Question 1

The story of the prisoners' dilemma shows why

Accepted Answer

A)  predatory pricing is clearly not in society's best interest. 
B)  economists are unanimous in condemning resale price maintenance, since it inevitably reduces competition. 
C)  oligopolies can fail to act independently, even when independent decision-making is in their best interest. 
D)  oligopolies can fail to cooperate, even when cooperation is in their best interest. 
A)  predatory pricing is clearly not in society's best interest. 
B)  economists are unanimous in condemning resale price maintenance, since it inevitably reduces competition. 
C)  oligopolies can fail to act independently, even when independent decision-making is in their best interest. 
D)  oligopolies can fail to cooperate, even when cooperation is in their best interest.

Question 2

A group of firms that collude is called a cartel.

Accepted Answer

A) True 
 B)False

Question 3

Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.
  
-Refer to Figure 17-1.Which of the following statements is correct?

Accepted Answer

A)  ABC can potentially earn its highest possible profit if it produces a high level of output, and for that reason it is a dominant strategy for ABC to produce a high level of output. 
B)  The highest possible combined profit for the two firms occurs when both produce a low level of output, and for that reason producing a low level of output is a dominant strategy for both firms. 
C)  Regardless of the strategy pursued by ABC, XYZ's best strategy is to produce a high level of output, and for that reason producing a high level of output is a dominant strategy for XYZ. 
D)  Our knowledge of game theory suggests that the most likely outcome of the game, if it is played only once, is for one firm to produce a low level of output and for the other firm to produce a high level of output. 
A)  ABC can potentially earn its highest possible profit if it produces a high level of output, and for that reason it is a dominant strategy for ABC to produce a high level of output. 
B)  The highest possible combined profit for the two firms occurs when both produce a low level of output, and for that reason producing a low level of output is a dominant strategy for both firms. 
C)  Regardless of the strategy pursued by ABC, XYZ's best strategy is to produce a high level of output, and for that reason producing a high level of output is a dominant strategy for XYZ. 
D)  Our knowledge of game theory suggests that the most likely outcome of the game, if it is played only once, is for one firm to produce a low level of output and for the other firm to produce a high level of output.

Question 4

Table 17-3. The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero.
  
-Refer to Table 17-3.Assume there are two profit-maximizing digital cable TV companies operating in this market.Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions.How much profit will each company earn?

Accepted Answer

A)  $610,000 
B)  $550,000 
C)  $405,000 
D)  $205,000 
A)  $610,000 
B)  $550,000 
C)  $405,000 
D)  $205,000

Question 5

If one firm left a duopoly market where the firms did not cooperate then

Accepted Answer

A)  price and quantity would rise 
B)  price would rise and quantity would fall. 
C)  quantity would rise and price would fall. 
D)  quantity and price would fall. 
A)  price and quantity would rise 
B)  price would rise and quantity would fall. 
C)  quantity would rise and price would fall. 
D)  quantity and price would fall.

Question 6

An agreement between two duopolists to function as a monopolist usually breaks down because

Accepted Answer

A)  they cannot agree on the price that a monopolist would charge. 
B)  they cannot agree on the output that a monopolist would produce. 
C)  each duopolist wants a larger share of the market in order to capture more profit. 
D)  each duopolist wants to charge a higher price than the monopoly price. 
A)  they cannot agree on the price that a monopolist would charge. 
B)  they cannot agree on the output that a monopolist would produce. 
C)  each duopolist wants a larger share of the market in order to capture more profit. 
D)  each duopolist wants to charge a higher price than the monopoly price.

Question 7

Which of the following statements is false?

