Question

As the number of firms in an oligopoly increases, and provided the firms do not successfully collude, the

		price approaches marginal cost, and the quantity approaches the efficient level.
		price and quantity approach the monopoly levels.
		price effect exceeds the output effect.
		individual firms’ profits increase.

As the number of firms in an oligopolized market

		decreases, and provided the firms do not successfully collude, the price charged by the firms and the total quantity produced will both decrease.
		decreases, and provided the firms do not successfully collude, the market approaches the competitive market outcome.
		increases, and provided the firms do not successfully collude, the market approaches the competitive market outcome.
		increases, and provided the firms do not successfully collude, the market approaches the monopoly outcome.

The paradoxical nature of oligopoly can be demonstrated by the fact that, even though the monopoly outcome is best for the oligopolists,

		they collude to set the output level equal to the Nash equilibrium level of output.
		they have private incentives to increase production above the monopoly outcome.
		they do not behave as profit maximizers.
		self-interest juxtaposes the profits earned at the Nash equilibrium.

To increase their individual profits, members of a cartel have an incentive to

		charge a higher price than the other members of the cartel.
		increase production above the level agreed upon.
		ignore the choices made by the other firms and act as a monopolist.
		charge the same price a monopolist would charge.

Answer 1

Ans 1. Option a

This is because the competition in the industry rises, giving birth to a price war which ultimately results in prices approaching the marginal cost and quantity approaching efficient level if they are unable to collude and decide on individual outputs and industry price.

Ans 2. Option c

This is because firms start a price war due to increased competition and inability to collude, so, they undercut the prices and this leads to prices and quantity approaching the perfectly competitive level.

Ans 3. Option b

The personal incentives to increase profit leads to an increase in quantity produced by firms which increases the industry supply and pushes the prices down from monopolist level pf price and quantity more than the level in monopoly.

Ans 4. Option b

As the price is collectively set by the cartel, so, at given price firms have incentive to increase production beyond the decided level, this increases industry output and hence, drives the price down.

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