Page 699 - Krugmans Economics for AP Text Book_Neat

Module 66 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. For each of the following industry practices, explain whether b. There has been considerable variation in the market
the practice supports the conclusion that there is tacit collusion shares of the firms in the industry over time.
in this industry. c. Firms in the industry build into their products
a. For many years the price in the industry has changed unnecessary features that make it hard for consumers
infrequently, and all the firms in the industry charge the to switch from one company’s products to another’s. Section 12 Market Structures: Imperfect Competition
same price. The largest firm publishes a catalog containing a d. Firms meet yearly to discuss their annual sales forecasts.
“suggested” retail price. Changes in price coincide with e. Firms tend to adjust their prices upward at the same
changes in the catalog. times.

Tackle the Test: Multiple-Choice Questions

1. Having which of the following makes it easier for oligopolies to 3. When was the first federal legislation against cartels passed?
coordinate on raising prices? a. 1776
a. a large number of firms b. 1800
b. differentiated products c. 1890
c. buyers with bargaining power d. 1900
d. identical perceptions of fairness e. 1980
e. complex pricing schemes
4. Which of the following industries has been prosecuted for
2. Which of the following led to the passage of the first antitrust creating an illegal cartel?
laws? a. the lysine industry
I. growth of the railroad industry b. the art auction house industry
II. the emergence of the Standard Oil Company c. the U.S. electrical equipment industry
III. increased competition in agricultural industries d. the bulk vitamin industry
a. I only e. all of the above
b. II only
5. Oligopolists engage in tacit collusion in order to
c. III only
a. raise prices.
d. I and II only
b. increase output.
e. I, II, and III
c. share profits.
d. increase market share.
e. all of the above.

Tackle the Test: Free-Response Questions

1. Like other firms, universities face temptations to collude in c. Explain one way in which universities could engage in illegal
order to limit the effects of competition and avoid price wars. collusion.
(In fact, the U.S. Department of Justice formally accused a d. What are three ways in which universities engage in product
group of universities of price-fixing in 1991.) Answer the differentiation?
following questions about behavior in the market for higher e. Explain how price leadership might work in the university
education. setting.
a. Describe one factor of the market for higher education that f. What forms of nonprice competition do you see universities
invites tacit collusion. engaged in?
b. Describe one factor of the market for higher education that
works against tacit collusion.

module 66 Oligopoly in Practice 657