eliminated, and the cartel members can maximize their profits by restricting output and charging higher prices.

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  • 19. 

    Suppose an oligopolist individual maximizes its profits. When calculating profits, if the output effect exceeds the price effect on the marginal unit of production, then the oligopolist

    • A.

      Has maximized profits

    • B.

      Should produce more units

    • C.

      Should produce fewer units

    • D.

      Should exit the industry

    • E.

      Is in a Nash equilibrium

    Correct Answer
    B. Should produce more units
    Explanation
    If the output effect exceeds the price effect on the marginal unit of production, it means that the increase in profits from producing one more unit is greater than any potential decrease in price. Therefore, the oligopolist should produce more units to maximize their profits.

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  • 20. 

    As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more like 

    • A.

      A monopoly

    • B.

      A duopoly

    • C.

      A competitive market

    • D.

      A collusion solution

    Correct Answer
    C. A competitive market
    Explanation
    As the number of sellers in an oligopoly grows larger, the market becomes more competitive. In a competitive market, there are many sellers offering similar products or services, which leads to price competition and a wider range of choices for consumers. This is in contrast to a monopoly or a duopoly, where there are fewer sellers and they have more control over pricing and market conditions. A collusion solution, on the other hand, implies that the sellers in the market are cooperating to manipulate prices and reduce competition, which is not the case in a competitive market.

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  • 21. 

    When an oligopolit 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.

      More than the level produced by either a monopoly of a competitive market

    • D.

      Less than the level produced by either a monopoly or a competitive market

    Correct Answer
    A. More than the level produced by a monopoly and less than the level produced by a competitive market
    Explanation
    In an oligopoly, where a few firms dominate the market, each firm individually decides its production level to maximize profits. Unlike a monopoly, where a single firm controls the market, an oligopolist produces more than a monopoly, but less than a perfectly competitive market. This is because an oligopolist has some market power, allowing them to produce more than a monopoly, but they still face competition from other firms, which limits their production level compared to a perfectly competitive market.

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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 a monopoly and less than the price charged by a competitive market

    • B.

      Less than the price charged by a monopoly and more than the price charged by a competitive market

    • C.

      More than the price charged by either a monopoly or a competitive market

    • D.

      Less than the price charged by either a monopoly of a competitive market

    Correct Answer
    B. Less than the price charged by a monopoly and more than the price charged by a competitive market
    Explanation
    When an oligopolist individually chooses its level of production to maximize its profits, it charges a price that is less than the price charged by a monopoly and more than the price charged by a competitive market. This is because in an oligopoly, there are a few dominant firms that have significant market power, but they still face competition from each other. As a result, they have the ability to charge higher prices than in a competitive market, but they cannot charge as high as a monopoly because they still have to consider the potential reactions of their competitors.

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  • 23. 

    As the number of sellers in an oligopoly increases

    • A.

      Collusion is more likely to occur because of larger number of firms can place pressure on any firm that defects

    • B.

      Output in the market tends to fall because each firm must cut back on production

    • C.

      The price in the market moves further from marginal cost

    • D.

      The price in the market moves closer to marginal cost

    Correct Answer
    D. The price in the market moves closer to marginal cost
    Explanation
    In an oligopoly, a market structure with a few dominant sellers, as the number of sellers increases, the competition among them intensifies. This increased competition leads to a decrease in market power for each individual firm. As a result, firms are more likely to lower their prices to stay competitive, which causes the market price to move closer to the marginal cost of production. This is because firms cannot afford to charge significantly higher prices without losing customers to their competitors. Therefore, the correct answer is that the price in the market moves closer to marginal cost.

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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.

      Collusion solution

    • B.

      Cartel

    • C.

      Nash equilibrium

    • D.

      Dominant strategy

    Correct Answer
    C. Nash equilibrium
    Explanation
    A Nash equilibrium is a situation in which each oligopolist chooses their best strategy given the strategies chosen by all the other oligopolists. In other words, no oligopolist has an incentive to unilaterally change their strategy because they are already maximizing their own payoff given the strategies of their competitors. This concept, named after mathematician John Nash, is widely used in game theory to analyze strategic interactions between players. It is different from collusion or cartel, where oligopolists cooperate to maximize joint profits, and dominant strategy, where one strategy is always optimal regardless of the strategies chosen by others.

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  • 25. 

    Many economists argue that resale price maintenance

    • A.

      Is price fixing and, therefore, is prohibited by law

    • B.

      Enhances the market power of the producer

    • C.

      Has a legitimate purpose of stopping discount retailers from free riding on the services provided by full-service retailers

    • D.

      Is both a and b

    Correct Answer
    C. Has a legitimate purpose of stopping discount retailers from free riding on the services provided by full-service retailers
    Explanation
    Resale price maintenance refers to a practice where a producer sets a minimum price at which a retailer can sell their product. While many economists argue that this practice is a form of price fixing and should be prohibited by law, the given answer suggests that it has a legitimate purpose. According to this explanation, the purpose of resale price maintenance is to prevent discount retailers from taking advantage of the services provided by full-service retailers without contributing to their costs. This implies that the practice aims to protect the interests of full-service retailers and maintain a fair market for all participants.

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  • 26. 

    Collusion is difficult for an oligopoly to maintain

    • A.

      Because antitrust laws make collusion illegal

    • B.

      Because, in the case of oligopoly, self-interest is in conflict with cooperation

    • C.

      If additional firms enter of the oligopoly

    • D.

      For all the above reasons

    Correct Answer
    D. For all the above reasons
    Explanation
    In an oligopoly, collusion refers to an agreement between competing firms to limit competition and maximize their joint profits. However, collusion is difficult for an oligopoly to maintain due to several reasons. Firstly, antitrust laws make collusion illegal, imposing penalties and legal consequences on firms that engage in such behavior. Secondly, in an oligopoly, self-interest often conflicts with cooperation, as each firm aims to maximize its own profits. Lastly, if additional firms enter the oligopoly, it becomes even more challenging to sustain collusion as there are more players with diverse interests and incentives. Therefore, all the mentioned reasons contribute to the difficulty of maintaining collusion in an oligopoly.

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  • 27. 

    Laws that make it illegal for firms to conspire to raise prices or reduce production are known as

    • A.

      Pro-competition laws

    • B.

      Antitrust laws

    • C.

      Antimonopoly laws

    • D.

      Anticollusion laws

    • E.

      All of the above

    Correct Answer
    B. Antitrust laws
    Explanation
    Antitrust laws are designed to promote fair competition in the market by preventing firms from conspiring to raise prices or reduce production. These laws aim to protect consumers from monopolistic practices and ensure a level playing field for businesses. Antitrust laws are also referred to as pro-competition laws, antimonopoly laws, and anticollusion laws. Therefore, the correct answer is antitrust laws.

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