Accepted Answer

A)  The Clayton Act allows triple damages in civil lawsuits in order to encourage lawsuits against conspiring oligopolists. 
B)  Many economists defend the practice of resale price maintenance on the grounds that it may help solve a free-rider problem. 
C)  Most economists agree that predatory pricing is a profitable business strategy that usually preserves market power. 
D)  The U.S. Supreme Court's view that the practice of tying usually allows a firm to extend its market power is not generally supported by economic theory. 
A)  The Clayton Act allows triple damages in civil lawsuits in order to encourage lawsuits against conspiring oligopolists. 
B)  Many economists defend the practice of resale price maintenance on the grounds that it may help solve a free-rider problem. 
C)  Most economists agree that predatory pricing is a profitable business strategy that usually preserves market power. 
D)  The U.S. Supreme Court's view that the practice of tying usually allows a firm to extend its market power is not generally supported by economic theory.

Question 8

If duopolists individually pursue their own self-interest when deciding how much to produce,the profit-maximizing price they will charge for their product will be

Accepted Answer

A)  less than the monopoly price. 
B)  equal to the perfectly competitive market price. 
C)  greater than the monopoly price. 
D)  possibly less than or greater than the monopoly price. 
A)  less than the monopoly price. 
B)  equal to the perfectly competitive market price. 
C)  greater than the monopoly price. 
D)  possibly less than or greater than the monopoly price.

Question 9

The prisoners' dilemma game

Accepted Answer

A)  is a situation in which two players both have dominant strategies which lead to the highest total payoff for the two players. 
B)  has no Nash equilibrium since players, after agreeing to play their dominant strategy, will have an incentive to switch to another strategy. 
C)  has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would agree to if they could cooperate with each other. 
D)  Both a and c are correct. 
A)  is a situation in which two players both have dominant strategies which lead to the highest total payoff for the two players. 
B)  has no Nash equilibrium since players, after agreeing to play their dominant strategy, will have an incentive to switch to another strategy. 
C)  has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would agree to if they could cooperate with each other. 
D)  Both a and c are correct.

Question 10

Table 17-22
Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for repair work and a high price. The annual economic profit from each strategy is indicated in the table. The profits are shown as (Matt, Brian) in each cell.
  
-Refer to Table 17-22.Which of the following statements is correct?

Accepted Answer

A)  Matt's dominant strategy is to charge a low price. 
B)  Brian's dominant strategy is to charge a high price. 
C)  The dominant strategy for both Brian and Matt is to charge a low price. 
D)  Matt's dominant strategy is to charge a high price. 
A)  Matt's dominant strategy is to charge a low price. 
B)  Brian's dominant strategy is to charge a high price. 
C)  The dominant strategy for both Brian and Matt is to charge a low price. 
D)  Matt's dominant strategy is to charge a high price.

Question 11

Table 17-21
The Chicken Game is named for a contest in which drivers test their courage by driving straight at each other. John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul).
  
-Refer to Table 17-21.How many Nash equilibria are there in this Chicken game?

Accepted Answer

A)  0 
B)  1 
C)  2 
D)  3 
A)  0 
B)  1 
C)  2 
D)  3

Question 12

Table 17-12
Each year the United States considers renewal of Most Favored Nation (MFN) trading status with Farland (a mythical nation). Historically, legislators have made threats of not renewing MFN status because of human rights abuses in Farland. The non-renewal of MFN trading status is likely to involve some retaliatory measures by Farland. The payoff table below shows the potential economic gains associated with a game in which Farland may impose trade sanctions against U.S. firms and the United States may not renew MFN status with Farland. The table contains the dollar value of all trade-flow benefits to the United States and Farland.
  
-Refer to Table 17-12.Assume that trade negotiators meet to discuss trade policy between the United States and Farland.If neither party to the negotiation is able to trust the other party,then

Accepted Answer

A)  each should assume that the other will choose a strategy that optimizes total value of the trade relationship. 
B)  the Nash equilibrium will provide the largest possible gains to each party. 
C)  Farland negotiators should assume that United States negotiators will implement a policy that is in the mutual best interest of both countries. 
D)  each should follow its dominant strategy. 
A)  each should assume that the other will choose a strategy that optimizes total value of the trade relationship. 
B)  the Nash equilibrium will provide the largest possible gains to each party. 
C)  Farland negotiators should assume that United States negotiators will implement a policy that is in the mutual best interest of both countries. 
D)  each should follow its dominant strategy.

