Test Prep For AP® Courses
Which of the following is NOT a condition of a monopolistically competitive market?
- many firms
- heterogeneous products
- downward-sloping marginal revenue curve
- downward-sloping demand curve
- high barriers to entry
Oligopolies are susceptible to collusion primarily because ____________.
- mutual independence can often lead to price wars between firms that have few other dimensions on which to compete
- high barriers to entry prevent competing firms from entering the market
- low marginal revenue curves cause a low quantity to be produced
- low economic profits require firms to pool resources
- demand for the goods produced is inelastic
Table 10.8 lists profit outcomes for a two-firm oligopoly—also known as a duopoly—where either a high or low price can be charged for the firm’s product. Answer the following questions based on the information in this table.
|Firm A||High price||Low price|
|High price||$3 million for both firms||$0.5 million for Firm A; $4.5 million for Firm B|
|Low price||$4.5 million for Firm A; $0.5 million for Firm B||$1 million for both firms|
- What is the dominant strategy for Firm A and Firm B? Which profit outcome is this strategy set associated with?
- Is the profit outcome you reported in part (a), the best strategy for both firms? If yes, explain why. If not, explain which alternative profit outcome is best for both firms.
- Suppose Firm A and Firm B formed a cartel. What strategy would each firm adopt in this case?