CFA Level I · CFA Level I Exam · The Firm and Market Structures
In an oligopoly market, a firm's best decision about price or output most likely depends on:
The best decision depends on the expected reactions of rival firms. In an oligopoly a few firms dominate the market, so each firm's profit is affected by competitors' pricing and output choices. This interdependence is why game theory is used to analyze oligopoly behavior.
- Aits own costs only, because rivals' actions are irrelevant
- Bthe expected reactions of rival firms to its decisionCorrect
- Cthe market demand curve only, because firms are price takers
Explanation
Oligopoly firms are interdependent: each firm's profit depends on rivals' choices, so a firm must anticipate their reactions. Price takers and ignoring rivals describe perfect competition or monopoly, not oligopoly.
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