Question 1

Interdependence of firms is most common in

Accepted Answer

A)  monopolistically competitive industries. 
B)  monopolistic industries. 
C)  monopolistically competitive and oligopolistic industries. 
D)  oligopolistic industries. 
A)  monopolistically competitive industries. 
B)  monopolistic industries. 
C)  monopolistically competitive and oligopolistic industries. 
D)  oligopolistic industries.

Question 2

The Brooks Appliance Store and the Lefingwell Appliance Store (both are located in the same city) each sell an identical washer-dryer pair. The owner of each store considered offering the washer-dryer pair for $700, but decided on a price of $500. If this is a Nash equilibrium we can conclude that

Accepted Answer

A)  each store owner feared charging the higher price would result in being undercut by the other store charging the lower price. 
B)  the owners of the stores feared that charging $700 could be used as evidence of collusion. 
C)  charging $500 was the most profitable strategy for each store, regardless of what price was charged by the other store. 
D)  the stores were less concerned about making a profit from the washer-dryer pair than they were with attracting customers who would also buy other appliances. 
A)  each store owner feared charging the higher price would result in being undercut by the other store charging the lower price. 
B)  the owners of the stores feared that charging $700 could be used as evidence of collusion. 
C)  charging $500 was the most profitable strategy for each store, regardless of what price was charged by the other store. 
D)  the stores were less concerned about making a profit from the washer-dryer pair than they were with attracting customers who would also buy other appliances.

Question 3

Which of the following is an example of a way in which an oligopolistic firm can escape the prisoner's dilemma?

Accepted Answer

A)  producing more of its product 
B)  advertising that it will match its rival's price 
C)  reneging on a previous tacit agreement with rival firms to charge identical high prices 
D)  ignoring the pricing decisions of the other firms 
A)  producing more of its product 
B)  advertising that it will match its rival's price 
C)  reneging on a previous tacit agreement with rival firms to charge identical high prices 
D)  ignoring the pricing decisions of the other firms

Question 4

If the painting firms in a city sign a contract outlining a pricing plan, they are involved in

Accepted Answer

A)  price competition. 
B)  a legal form of business contract in the United States. 
C)  collusion. 
D)  price regulation. 
A)  price competition. 
B)  a legal form of business contract in the United States. 
C)  collusion. 
D)  price regulation.

Question 5

The four-firm concentration ratio of the aircraft industry is over 80 percent. Most economists would consider this industry an oligopoly.

Accepted Answer

A) True 
 B)False

Question 6

Figure 14-9  
-Refer to Figure 14-9. Uniquest, Inc. is a company that provides PCs with internet access and touch-sensitive screens to hotels. Suppose the Hard Rock Hotel and Casino in Las Vegas informs Uniquest that it is considering installing these systems in its hotel rooms. The Hard Rock expects to be able to charge higher prices for these rooms if it installs Uniquest's systems in its rooms. The two companies begin bargaining over what price the Hard Rock will pay Uniquest for its systems, and the decision tree shown above illustrates this bargaining game. Note that the profit figures listed in the decision tree are additional profits for the Hard Rock and total profits for Uniquest.
a. Suppose the Hard Rock offers Uniquest $1,200 per system. Will Uniquest accept or reject this offer? Why?
b. Suppose the Hard Rock offers Uniquest $800 per system. Will Uniquest accept or reject this offer? Why?
c. Suppose Uniquest attempts to obtain a favorable outcome from the bargaining by telling the Hard Rock it will reject an $800-per-system offer. If the Hard Rock does not believe the threat is credible, what will it do? Why? What will Uniquest do? Why?
d. Is there a subgame-perfect equilibrium in this situation? Explain.

Accepted Answer

a. If the Hard Rock offers Uniquest $1,2

Question 7

A sequential game can be used to analyze whether a retail firm should build a large store or a small store in a city, when the correct choice depends on whether a competing firm will build a new store in the same city. Which of the following is used to analyze this type of decision?

Accepted Answer

A)  a decision tree 
B)  a decision matrix 
C)  a sequential matrix 
D)  an either-or graph 
A)  a decision tree 
B)  a decision matrix 
C)  a sequential matrix 
D)  an either-or graph

Question 8

Which of the following best explains why airlines often cut their ticket prices at the last-minute in order to fill the remaining empty seats on their flights?

