Question 1

The bargaining power of buyers of inputs increases if

Accepted Answer

A)  there are many large buyers. 
B)  the input in question has few substitutes. 
C)  the input in question is not a critical component of production. 
D)  there are wide variations in the quality of inputs from supplier to supplier. 
A)  there are many large buyers. 
B)  the input in question has few substitutes. 
C)  the input in question is not a critical component of production. 
D)  there are wide variations in the quality of inputs from supplier to supplier.

Question 2

Table 14-2   Table 14-2 shows the payoff matrix for Walmart and Target from every combination of pricing strategies for the popular PlayStation 4. At the start of the game each firm charges a low price and each earns a profit of $7,000.
-Refer to Table 14-2. Suppose Walmart and Target both advertise that they will match the lowest price offered by any competitor. What is the purpose of such a strategy?

Accepted Answer

A)  to signal to each other not to charge below the current low price 
B)  to signal to each other that they will not hesitate to initiate a price war 
C)  to signal to each other that they intend to charge the high price 
D)  to signal to each other to share the market equally 
A)  to signal to each other not to charge below the current low price 
B)  to signal to each other that they will not hesitate to initiate a price war 
C)  to signal to each other that they intend to charge the high price 
D)  to signal to each other to share the market equally

Question 3

Consider two craft bourbons distilled in Brooklyn, New York: Kings County and Stillhouse. If the distilleries advertise, they can both sell more bourbon and increase their revenue. However, the cost of advertising more than offsets the increased revenue so that each distillery ends up with a lower profit than if they do not advertise. On the other hand, if only one advertises, that distillery increases its market share and also its profit.
a. Construct a payoff matrix using the following hypothetical information: If neither distillery advertises, each earns a profit of $500,000 per month. If both advertise, each earns a profit of $250,000 per month. If one advertises and the other does not, the distillery that advertises earns a profit of $750,000 and the distillery that does not advertise earns a profit of $125,000.
b. If Kings County wants to maximize profit, will it advertise? Briefly explain.
c. If Stillhouse wants to maximize profit, will it advertise? Briefly explain.
d. Is there a dominant strategy for each distiller? Briefly explain.

Accepted Answer

a. The payoff matrix: @#IMG-DLM& b. If Kings Count

Question 4

Table 14-10  
-Refer to Table 14-10. Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Ecuador for the production of oil. Saudi Arabia and Ecuador must decide how much oil to produce. Since the demand for oil is inelastic, relatively low production rates drive up prices and profits. Saudi Arabia, the world's largest and lowest-cost producer, is able to influence market price; it has an incentive to keep output low. Ecuador, on the other hand, is a relatively high-cost producer with much smaller reserves. Assume Saudi Arabia now decides to try to further influence the oil market by offering to pay Ecuador $15 million to produce a low output.
a. Create a new payoff matrix that reflects Saudi Arabia's willingness to pay Ecuador $15 million to produce a low output.
b. What is the dominant strategy for each country in this new game?
c. What is the new Nash equilibrium?

Accepted Answer

a. See payoff matrix below.
b.

Question 5

Because many business situations are repeated games, firms may be able to avoid the prisoner's dilemma and implicitly collude to keep prices high.

Accepted Answer

A) True 
 B)False

Question 6

An oligopolist's demand curve is

Accepted Answer

A)  identical to that of a perfectly competitive firm. 
B)  identical to that of a monopolistically competitive firm. 
C)  vertical on a price-quantity diagram. 
D)  unknown because a response of firms to price changes by rivals is uncertain. 
A)  identical to that of a perfectly competitive firm. 
B)  identical to that of a monopolistically competitive firm. 
C)  vertical on a price-quantity diagram. 
D)  unknown because a response of firms to price changes by rivals is uncertain.

Question 7

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

Accepted Answer

A)  deciding on how to manage relations with suppliers 
B)  choosing what new technologies to adopt 
C)  selecting which new markets to enter 
D)  independently setting a product's price without consideration of its rivals' pricing policies 
A)  deciding on how to manage relations with suppliers 
B)  choosing what new technologies to adopt 
C)  selecting which new markets to enter 
D)  independently setting a product's price without consideration of its rivals' pricing policies

Question 8

All games share three characteristics. Two of these characteristics are rule and strategies. What is the third characteristic called?

