Question 1

According to the textbook, the most important barrier to entry is economies of scale.

Accepted Answer

A) True 
 B)False

Question 2

Explain why member firms of a cartel like OPEC have incentives to agree to a low cartel production level and then produce more than its quota.

Accepted Answer

A low cartel production level results in

Question 3

The fraction of an industry's sales that are accounted for by the four largest firms is called

Accepted Answer

A)  the four-firm competition ratio. 
B)  the four-firm concentration ratio. 
C)  the four-firm industry ratio. 
D)  the four-firm oligopoly ratio. 
A)  the four-firm competition ratio. 
B)  the four-firm concentration ratio. 
C)  the four-firm industry ratio. 
D)  the four-firm oligopoly ratio.

Question 4

An oligopolistic industry is characterized by all of the following except

Accepted Answer

A)  existence of entry barriers. 
B)  the possibility of reaping long-run economic profits. 
C)  firms pursuing aggressive business strategies, independent of rivals' strategies. 
D)  production of standardized or differentiated products. 
A)  existence of entry barriers. 
B)  the possibility of reaping long-run economic profits. 
C)  firms pursuing aggressive business strategies, independent of rivals' strategies. 
D)  production of standardized or differentiated products.

Question 5

Who won a Nobel Prize in economics for his work in the development of game theory?

Accepted Answer

A)  John von Neuman 
B)  Oskar Morgenstern 
C)  John Nash 
D)  Howard Schultz 
A)  John von Neuman 
B)  Oskar Morgenstern 
C)  John Nash 
D)  Howard Schultz

Question 6

Table 14-1   LimoZeenz and AirPorter and are the only two airport shuttle and limousine rental service companies in the mid-sized town of Shady Shores. Each firm must decide on whether to offer its customers a mid-week discount for airport transportation. Table 14-1 shows the payoff matrix for profits earned by each company based on either offering or not offering the discount.
-Refer to Table 14-1. Let's suppose the game starts with each firm offering the mid-week discount so that LimoZeenz earns a profit of $6,000 and AirPorter earns a profit of $12,000. Is there an incentive for any one firm to stop offering the mid-week discount?

Accepted Answer

A)  No, neither firm has an incentive to stop offering the discount. 
B)  Yes, both firms have an incentive to stop offering the discount. 
C)  Yes, AirPorter has an incentive to stop offering the discount, but LimoZeenz does not. 
D)  Yes, LimoZeenz has an incentive to stop offering the discount, but AirPorter does not. 
A)  No, neither firm has an incentive to stop offering the discount. 
B)  Yes, both firms have an incentive to stop offering the discount. 
C)  Yes, AirPorter has an incentive to stop offering the discount, but LimoZeenz does not. 
D)  Yes, LimoZeenz has an incentive to stop offering the discount, but AirPorter does not.

Question 7

Figure 14-4   Rainbow Writer (RW) is a small online company selling a highly rated software package for engraving words onto objects produced by 3D printers. The firm currently earns a profit of $2 million per year selling its package exclusively on its Website. Odeon, the producer of the most popular 3D printers has expressed interest in bundling Rainbow Writer's product with its printers. Odeon expects that bundling would further boost its sales and allow it to sell its printers at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 14.4 shows the decision tree for the Rainbow Writer-Odeon bargaining game.
-Refer to Figure 14-4. How will Rainbow Writer respond to Odeon's two possible offers?

Accepted Answer

A)  Rainbow Writer will reject either offer. 
B)  Rainbow Writer will only accept an offer of $30 per copy of the software package. 
C)  Rainbow Writer will only accept an offer of $40 per copy of the software package. 
D)  Rainbow Writer will accept either offer. 
A)  Rainbow Writer will reject either offer. 
B)  Rainbow Writer will only accept an offer of $30 per copy of the software package. 
C)  Rainbow Writer will only accept an offer of $40 per copy of the software package. 
D)  Rainbow Writer will accept either offer.