Question 13

Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.
  
-Refer to Figure 17-1.If this game is played only once,then the most likely outcome is that

Accepted Answer

A)  both firms produce a low level of output. 
B)  ABC produces a low level of output and XYZ produces a high level of output. 
C)  ABC produces a high level of output and XYZ produces a low level of output. 
D)  both firms produce a high level of output. 
A)  both firms produce a low level of output. 
B)  ABC produces a low level of output and XYZ produces a high level of output. 
C)  ABC produces a high level of output and XYZ produces a low level of output. 
D)  both firms produce a high level of output.

Question 14

Table 17-13
Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits of the two home-improvement stores are shown in the table below.
  
-Refer to Table 17-13.Increasing the size of its store and parking lot is a dominant strategy for

Accepted Answer

A)  Lopes, but not for HomeMax. 
B)  HomeMax, but not for Lopes. 
C)  both stores. 
D)  neither store. 
A)  Lopes, but not for HomeMax. 
B)  HomeMax, but not for Lopes. 
C)  both stores. 
D)  neither store.

Question 15

Table 17-24
Two firms are considering going out of business and selling their assets. Each considers what happens if the other goes out of business. The payoff matrix below shows the net gain or loss to each firm.
  
-Refer to Table 17-24.What is the Nash equilibrium?

Accepted Answer

A)  A and B both stay in business 
B)  A stays in business, B sells 
C)  B stays in business, A sells 
D)  Both A and B sell 
A)  A and B both stay in business 
B)  A stays in business, B sells 
C)  B stays in business, A sells 
D)  Both A and B sell

Question 16

Table 17-3. The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero.
  
-Refer to Table 17-3.Assume that there are two profit-maximizing digital cable TV companies operating in this market.Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell.How much profit will each firm earn when this market reaches a Nash equilibrium?

Accepted Answer

A)  $25,000 
B)  $90,000 
C)  $160,000 
D)  $215,000 
A)  $25,000 
B)  $90,000 
C)  $160,000 
D)  $215,000

Question 17

Table 17-14
This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B).
  
-Refer to Table 17-14.Which of the following statements about this game is true?

Accepted Answer

A)  Up is a dominant strategy for A and Right is a dominant strategy for B. 
B)  Up is a dominant strategy for A and Left is a dominant strategy for B. 
C)  Down is a dominant strategy for A and Right is a dominant strategy for B. 
D)  Down is a dominant strategy for A and Left is a dominant strategy for B. 
A)  Up is a dominant strategy for A and Right is a dominant strategy for B. 
B)  Up is a dominant strategy for A and Left is a dominant strategy for B. 
C)  Down is a dominant strategy for A and Right is a dominant strategy for B. 
D)  Down is a dominant strategy for A and Left is a dominant strategy for B.

Question 18

Table 17-2. The table shows the town of Pittsville's demand schedule for gasoline. For simplicity, assume the town's gasoline seller(s) incur no costs in selling gasoline.
  
-Refer to Table 17-2.If there are exactly three sellers of gasoline in Pittsville and if they collude,then which of the following outcomes is most likely?

Accepted Answer

A)  Each seller will sell 166.67 gallons and charge a price of $1.33. 
B)  Each seller will sell 166.67 gallons and charge a price of $5. 
C)  Each seller will sell 200 gallons and charge a price of $4. 
D)  Each seller will sell 233.33 gallons and charge a price of $5. 
A)  Each seller will sell 166.67 gallons and charge a price of $1.33. 
B)  Each seller will sell 166.67 gallons and charge a price of $5. 
C)  Each seller will sell 200 gallons and charge a price of $4. 
D)  Each seller will sell 233.33 gallons and charge a price of $5.