Accepted Answer

A)  Fixed costs in the airline industry are very large, but the marginal cost of flying one more passenger is very low. 
B)  Airlines receive a subsidy from the government for each flight that is fully booked and departs on time. 
C)  The Federal Aviation Administration ranks each airline based on the percentage of flights that are fully booked. These rankings affect the decisions of firms to use a particular airline to fly their employees to business meetings. 
D)  Cutting prices makes the airlines more popular with their customers, who may fly with the same airline in the future as the result of buying low-price tickets. 
A)  Fixed costs in the airline industry are very large, but the marginal cost of flying one more passenger is very low. 
B)  Airlines receive a subsidy from the government for each flight that is fully booked and departs on time. 
C)  The Federal Aviation Administration ranks each airline based on the percentage of flights that are fully booked. These rankings affect the decisions of firms to use a particular airline to fly their employees to business meetings. 
D)  Cutting prices makes the airlines more popular with their customers, who may fly with the same airline in the future as the result of buying low-price tickets.

Question 9

Collusion

Accepted Answer

A)  is rampant in perfect competition as all firms charge the same price. 
B)  reduces market concentration in an industry. 
C)  among firms is difficult to maintain because it eliminates long-run economic profit. 
D)  is more difficult when there are many firms producing differentiated products in an industry. 
A)  is rampant in perfect competition as all firms charge the same price. 
B)  reduces market concentration in an industry. 
C)  among firms is difficult to maintain because it eliminates long-run economic profit. 
D)  is more difficult when there are many firms producing differentiated products in an industry.

Question 10

A game in which each player adopts its dominant strategy

Accepted Answer

A)  will not lead to an equilibrium. 
B)  must be a cooperative game. 
C)  could result in a Nash equilibrium. 
D)  can never result in a Nash equilibrium. 
A)  will not lead to an equilibrium. 
B)  must be a cooperative game. 
C)  could result in a Nash equilibrium. 
D)  can never result in a Nash equilibrium.

Question 11

Table 14-7   The payoff matrix shown above assumes that Perfect Plants and Floribunda Florist must decide whether to offer same-day delivery for their products. The matrix shows how much profit each firm will earn if it does or does not offer same-day delivery. The amount of profit for one firm depends on whether the other firm offers same-day delivery.
-Refer to Table 14-7. Which of the following statements is true?

Accepted Answer

A)  Neither Perfect nor Floribunda have a dominant strategy. 
B)  Perfect's dominant strategy is to offer same-day delivery; Floribunda's dominant strategy is to not offer same-day delivery. 
C)  Floribunda's dominant strategy is to offer same-day delivery; Perfect's dominant strategy is to not offer same-day delivery. 
D)  The dominant strategy for both firms is to offer same-day delivery. 
A)  Neither Perfect nor Floribunda have a dominant strategy. 
B)  Perfect's dominant strategy is to offer same-day delivery; Floribunda's dominant strategy is to not offer same-day delivery. 
C)  Floribunda's dominant strategy is to offer same-day delivery; Perfect's dominant strategy is to not offer same-day delivery. 
D)  The dominant strategy for both firms is to offer same-day delivery.

Question 12

Which of the following is not part of an oligopolist's business strategy?

Accepted Answer

A)  meeting worker health and safety standards required of all firms 
B)  deciding the level of total output of a new product 
C)  determining the amount of advertising a new product needs 
D)  setting the product's price after considering what rivals will do 
A)  meeting worker health and safety standards required of all firms 
B)  deciding the level of total output of a new product 
C)  determining the amount of advertising a new product needs 
D)  setting the product's price after considering what rivals will do

Question 13

Selling baked goods out of your home or apartment is illegal in Wisconsin and New Jersey. In these states, baked goods must be prepared in commercial kitchens that are subject to state inspection if they are to be sold to the public. For home bakers in these two states, they barrier to entry they face is

Accepted Answer

A)  due to economies of scale. 
B)  due to ownership of a key resource. 
C)  government imposed. 
D)  self imposed. 
A)  due to economies of scale. 
B)  due to ownership of a key resource. 
C)  government imposed. 
D)  self imposed.

Question 14

The people firms hire to attempt to convince state legislators and members of Congress to pass laws that are favorable to the economic interests of the firms are called

Accepted Answer

A)  economic advisors. 
B)  legislative assistants. 
C)  government bureaucrats. 
D)  lobbyists. 
A)  economic advisors. 
B)  legislative assistants. 
C)  government bureaucrats. 
D)  lobbyists.

Question 15

In an oligopoly market

Accepted Answer

A)  the pricing decisions of all other firms have no effect on an individual firm. 
B)  individual firms pay no attention to the behavior of other firms. 
C)  advertising of one firm has no effect on all other firms. 
D)  one firm's pricing decision affects all the other firms. 
A)  the pricing decisions of all other firms have no effect on an individual firm. 
B)  individual firms pay no attention to the behavior of other firms. 
C)  advertising of one firm has no effect on all other firms. 
D)  one firm's pricing decision affects all the other firms.

