Question 1

The most important source of oligopoly in an industry is:

Accepted Answer

A)  economies of scale. 
B)  government regulation. 
C)  technological inferiority. 
D)  ownership of plentiful resources. 
A)  economies of scale. 
B)  government regulation. 
C)  technological inferiority. 
D)  ownership of plentiful resources.

Question 2

Use the following to answer questions:
Figure: Pricing Strategy in Cable TV Market II  
-(Figure: Pricing Strategy in Cable TV Market II) Look at the figure Pricing Strategy in Cable TV Market II. If the two firms in the cable TV market collude:

Accepted Answer

A)  CableNorth will set a high price and earn $80,000 per month, and CableSouth will set a low price and earn $130,000 per month. 
B)  CableNorth will set a low price and earn $130,000 per month, and CableSouth will set a high price and earn $80,000 per month. 
C)  both firms will set a low price and each will earn $90,000 per month. 
D)  both firms will set a high price and each will earn $100,000 per month. 
A)  CableNorth will set a high price and earn $80,000 per month, and CableSouth will set a low price and earn $130,000 per month. 
B)  CableNorth will set a low price and earn $130,000 per month, and CableSouth will set a high price and earn $80,000 per month. 
C)  both firms will set a low price and each will earn $90,000 per month. 
D)  both firms will set a high price and each will earn $100,000 per month.

Question 3

Use the following to answer questions:
Figure: Monopoly Profits in Duopoly  
-(Figure: Monopoly Profits in Duopoly) The figure Monopoly Profits in Duopoly shows how an industry consisting of two firms that face identical demand curves (D1) can collude to increase profits. The market demand curve is D2. If the firms collude to share the market demand equally, then each firm will act as if its demand curve is given by:

Accepted Answer

A)  D1. 
B)  D2. 
C)  MR1. 
D)  2 × D1. 
A)  D1. 
B)  D2. 
C)  MR1. 
D)  2 × D1.

Question 4

Cartels made up of a large number of firms are unstable because each firm in the cartel:

Accepted Answer

A)  has an incentive to cheat. 
B)  is producing a relatively homogeneous product in which entry barriers are low. 
C)  does not have to worry about losses. 
D)  recognizes that the market size is relatively stable. 
A)  has an incentive to cheat. 
B)  is producing a relatively homogeneous product in which entry barriers are low. 
C)  does not have to worry about losses. 
D)  recognizes that the market size is relatively stable.

Question 5

Gary's Gas and Frank's Fuel are the only two providers of gasoline in their small town. Gary and Frank decide to form a cartel to raise the price of gasoline. The total industry profits are highest when _____ cheat(s) on the agreement, and Gary's profits are highest when _____.

Accepted Answer

A)  neither firm; neither firm cheats on the agreement 
B)  neither firm; Gary cheats but Frank does not 
C)  both firms; Gary cheats but Frank does not 
D)  both Gary and Frank; both Gary and Frank cheat 
A)  neither firm; neither firm cheats on the agreement 
B)  neither firm; Gary cheats but Frank does not 
C)  both firms; Gary cheats but Frank does not 
D)  both Gary and Frank; both Gary and Frank cheat

Question 6

_____ occurs when the only two firms in an industry openly agree to fix the price at a given level.

Accepted Answer

A)  Overt collusion 
B)  Price leadership 
C)  Contestability 
D)  Tacit collusion 
A)  Overt collusion 
B)  Price leadership 
C)  Contestability 
D)  Tacit collusion

Question 7

Which of the following is TRUE?

Accepted Answer

A)  Once an industry has achieved tacit collusion, producers have an incentive to raise prices. 
B)  Tacit collusion is legal in the United States. 
C)  The fact that one firm changes its price shortly after another firm does is proof of tacit collusion. 
D)  It is difficult to determine how much tacit collusion exists in a particular industry; hence tacit collusion remains hard to prosecute in the United States. 
A)  Once an industry has achieved tacit collusion, producers have an incentive to raise prices. 
B)  Tacit collusion is legal in the United States. 
C)  The fact that one firm changes its price shortly after another firm does is proof of tacit collusion. 
D)  It is difficult to determine how much tacit collusion exists in a particular industry; hence tacit collusion remains hard to prosecute in the United States.

Question 8

A dominant strategy equilibrium occurs when:

Accepted Answer

A)  a player has no choice. 
B)  all players make the same choice regardless of the action of the other players. 
C)  each player makes the best choice given the choice of the other player. 
D)  no player is able to dictate the actions of any other player. 
A)  a player has no choice. 
B)  all players make the same choice regardless of the action of the other players. 
C)  each player makes the best choice given the choice of the other player. 
D)  no player is able to dictate the actions of any other player.

Question 9

A situation in which each firm acts to raise the profits of its rivals (and of itself) without any formal agreement between firms is known as tacit collusion.

Accepted Answer

A) True 
 B)False

Question 10

The airline industry often engages in price wars. This means that firms often _____ prices until profits _____.

