Regulation & Antitrust Policy (Econ 198) Signature:
Drake University, Spring 2005
William M. Boal Printed name:
Quiz #3
"Oligopoly and Collusion"
INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but graphing
calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be
correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points
are 100.
I. Multiple choice: Circle the one best answer to each question. [4 pts each: 48 pts total]
(1) Suppose market demand is given by the formula
P = 12 – Q/100, where P denotes the market price
and Q denotes the total market quantity. Let qA
denote the quantity produced by Firm A. If Firm A
believes its rivals will produce 400 units, then Firm
A's marginal revenue is given by
a. MRA = 12 – (qA/100).
b. MRA = 12 - (qA/50).
c. MRA = 8 – (qA/100).
d. MRA = 8 – (qA/50).
(2) If five firms want to produce 100 units of output
at minimum combined total cost, they should set their
output quotas so that
a. each firm produces 20 units.
b. all five firms have the same total cost.
c. all five firms have the same average cost.
d. all five firms have the same marginal cost.
(3) Firm A and Firm B want to produce 100 units of
output at minimum combined total cost. The firms
initially divide output responsibilities evenly so that
each firm is producing 50 units. Firm A's marginal
cost is $20 per unit, while Firm B's marginal cost is
$30 per unit. The two firms can reduce their
combined total cost if
a. Firm A increases output and Firm B decreases
output.
b. Firm A decreases output and Firm B increases
output.
c. Combined total cost is already minimized.
d. Cannot be determined from the information
given.
(4) The "joint marginal cost" curve under the model
of joint profit maximization is the same as the
a. marginal revenue curve under monopoly.
b. supply curve under price competition.
c. market demand curve under Cournot oligopoly.
d. none of the above.
(5) AFter firms agree to maximize their joint profits,
each firm will have an incentive to cheat on any
agreement by quietly
a. lowering its price.
b. raising its price.
c. lowering its output level.
d. any of the above.
(6) The Cournot model of oligopoly assumes that
each firm maximizes its profit while taking its rivals'
a. prices as given.
b. output quantities as given.
c. costs as given.
d. all of the above.
(7) One implication of the Cournot model of
oligopoly is that the equilibrium price is lower
a. the more firms are in the industry.
b. the more elastic is market demand.
c. both of the above.
d. none of the above.
(8) A certain industry is served by a symmetric
Cournot oligopoly of 5 firms. If the elasticity of
market demand is -2, the Lerner index (or "price-cost
margin") in equilibrium equals
a. 0.1 .
b. 0.2 .
c. 0.3 .
d. 0.5 .