Question 8

If an industry is made up of five identical-sized firms, the four-firm concentration ratio is

Accepted Answer

A)  5%. 
B)  20%. 
C)  80%. 
D)  100%. 
A)  5%. 
B)  20%. 
C)  80%. 
D)  100%.

Question 9

Table 14-4   Alpha and Beta are the only firms selling gyros in the upscale town of Delphi. Each firm must decide on whether to offer a discount to students to compete for customers. If one firm offers a discount but the other does not, then the firm that offers the discount will increase its profit. Table 14-4 shows the payoff matrix for this game.
-Refer to Table 14-4. Does Alpha have a dominant strategy and if so, what is it?

Accepted Answer

A)  Yes, Alpha should offer a student discount. 
B)  Yes, Alpha should not offer a student discount. 
C)  There are two dominant strategies: if Beta offers a student discount then Alpha's best bet is to not offer a student discount, but if Beta does not offer a student discount then Alpha should offer a student discount. 
D)  No, there is no dominant strategy. 
A)  Yes, Alpha should offer a student discount. 
B)  Yes, Alpha should not offer a student discount. 
C)  There are two dominant strategies: if Beta offers a student discount then Alpha's best bet is to not offer a student discount, but if Beta does not offer a student discount then Alpha should offer a student discount. 
D)  No, there is no dominant strategy.

Question 10

Why do economists refer to the pricing strategies of oligopoly firms as a prisoner's dilemma game?

Accepted Answer

A prisoners' dilemma is a game in which

Question 11

Table 14-4   Alpha and Beta are the only firms selling gyros in the upscale town of Delphi. Each firm must decide on whether to offer a discount to students to compete for customers. If one firm offers a discount but the other does not, then the firm that offers the discount will increase its profit. Table 14-4 shows the payoff matrix for this game.
-Refer to Table 14-4. If Alpha assumes that Beta would offer a student discount, what should it do?

Accepted Answer

A)  Alpha should not offer a student discount. 
B)  Alpha should also offer a student discount. 
C)  Alpha should wait at least a year to see if Beta stops offering a student discount before making a decision. 
D)  Being a duopolist, Alpha is not affected by Beta's choices because it has a secure 50 percent market share. 
A)  Alpha should not offer a student discount. 
B)  Alpha should also offer a student discount. 
C)  Alpha should wait at least a year to see if Beta stops offering a student discount before making a decision. 
D)  Being a duopolist, Alpha is not affected by Beta's choices because it has a secure 50 percent market share.

Question 12

A subgame-perfect equilibrium is a Nash equilibrium in which no player can make himself better off by changing his decision at any decision node.

Accepted Answer

A) True 
 B)False

Question 13

Sequential games are often used to analyze which two types of business strategies?

Accepted Answer

A)  whether to invest in research and development and whether to offer employees an early retirement package 
B)  deciding to merge with another firm and deciding how much to spend on an advertising campaign 
C)  deciding to end production of an unprofitable product and deciding to shut down temporarily 
D)  deterring entry by another firm and bargaining between firms 
A)  whether to invest in research and development and whether to offer employees an early retirement package 
B)  deciding to merge with another firm and deciding how much to spend on an advertising campaign 
C)  deciding to end production of an unprofitable product and deciding to shut down temporarily 
D)  deterring entry by another firm and bargaining between firms

Question 14

If economies of scale are relatively unimportant in an industry, the typical firm's long-run average total cost curve will reach a minimum at a level of output that is a ________ fraction of total industry sales. The industry will be ________.

Accepted Answer

A)  large; competitive 
B)  large; an oligopoly 
C)  small; competitive 
D)  small; an oligopoly 
A)  large; competitive 
B)  large; an oligopoly 
C)  small; competitive 
D)  small; an oligopoly

Question 15

A four-firm concentration ratio measures

Accepted Answer

A)  the extent to which industry sales are concentrated among the four largest firms in the industry. 
B)  the price elasticity of demand among the four largest firms in an industry. 
C)  the number of firms in an industry. 
D)  the price elasticity of demand in an industry. 
A)  the extent to which industry sales are concentrated among the four largest firms in the industry. 
B)  the price elasticity of demand among the four largest firms in an industry. 
C)  the number of firms in an industry. 
D)  the price elasticity of demand in an industry.