Accepted Answer

A)  raise; are maximized 
B)  lower; are maximized 
C)  lower; approach zero 
D)  raise; approach zero 
A)  raise; are maximized 
B)  lower; are maximized 
C)  lower; approach zero 
D)  raise; approach zero

Question 11

Use the following to answer questions:  
-(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets with no marginal cost or fixed cost. Suppose that these two producers have formed a cartel, agreed to split production of output evenly and are maximizing total industry profits. If Margaret decides to cheat on the agreement and sell 100 more gadgets, Margaret's price effect will be a(n) _____ in profit of _____.

Accepted Answer

A)  decrease; $400 
B)  increase; $400 
C)  increase; $250 
D)  decrease; $250 
A)  decrease; $400 
B)  increase; $400 
C)  increase; $250 
D)  decrease; $250

Question 12

Use the following to answer questions:
Scenario: Payoff Matrix for Two Firms
The following table provides the payoff matrix for two firms, firm A and firm B. They are the only two firms in the industry and can either compete or cooperate with each other, with the following profit results reflecting their actions.  
-(Scenario: Payoff Matrix for Two Firms) In the scenario Payoff Matrix for Two Firms, if both firms pursue their dominant strategies:

Accepted Answer

A)  their joint profits are maximized. 
B)  their joint profits are not maximized. 
C)  their joint profits reflect an equal sharing of the total profits. 
D)  neither can attain its largest possible profits, since there are two dominant strategies for each firm. 
A)  their joint profits are maximized. 
B)  their joint profits are not maximized. 
C)  their joint profits reflect an equal sharing of the total profits. 
D)  neither can attain its largest possible profits, since there are two dominant strategies for each firm.

Question 13

If Delta offers free drinks and snacks on its flights, and Southwest follows, they are engaging in tacit collusion.

Accepted Answer

A) True 
 B)False

Question 14

Use the following to answer questions:
Figure: Collusion  
-(Figure: Collusion) Look at the figure Collusion. The price charged by the industry with collusion is shown by:

Accepted Answer

A)  W. 
B)  X. 
C)  Y. 
D)  Z. 
A)  W. 
B)  X. 
C)  Y. 
D)  Z.

Question 15

A strategy that is the same regardless of the action of the other player in a game is a _____ strategy.

Accepted Answer

A)  competitive 
B)  trigger 
C)  dominant 
D)  tit-for-tat 
A)  competitive 
B)  trigger 
C)  dominant 
D)  tit-for-tat

Question 16

Use the following to answer questions:
Figure: Collusion  
-(Figure: Collusion) Look at the figure Collusion. The quantity of output produced by firm 1 when there is collusion in the industry is shown by:

Accepted Answer

A)  F. 
B)  G. 
C)  H. 
D)  K. 
A)  F. 
B)  G. 
C)  H. 
D)  K.

Question 17

Use the following to answer questions:  
-(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. If industry output is 300 gadgets produced by Margaret and 200 gadgets produced by Ray and if Ray decides to increase output by 100, Margaret's profit will be _____, and Ray's profit will be _____.

Accepted Answer

A)  $1,750; $1,250 
B)  $1,250; $1,250 
C)  $1,400; $1,000 
D)  $600; $600 
A)  $1,750; $1,250 
B)  $1,250; $1,250 
C)  $1,400; $1,000 
D)  $600; $600

Question 18

A firm that is in an oligopoly knows that its _____ affect its _____ and that the _____ of its rivals will affect it.

Accepted Answer

A)  actions; rivals; reactions 
B)  price changes; total revenue in a positive way; reactions 
C)  actions rarely; rivals; actions 
D)  price increases; total revenue in the long run only; large but not small price changes 
A)  actions; rivals; reactions 
B)  price changes; total revenue in a positive way; reactions 
C)  actions rarely; rivals; actions 
D)  price increases; total revenue in the long run only; large but not small price changes

Question 19

Suppose that each of the two firms in a duopoly has the independent choice of advertising or not advertising. If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million and the other gets profit of $2 million. According to game theory, the Nash equilibrium is:

Accepted Answer

A)  both may or may not advertise. 
B)  one will advertise and the other will not. 
C)  both will advertise. 
D)  neither will advertise. 
A)  both may or may not advertise. 
B)  one will advertise and the other will not. 
C)  both will advertise. 
D)  neither will advertise.

Question 20

Gary's Gas and Frank's Fuel are the only two providers of gasoline in their town. Gary and Frank decide to form a cartel. Later, Gary summarizes his pricing strategy as, "I'll cheat on the cartel because regardless of what Frank does, cheating gives me the best payoff." This is an example of:

Accepted Answer

A)  a dominant strategy. 
B)  a tit-for-tat strategy. 
C)  an irrational strategy. 
D)  product differentiation. 
A)  a dominant strategy. 
B)  a tit-for-tat strategy. 
C)  an irrational strategy. 
D)  product differentiation.