Question 19

Some business practices that appear to reduce competition,such as resale price maintenance,may have legitimate economic purposes.

Accepted Answer

A) True 
 B)False

Question 20

Table 17-9
Only two firms, Acme and Pinnacle, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $10 and zero fixed cost.
  
-Refer to Table 17-9.Acme and Pinnacle agree to maximize joint profits.However,while Acme produces the agreed upon amount,Pinnacle breaks the agreement and produces 100 more than agreed,how much profit does Pinnacle make?

Accepted Answer

A)  $10,000 
B)  $9,000 
C)  $8,750 
D)  $7500 
A)  $10,000 
B)  $9,000 
C)  $8,750 
D)  $7500

The story of the prisoners' dilemma shows why

A group of firms that collude is called a cartel.

Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. -Refer to Figure 17-1.Which of the following statements is correct?

If one firm left a duopoly market where the firms did not cooperate then

An agreement between two duopolists to function as a monopolist usually breaks down because

Which of the following statements is false?

If duopolists individually pursue their own self-interest when deciding how much to produce,the profit-maximizing price they will charge for their product will be

The prisoners' dilemma game

Table 17-24 Two firms are considering going out of business and selling their assets. Each considers what happens if the other goes out of business. The payoff matrix below shows the net gain or loss to each firm. -Refer to Table 17-24.What is the Nash equilibrium?

Table 17-14 This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). -Refer to Table 17-14.Which of the following statements about this game is true?

Some business practices that appear to reduce competition,such as resale price maintenance,may have legitimate economic purposes.

Ten Principles of Economics.

Thinking Like an Economist.

Interdependence and the Gains from Trade.

The Market Forces of Supply and Demand.

Elasticity and Its Application

Supply, Demand, And Government Policies.

Consumers, Producers, and the Efficiency of Markets.

Application: The Costs of Taxation.

Application: International Trade.

Externalities.

Public Goods and Common Resources.

The Design of the Tax System.

The Costs of Production.

Firms in Competitive Markets.

Monopoly.

Monopolistic Competition.

The Market For the Factors of Production.

Earnings and Discrimination.

Income Inequality and Poverty.

The Theory of Consumer Choice.

Frontiers in Microeconomics.

Filters

Exam 17: Oligopoly.

The story of the prisoners' dilemma shows why

A group of firms that collude is called a cartel.

Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. -Refer to Figure 17-1.Which of the following statements is correct?

If one firm left a duopoly market where the firms did not cooperate then

An agreement between two duopolists to function as a monopolist usually breaks down because

Which of the following statements is false?

If duopolists individually pursue their own self-interest when deciding how much to produce,the profit-maximizing price they will charge for their product will be

The prisoners' dilemma game

Table 17-24 Two firms are considering going out of business and selling their assets. Each considers what happens if the other goes out of business. The payoff matrix below shows the net gain or loss to each firm. -Refer to Table 17-24.What is the Nash equilibrium?

Table 17-14 This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). -Refer to Table 17-14.Which of the following statements about this game is true?

Some business practices that appear to reduce competition,such as resale price maintenance,may have legitimate economic purposes.

Ten Principles of Economics.

Thinking Like an Economist.

Interdependence and the Gains from Trade.

The Market Forces of Supply and Demand.

Elasticity and Its Application

Supply, Demand, And Government Policies.

Consumers, Producers, and the Efficiency of Markets.

Application: The Costs of Taxation.

Application: International Trade.

Externalities.

Public Goods and Common Resources.

The Design of the Tax System.

The Costs of Production.

Firms in Competitive Markets.

Monopoly.

Monopolistic Competition.

The Market For the Factors of Production.

Earnings and Discrimination.

Income Inequality and Poverty.

The Theory of Consumer Choice.

Frontiers in Microeconomics.

Filters