Accepted Answer

A)  competition 
B)  collusion 
C)  results 
D)  payoffs 
A)  competition 
B)  collusion 
C)  results 
D)  payoffs

Question 9

For years, economists believed that market structure explained the ability of some firms to earn economic profits. For example, firms in industries with little competition and high barriers to entry would earn higher profits than firms in competitive industries with low entry barriers. Which of the following has caused economists to question this explanation and seek other explanations for why firms are profitable?

Accepted Answer

A)  Studies have shown that, on average, firms in competitive industries earn higher profit rates than firms in industries with little competition. 
B)  In recent years, new technologies have increased the potential entry of new firms in industries with high entry barriers. 
C)  Studies have shown that firms in industries that have little competition and high entry barriers are not very profitable. Economists conclude from this that some competition is necessary in order to force firms to lower their costs and develop products that satisfy new consumer demands. 
D)  The market structure explanation fails to explain how firms in the same industry can have very different levels of profit. 
A)  Studies have shown that, on average, firms in competitive industries earn higher profit rates than firms in industries with little competition. 
B)  In recent years, new technologies have increased the potential entry of new firms in industries with high entry barriers. 
C)  Studies have shown that firms in industries that have little competition and high entry barriers are not very profitable. Economists conclude from this that some competition is necessary in order to force firms to lower their costs and develop products that satisfy new consumer demands. 
D)  The market structure explanation fails to explain how firms in the same industry can have very different levels of profit.

Question 10

Economies of scale will create a barrier to entry in an oligopoly when

Accepted Answer

A)  a firm's minimum efficient scale occurs where long-run average total costs are constant. 
B)  the typical firm's long-run average total cost curve reaches a minimum at a level of output that is a large fraction of total industry sales. 
C)  the typical firm's long-run average total cost curve reaches a minimum at a level of output that is a small fraction of total industry sales. 
D)  the industry's four-firm concentration ratio is less than 40 percent. 
A)  a firm's minimum efficient scale occurs where long-run average total costs are constant. 
B)  the typical firm's long-run average total cost curve reaches a minimum at a level of output that is a large fraction of total industry sales. 
C)  the typical firm's long-run average total cost curve reaches a minimum at a level of output that is a small fraction of total industry sales. 
D)  the industry's four-firm concentration ratio is less than 40 percent.

Question 11

Natural resource cartels such as OPEC are inherently unstable because their members operate with excess capacity and have an incentive to cheat on their output quotas.

Accepted Answer

A) True 
 B)False

Question 12

The equilibrium in the prisoner's dilemma is a Nash equilibrium.

Accepted Answer

A) True 
 B)False

Question 13

The prisoner's dilemma illustrates

Accepted Answer

A)  how oligopolists engage in implicit collusion under strategic situations. 
B)  why firms will not cooperate if they behave strategically. 
C)  why firms have an incentive to cheat on agreements. 
D)  how cooperation in strategic situations leads to the economically efficient market outcome. 
A)  how oligopolists engage in implicit collusion under strategic situations. 
B)  why firms will not cooperate if they behave strategically. 
C)  why firms have an incentive to cheat on agreements. 
D)  how cooperation in strategic situations leads to the economically efficient market outcome.

Question 14

For many years the Aluminum Company of America (Alcoa) controlled most of the world's supply of high quality bauxite, the ore needed to produce aluminum. What type of entry barrier was responsible for Alcoa's position in the aluminum industry?

Accepted Answer

A)  ownership of a key input 
B)  a government-imposed barrier 
C)  a patent on the manufacture of aluminum 
D)  economies of scale 
A)  ownership of a key input 
B)  a government-imposed barrier 
C)  a patent on the manufacture of aluminum 
D)  economies of scale

Question 15

Consider two craft bourbons distilled in Brooklyn, New York: Kings County and Stillhouse. If the distilleries advertise, they can both sell more bourbon and increase their revenue. However, the cost of advertising more than offsets the increased revenue so that each distillery ends up with a lower profit than if they do not advertise. On the other hand, if only one advertises, that distillery increases its market share and also its profit.
a. Construct a payoff matrix using the following hypothetical information: If neither distillery advertises: each earns a profit of $500,000 per year. If both advertise: each earns a profit of $250,000 per year. If one advertises and the other does not: the distillery that advertises earns a profit of $750.000 and the distillery that does not advertise earns a profit of $125,000.
b. If the two distilleries agree to coordinate their strategies, what is the outcome?

