Question 1

In a typical cartel agreement,the cartel maximizes profit when it

Accepted Answer

A)  behaves as a monopolist. 
B)  behaves as a duopolist. 
C)  is flexible in enforcing production targets. 
D)  behaves as a perfectly competitive firm. 
A)  behaves as a monopolist. 
B)  behaves as a duopolist. 
C)  is flexible in enforcing production targets. 
D)  behaves as a perfectly competitive firm.

Question 2

Much of the research on game theory in recent decades was driven by attempts to analyze actions of players during

Accepted Answer

A)  the Great Depression of the 1930s. 
B)  World War II. 
C)  the Cold War between the United States and the Soviet Union. 
D)  the ascendancy of the conservative movement in the United States in the 1970s and 1980s. 
A)  the Great Depression of the 1930s. 
B)  World War II. 
C)  the Cold War between the United States and the Soviet Union. 
D)  the ascendancy of the conservative movement in the United States in the 1970s and 1980s.

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

Cartels are difficult to maintain because

Accepted Answer

A)  antitrust laws are difficult to enforce. 
B)  cartel agreements are conducive to monopoly outcomes. 
C)  there is always tension between cooperation and self-interest in a cartel. 
D)  firms pay little attention to the decisions made by other firms. 
A)  antitrust laws are difficult to enforce. 
B)  cartel agreements are conducive to monopoly outcomes. 
C)  there is always tension between cooperation and self-interest in a cartel. 
D)  firms pay little attention to the decisions made by other firms.

Question 5

Table 17-4.The information in the table below shows the total demand for high-speed Internet subscriptions in a small urban market.Assume that each company that provides these subscriptions incurs an annual fixed cost of $200,000 (per year)and that the marginal cost of providing an additional subscription is always $80.
  
-Refer to Table 17-4.Assume there are two profit-maximizing high-speed Internet service providers operating in this market.Further assume that they are not able to collude on the price and quantity of subscriptions to sell.How many subscriptions will be sold altogether when this market reaches a Nash equilibrium?

Accepted Answer

A)  6,000 
B)  8,000 
C)  10,000 
D)  12,000 
A)  6,000 
B)  8,000 
C)  10,000 
D)  12,000

Question 6

The players in a two-person game are choosing between Strategy X and Strategy Y.If the second player chooses Strategy X,the first player's best outcome is to select X.If the second player chooses Strategy Y,the first player's best outcome is to select X.For the first player,Strategy X is called a

Accepted Answer

A)  dominant strategy. 
B)  collusive strategy. 
C)  repeated-trial strategy. 
D)  cartel strategy. 
A)  dominant strategy. 
B)  collusive strategy. 
C)  repeated-trial strategy. 
D)  cartel strategy.

Question 7

Which of the following statements is (are)true of the prisoners' dilemma?

Accepted Answer

A)  (ii)only 
B)  (ii)and (iii) 
C)  (i)and (iii) 
D)  (i),(ii),and (iii) 
A)  (ii)only 
B)  (ii)and (iii) 
C)  (i)and (iii) 
D)  (i),(ii),and (iii)

Question 8

Games that are played more than once generally

Accepted Answer

A)  lead to outcomes dominated purely by self-interest. 
B)  lead to outcomes that do not reflect joint rationality. 
C)  encourage cheating on cartel production quotas. 
D)  make collusive arrangements easier to enforce. 
A)  lead to outcomes dominated purely by self-interest. 
B)  lead to outcomes that do not reflect joint rationality. 
C)  encourage cheating on cartel production quotas. 
D)  make collusive arrangements easier to enforce.

Question 9

The practice of tying is illegal on the grounds that

Accepted Answer

A)  it allows firms to expand their market power. 
B)  it allows firms to form collusive arrangements. 
C)  it prevents firms from forming collusive agreements. 
D)  the Sherman Act explicitly prohibited such agreements. 
A)  it allows firms to expand their market power. 
B)  it allows firms to form collusive arrangements. 
C)  it prevents firms from forming collusive agreements. 
D)  the Sherman Act explicitly prohibited such agreements.

Question 10

In 2007 the U.S.Supreme Court ruled that it was not necessary illegal for manufacturers and distributors to agree on minimum retail prices.

Accepted Answer

A) True 
 B)False

Question 11

Scenario 17-3.Consider two countries,Muria and Zenya,that are engaged in an arms race.Each country must decide whether to build new weapons or to disarm existing weapons.Each country prefers to have more arms than the other because a large arsenal gives it more influence in world affairs.But each country also prefers to live in a world safe from the other country's weapons.The following table shows the possible outcomes for each decision combination.The numbers in each cell represent the country's ranking of the outcome (4 = best outcome,1 = worst outcome).
  
-Refer to Scenario 17-3.If Zenya chooses to build new weapons,then Muria will

Accepted Answer

A)  disarm in order to prevent the loss of influence in world affairs. 
B)  disarm in order to promote world peace. 
C)  build new weapons in order to prevent the loss of influence in world affairs. 
D)  None of the above are correct. 
A)  disarm in order to prevent the loss of influence in world affairs. 
B)  disarm in order to promote world peace. 
C)  build new weapons in order to prevent the loss of influence in world affairs. 
D)  None of the above are correct.