Question 16

There are two firms in the residential paint industry, Cool Shades (C) and Warm Hues (W). They collude to share the market equally. They jointly set a monopoly price and split the quantity demanded at that price. Here are their options:
i. They continue to collude (no cheating) and make $36 million each in profits.
ii. One firm cheats and the other does not. The firm that cheats makes a profit of $42 million whereas the firm that doesn't makes a profit of $27 million.
iii. They both cheat and each firm makes a profit of $21 million.
a. Construct a payoff matrix for these two firms.
b. How does this situation relate to the prisoner's dilemma?
c. If each firm acted noncooperatively, how much profit would each make?
d. Are the firms better off colluding (with no cheating) or competing? Explain.

Accepted Answer

a. The payoff matrix: @#IMG-DLM& b. With a prisone

Question 17

Table 14-3   Suppose OPEC has only two producers, Saudi Arabia and Ecuador. Saudi Arabia has far more oil reserves and is the lower-cost producer compared to Ecuador. The payoff matrix in Table 14-3 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
-Refer to Table 14-3. Which of the following statements is true?

Accepted Answer

A)  The Nash equilibrium is a noncooperative, dominant strategy equilibrium. 
B)  The Nash equilibrium is a cooperative equilibrium. 
C)  The Nash equilibrium is a collusive equilibrium. 
D)  There is no Nash equilibrium in this game because each party pursues its dominant strategy. 
A)  The Nash equilibrium is a noncooperative, dominant strategy equilibrium. 
B)  The Nash equilibrium is a cooperative equilibrium. 
C)  The Nash equilibrium is a collusive equilibrium. 
D)  There is no Nash equilibrium in this game because each party pursues its dominant strategy.

Question 18

Producing a differentiated product occurs in which of the following industries?

Accepted Answer

A)  oligopoly, monopolistic competition, and perfect competition 
B)  monopolistic competition only 
C)  oligopoly only 
D)  monopolistic competition and oligopoly 
A)  oligopoly, monopolistic competition, and perfect competition 
B)  monopolistic competition only 
C)  oligopoly only 
D)  monopolistic competition and oligopoly

Question 19

Why does a prisoner's dilemma lead to a noncooperative equilibrium?

Accepted Answer

A)  because each player had agreed before the game started to minimize the harm that he can inflict on the other players 
B)  because each player is uncertain how other players will play the game 
C)  because players must choose from a limited number of non-dominant strategies 
D)  because each rational player has a dominant strategy to play a certain way regardless of what other players do 
A)  because each player had agreed before the game started to minimize the harm that he can inflict on the other players 
B)  because each player is uncertain how other players will play the game 
C)  because players must choose from a limited number of non-dominant strategies 
D)  because each rational player has a dominant strategy to play a certain way regardless of what other players do

Question 20

Which of the following statements regarding concentration ratios is most accurate?

Accepted Answer

A)  Concentration ratios always provide an accurate account of the extent of competition in an industry. 
B)  Due to their shortcomings, concentration ratios provide no useable information as to the extent of competition in an industry. 
C)  Due to their shortcomings, concentration ratios generally do not provide any legitimate idea of the extent of competition in an industry. 
D)  Despite their shortcomings, concentration ratios can provide a general idea of the extent of competition in an industry. 
A)  Concentration ratios always provide an accurate account of the extent of competition in an industry. 
B)  Due to their shortcomings, concentration ratios provide no useable information as to the extent of competition in an industry. 
C)  Due to their shortcomings, concentration ratios generally do not provide any legitimate idea of the extent of competition in an industry. 
D)  Despite their shortcomings, concentration ratios can provide a general idea of the extent of competition in an industry.

Exam 14: Oligopoly: Firms in Less Competitive Markets

Interdependence of firms is most common in

The Brooks Appliance Store and the Lefingwell Appliance Store (both are located in the same city) each sell an identical washer-dryer pair. The owner of each store considered offering the washer-dryer pair for $700, but decided on a price of $500. If this is a Nash equilibrium we can conclude that

Which of the following is an example of a way in which an oligopolistic firm can escape the prisoner's dilemma?

If the painting firms in a city sign a contract outlining a pricing plan, they are involved in

The four-firm concentration ratio of the aircraft industry is over 80 percent. Most economists would consider this industry an oligopoly.

A sequential game can be used to analyze whether a retail firm should build a large store or a small store in a city, when the correct choice depends on whether a competing firm will build a new store in the same city. Which of the following is used to analyze this type of decision?

Which of the following best explains why airlines often cut their ticket prices at the last-minute in order to fill the remaining empty seats on their flights?

Collusion

A game in which each player adopts its dominant strategy

Which of the following is not part of an oligopolist's business strategy?

The people firms hire to attempt to convince state legislators and members of Congress to pass laws that are favorable to the economic interests of the firms are called

In an oligopoly market

Producing a differentiated product occurs in which of the following industries?

Why does a prisoner's dilemma lead to a noncooperative equilibrium?

Which of the following statements regarding concentration ratios is most accurate?

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

Gdp: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

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