Accepted Answer

a. The payoff matrix: @#IMG-DLM& b. If t

Question 16

Suppose we want to use game theory to analyze how an oligopolist selects its optimal price. The payoff matrix shows

Accepted Answer

A)  the profit that each producer can expect to earn by pursuing a single strategy. 
B)  the profit that each producer can expect to earn from every combination of strategies by the firms in the market. 
C)  the strategy that a firm must pursue to earn various levels of profit. 
D)  the expected profits of rival firms. 
A)  the profit that each producer can expect to earn by pursuing a single strategy. 
B)  the profit that each producer can expect to earn from every combination of strategies by the firms in the market. 
C)  the strategy that a firm must pursue to earn various levels of profit. 
D)  the expected profits of rival firms.

Question 17

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 Beta have a dominant strategy and if so, what is it?

Accepted Answer

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

Question 18

Consider two oligopolistic industries selling the same product in different locations. In the first industry, firms always match price changes by any other firm in the industry. In the second industry, firms always ignore price changes by any other firm. Which of the following statements is true about these two industries, holding everything else constant?

Accepted Answer

A)  Market prices are likely to be higher in the first industry in which firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. 
B)  Market prices are likely to be lower in the first industry where firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. 
C)  Market prices are likely to be the same in both markets because they are both oligopolistic markets. 
D)  No conclusions can be drawn about the pricing behavior under these very different firm behaviors. 
A)  Market prices are likely to be higher in the first industry in which firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. 
B)  Market prices are likely to be lower in the first industry where firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. 
C)  Market prices are likely to be the same in both markets because they are both oligopolistic markets. 
D)  No conclusions can be drawn about the pricing behavior under these very different firm behaviors.

Question 19

Figure 14-1   Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW's entry into the luxury hybrid niche.
-Refer to Figure 14-1. Should Lexus lower its price in order to deter BMW's entry into the luxury hybrid automobile market?

Accepted Answer

A)  In terms of profit earned, it makes no difference whether Lexus lowers its price or not; in either case it will make $280 million profit if BMW enters. 
B)  No, it should keep the same price and work to capitalize on its brand loyalty. 
C)  Yes, it will drive BMW out of the market. 
D)  No, because BMW will enter the market regardless of Lexus' decision about its price. 
A)  In terms of profit earned, it makes no difference whether Lexus lowers its price or not; in either case it will make $280 million profit if BMW enters. 
B)  No, it should keep the same price and work to capitalize on its brand loyalty. 
C)  Yes, it will drive BMW out of the market. 
D)  No, because BMW will enter the market regardless of Lexus' decision about its price.

Question 20

Table 14-2   Table 14-2 shows the payoff matrix for Walmart and Target from every combination of pricing strategies for the popular PlayStation 4. At the start of the game each firm charges a low price and each earns a profit of $7,000.
-Refer to Table 14-2. For each firm, is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000?

Accepted Answer

A)  Yes, the firms can implicitly collude and agree to charge a higher price. 
B)  No, there is no incentive for each firm to consider any other strategy. 
C)  No, any other strategy hurts consumers. 
D)  Yes, each firm can implicitly agree to increase output and not to deviate from a low price. 
A)  Yes, the firms can implicitly collude and agree to charge a higher price. 
B)  No, there is no incentive for each firm to consider any other strategy. 
C)  No, any other strategy hurts consumers. 
D)  Yes, each firm can implicitly agree to increase output and not to deviate from a low price.

Exam 14: Oligopoly: Firms in Less Competitive Markets

The bargaining power of buyers of inputs increases if

Because many business situations are repeated games, firms may be able to avoid the prisoner's dilemma and implicitly collude to keep prices high.

An oligopolist's demand curve is

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

All games share three characteristics. Two of these characteristics are rule and strategies. What is the third characteristic called?

Economies of scale will create a barrier to entry in an oligopoly when

Natural resource cartels such as OPEC are inherently unstable because their members operate with excess capacity and have an incentive to cheat on their output quotas.

The equilibrium in the prisoner's dilemma is a Nash equilibrium.

The prisoner's dilemma illustrates

For many years the Aluminum Company of America (Alcoa) controlled most of the world's supply of high quality bauxite, the ore needed to produce aluminum. What type of entry barrier was responsible for Alcoa's position in the aluminum industry?

Suppose we want to use game theory to analyze how an oligopolist selects its optimal price. The payoff matrix shows

Economics: Foundations and Models

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The Economics of Health Care

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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

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Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

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