When Members of an Oligopolistic Industry Agree to Collude, Raising

question 219

Multiple Choice

When members of an oligopolistic industry agree to collude, raising their product price substantially above average cost, the passage of time (months and years)

• A) is usually needed for the members to solidify their cooperation.
• B) usually results in finer control of prices and markets by the group and larger profit margins.
• C) is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price.
• D) seldom has any impact on the agreement, as long as the participants maintain high profit levels as a result of the agreement.

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Definitions:

Market Risk Premium

The additional return an investor requires from a market portfolio over the risk-free rate as compensation for bearing higher risk.

Risk-free Rate

The theoretical return on an investment with zero risk, typically represented by the yield on government securities.

Individual Security

A specific financial instrument, such as a stock or bond, that represents ownership in a company or governmental debt obligation.

Treasury Bills

Treasury bills are short-term government securities issued at a discount from the face value and mature in one year or less, representing a secure, low-risk investment option.