The most important source of oligopoly in an industry is:

Use the following to answer questions: Figure: Pricing Strategy in Cable TV Market II -(Figure: Pricing Strategy in Cable TV Market II) Look at the figure Pricing Strategy in Cable TV Market II. If the two firms in the cable TV market collude:

Cartels made up of a large number of firms are unstable because each firm in the cartel:

Gary's Gas and Frank's Fuel are the only two providers of gasoline in their small town. Gary and Frank decide to form a cartel to raise the price of gasoline. The total industry profits are highest when _ cheat(s) on the agreement, and Gary's profits are highest when _.

_____ occurs when the only two firms in an industry openly agree to fix the price at a given level.

Which of the following is TRUE?

A dominant strategy equilibrium occurs when:

A situation in which each firm acts to raise the profits of its rivals (and of itself) without any formal agreement between firms is known as tacit collusion.

The airline industry often engages in price wars. This means that firms often _ prices until profits _.

If Delta offers free drinks and snacks on its flights, and Southwest follows, they are engaging in tacit collusion.

Use the following to answer questions: Figure: Collusion -(Figure: Collusion) Look at the figure Collusion. The price charged by the industry with collusion is shown by:

A strategy that is the same regardless of the action of the other player in a game is a _____ strategy.

Use the following to answer questions: Figure: Collusion -(Figure: Collusion) Look at the figure Collusion. The quantity of output produced by firm 1 when there is collusion in the industry is shown by:

A firm that is in an oligopoly knows that its ___ affect its _ and that the ___ of its rivals will affect it.

Gary's Gas and Frank's Fuel are the only two providers of gasoline in their town. Gary and Frank decide to form a cartel. Later, Gary summarizes his pricing strategy as, "I'll cheat on the cartel because regardless of what Frank does, cheating gives me the best payoff." This is an example of:

First Principles

Economic Models: Trade-Offs and Trade 25

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods Common Resources

The Economics of the Welfare

Factor Markets and the Distribution of Income

Uncertainty, Risk, and Private Information

Filters

Exam 14: Oligopoly

The most important source of oligopoly in an industry is:

Use the following to answer questions: Figure: Pricing Strategy in Cable TV Market II -(Figure: Pricing Strategy in Cable TV Market II) Look at the figure Pricing Strategy in Cable TV Market II. If the two firms in the cable TV market collude:

Cartels made up of a large number of firms are unstable because each firm in the cartel:

Gary's Gas and Frank's Fuel are the only two providers of gasoline in their small town. Gary and Frank decide to form a cartel to raise the price of gasoline. The total industry profits are highest when _____ cheat(s) on the agreement, and Gary's profits are highest when _____.

_____ occurs when the only two firms in an industry openly agree to fix the price at a given level.

Which of the following is TRUE?

A dominant strategy equilibrium occurs when:

A situation in which each firm acts to raise the profits of its rivals (and of itself) without any formal agreement between firms is known as tacit collusion.

The airline industry often engages in price wars. This means that firms often _____ prices until profits _____.

If Delta offers free drinks and snacks on its flights, and Southwest follows, they are engaging in tacit collusion.

Use the following to answer questions: Figure: Collusion -(Figure: Collusion) Look at the figure Collusion. The price charged by the industry with collusion is shown by:

A strategy that is the same regardless of the action of the other player in a game is a _____ strategy.

Use the following to answer questions: Figure: Collusion -(Figure: Collusion) Look at the figure Collusion. The quantity of output produced by firm 1 when there is collusion in the industry is shown by:

A firm that is in an oligopoly knows that its _____ affect its _____ and that the _____ of its rivals will affect it.

Gary's Gas and Frank's Fuel are the only two providers of gasoline in their town. Gary and Frank decide to form a cartel. Later, Gary summarizes his pricing strategy as, "I'll cheat on the cartel because regardless of what Frank does, cheating gives me the best payoff." This is an example of:

First Principles

Economic Models: Trade-Offs and Trade 25

Supply and Demand

Consumer and Producer Surplus

Price Controls and Quotas: Meddling With Markets

Elasticity

Taxes

International Trade

Decision Making by Individuals Firms

The Rational Consumer

Behind the Supply Curve: Inputs and Costs

Perfect Competition and the Supply Curve

Monopoly

Monopolistic Competition and Product Differentiation

Externalities

Public Goods Common Resources

The Economics of the Welfare

Factor Markets and the Distribution of Income

Uncertainty, Risk, and Private Information

Filters

Gary's Gas and Frank's Fuel are the only two providers of gasoline in their small town. Gary and Frank decide to form a cartel to raise the price of gasoline. The total industry profits are highest when _ cheat(s) on the agreement, and Gary's profits are highest when _.

The airline industry often engages in price wars. This means that firms often _ prices until profits _.

A firm that is in an oligopoly knows that its ___ affect its _ and that the ___ of its rivals will affect it.