Question 16

What is the difference between explicit collusion and implicit collusion?

Accepted Answer

Explicit collusion involves ma

Question 17

A Nash equilibrium is

Accepted Answer

A)  reached when an oligopoly's market demand and supply intersect. 
B)  reached when each player chooses the best strategy for himself and for the group. 
C)  reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group. 
D)  an equilibrium comprising non-dominant strategies only. 
A)  reached when an oligopoly's market demand and supply intersect. 
B)  reached when each player chooses the best strategy for himself and for the group. 
C)  reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group. 
D)  an equilibrium comprising non-dominant strategies only.

Question 18

A form of implicit collusion where one firm in an oligopoly announces a price change which is matched by other firms in the same industry is

Accepted Answer

A)  "follow the leader" pricing. 
B)  price leadership. 
C)  retaliation pricing. 
D)  "tit-for-tat" pricing. 
A)  "follow the leader" pricing. 
B)  price leadership. 
C)  retaliation pricing. 
D)  "tit-for-tat" pricing.

Question 19

In game theory, the three key characteristics of a game are

Accepted Answer

A)  rules, strategies, and payoffs. 
B)  rules, regulations, and payoffs. 
C)  winners, losers, and rules. 
D)  risks, rewards, and penalties. 
A)  rules, strategies, and payoffs. 
B)  rules, regulations, and payoffs. 
C)  winners, losers, and rules. 
D)  risks, rewards, and penalties.

Question 20

Table 14-8   Two rival oligopolists in the coffee industry, Wide Awake and Zuma, have to decide on their pricing strategy. Each can choose either a high price or a low price. Table 14-8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts.
-Refer to Table 14-8. Which of the following is true?

Accepted Answer

A)  Wide Awake's dominant strategy is to select a low price. 
B)  Zuma's dominant strategy is to select a high price. 
C)  Wide Awake does not have a dominant strategy. 
D)  Zuma does not have a dominant strategy. 
A)  Wide Awake's dominant strategy is to select a low price. 
B)  Zuma's dominant strategy is to select a high price. 
C)  Wide Awake does not have a dominant strategy. 
D)  Zuma does not have a dominant strategy.

Exam 14: Oligopoly: Firms in Less Competitive Markets

According to the textbook, the most important barrier to entry is economies of scale.

Explain why member firms of a cartel like OPEC have incentives to agree to a low cartel production level and then produce more than its quota.

The fraction of an industry's sales that are accounted for by the four largest firms is called

An oligopolistic industry is characterized by all of the following except

Who won a Nobel Prize in economics for his work in the development of game theory?

If an industry is made up of five identical-sized firms, the four-firm concentration ratio is

Why do economists refer to the pricing strategies of oligopoly firms as a prisoner's dilemma game?

A subgame-perfect equilibrium is a Nash equilibrium in which no player can make himself better off by changing his decision at any decision node.

Sequential games are often used to analyze which two types of business strategies?

If economies of scale are relatively unimportant in an industry, the typical firm's long-run average total cost curve will reach a minimum at a level of output that is a ________ fraction of total industry sales. The industry will be ________.

A four-firm concentration ratio measures

What is the difference between explicit collusion and implicit collusion?

A Nash equilibrium is

A form of implicit collusion where one firm in an oligopoly announces a price change which is matched by other firms in the same industry is

In game theory, the three key characteristics of a game are

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

Filters

If economies of scale are relatively unimportant in an industry, the typical firm's long-run average total cost curve will reach a minimum at a level of output that is a fraction of total industry sales. The industry will be .