Question

The automobile industry in a developing country has very few sellers. If one automobile company raises the prices of its trucks by a certain amount, other automobile companies in the industry follow by raising prices by a similar amount.
This situation is an example of:

A. pure competition.
B. an oligopoly.
C. monopolistic competition.
D. a monopoly.
E. a monopsony.

Answer 1

Answer: b. An oligopoly

Explanation: An oligopoly is an economic condition in which a small number of sellers exert control over the market of a commodity. The firms in an oligopoly collude, to either restrict output or fix prices and sometimes both, in order to achieve above normal market returns, higher than that of a competitive market. None of the firms however can keep the others from having significant influence. Now firms in an oligopoly set prices of goods and services collectively or under the leadership of one firm. They do not take prices from the market. Thus, if one automobile company raises the prices of its trucks by a certain amount, other automobile companies in the industry are likely to follow by raising prices by a similar amount.

Answer 2

Answer:

The correct answer is B. an oligopoly.  

Explanation:

An oligopoly is a market structure where there are few relevant competitors and each of them has some capacity to influence the price and amount of equilibrium.

In the oligopoly, competitors have market power, but at a lower level than in the case of monopoly. This, since, instead of having only one bidder, there is a small group of companies.

This means that although each of the companies has an influence on the market price and quantity (they do not take it as given), the freedom to choose the level of these variables is limited by the existence of other competing firms. A special case of oligopoly is the duopoly, where there are only two bidders.