Test Prep For AP® Courses


Which of the following is NOT a condition of a monopolistically competitive market?

  1. many firms
  2. heterogeneous products
  3. downward-sloping marginal revenue curve
  4. downward-sloping demand curve
  5. high barriers to entry

Oligopolies are susceptible to collusion primarily because ____________.

  1. mutual independence can often lead to price wars between firms that have few other dimensions on which to compete
  2. high barriers to entry prevent competing firms from entering the market
  3. low marginal revenue curves cause a low quantity to be produced
  4. low economic profits require firms to pool resources
  5. 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 B
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
Table 10.8
  1. What is the dominant strategy for Firm A and Firm B? Which profit outcome is this strategy set associated with?
  2. 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.
  3. Suppose Firm A and Firm B formed a cartel. What strategy would each firm adopt in this case?