Oligopoly

Question 1

Describe the point of short-run profit maximization for a firm in an oligopoly industry.

Answer 1

Short-run profit is maximized where marginal revenue is equal to rising marginal cost (provided price > average total cost).

Question 2

How are long-run profits determined for a firm in an oligopoly industry?

Answer 2

A firm in an oligopoly industry will make profits in the long-run if average total cost is less than market price, and can continue to do so because entry into the market is restricted.

Question 3

LIst the characteristics of an oligopoly.

Answer 3

1. A few sellers
2. Firms sell either a homogeneous product (standardized oligopoly) or a differentiated product (differentiated oligopoly)
3. Restricted entry into the market

Question 4

Distinguish between overt collusion and tacit collusion.

Answer 4

1. Overt Collusion = Firms conspire to set output, price or profit; illegal in the U.S.
2. Tacit Collusion = Firms follow price charged by the price leader in the market; not illegal in the U.S.

Question 5

In what ways do firms in an oligopoly market compete?

Answer 5

Firms in an oligopoly market compete based on quality, service, distinctiveness, etc., but not on price, which might incite a “price war”.