Question 12

Resale price maintenance involves a firm

Accepted Answer

A)  colluding with another firm to restrict output and raise prices. 
B)  selling two individual products together for a single price rather than selling each product individually at separate prices. 
C)  temporarily cutting the price of its product to drive a competitor out of the market. 
D)  requiring that the firm reselling its product do so at a specified price. 
A)  colluding with another firm to restrict output and raise prices. 
B)  selling two individual products together for a single price rather than selling each product individually at separate prices. 
C)  temporarily cutting the price of its product to drive a competitor out of the market. 
D)  requiring that the firm reselling its product do so at a specified price.

Question 13

The paradoxical nature of oligopoly can be demonstrated by the fact that,even though the monopoly outcome is best for the oligopolists,

Accepted Answer

A)  they collude to set the output level equal to the Nash equilibrium level of output. 
B)  they have incentives to increase production above the monopoly outcome. 
C)  they do not behave as profit maximizers. 
D)  self-interest juxtaposes the profits earned at the Nash equilibrium. 
A)  they collude to set the output level equal to the Nash equilibrium level of output. 
B)  they have incentives to increase production above the monopoly outcome. 
C)  they do not behave as profit maximizers. 
D)  self-interest juxtaposes the profits earned at the Nash equilibrium.

Question 14

Suppose that Sonny and Cher are duopolists in the music industry.In January,they agree to work together as a monopolist,charging the monopoly price for their music and producing the monopoly quantity of songs.By February,each singer is considering breaking the agreement.What would you expect to happen next?

Accepted Answer

A)  Sonny and Cher will determine that it is in each singer's best self interest to maintain the agreement. 
B)  Sonny and Cher will each break the agreement.The new equilibrium quantity of songs will increase,and the new equilibrium price will decrease. 
C)  Sonny and Cher will each break the agreement.The new equilibrium quantity of songs will decrease,and the new equilibrium price will increase. 
D)  Sonny and Cher will each break the agreement.The new equilibrium quantity of songs will increase,and the new equilibrium price also will increase. 
A)  Sonny and Cher will determine that it is in each singer's best self interest to maintain the agreement. 
B)  Sonny and Cher will each break the agreement.The new equilibrium quantity of songs will increase,and the new equilibrium price will decrease. 
C)  Sonny and Cher will each break the agreement.The new equilibrium quantity of songs will decrease,and the new equilibrium price will increase. 
D)  Sonny and Cher will each break the agreement.The new equilibrium quantity of songs will increase,and the new equilibrium price also will increase.

Question 15

Table 17-17.Consider a small town that has two grocery stores from which residents can choose to buy a gallon of milk.The store owners each must make a decision to set a high milk price or a low milk price.The payoff table,showing profit per week,is provided below.The profit in each cell is shown as (Store 1,Store 2).
  
-Refer to Table 17-17.If grocery store 1 sets a low price,what price should grocery store 2 set? And what will grocery store 2's payoff equal?

Accepted Answer

A)  Low price,$500 
B)  High price,$800 
C)  Low price,$100 
D)  High price,$650 
A)  Low price,$500 
B)  High price,$800 
C)  Low price,$100 
D)  High price,$650

Question 16

A tit-for-tat strategy,in a repeated game,is one in which a player starts by cooperating and then does whatever the other player did last time.

Accepted Answer

A) True 
 B)False

Question 17

The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that the two prisoners play in the prisoners' dilemma.

Accepted Answer

A) True 
 B)False

Question 18

Table 17-19.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 17-19.What is (are)the Nash equilibrium (equilibria)in this Chicken game?

Accepted Answer

A)  John: Turn
Paul: Turn 
B)  John: Turn
Paul: Drive Straight 
C)  John: Drive Straight
Paul: Turn 
D)  Both b and c are Nash equilibria 
A)  John: Turn
Paul: Turn 
B)  John: Turn
Paul: Drive Straight 
C)  John: Drive Straight
Paul: Turn 
D)  Both b and c are Nash equilibria

Question 19

The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members.

Accepted Answer

A) True 
 B)False

Question 20

Table 17-1
Imagine a small town in which only two residents,Lisa and Mark,own wells that produce safe drinking water.Each week Lisa and Mark work together to decide how many gallons of water to pump.They bring the water to town and sell it at whatever price the market will bear.To keep things simple,suppose that Lisa and Mark can pump as much water as they want without cost so that the marginal cost of water equals zero.The weekly town demand schedule and total revenue schedule for water is shown in the table below:
  
-Refer to Table 17-1.Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from operating as a monopoly.What will be the price of water once Lisa and Mark reach a Nash equilibrium?

Accepted Answer

A)  $30 
B)  $40 
C)  $50 
D)  $60 
A)  $30 
B)  $40 
C)  $50 
D)  $60

Exam 17: Oligopoly

In a typical cartel agreement,the cartel maximizes profit when it

Much of the research on game theory in recent decades was driven by attempts to analyze actions of players during

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?

Cartels are difficult to maintain because

The players in a two-person game are choosing between Strategy X and Strategy Y.If the second player chooses Strategy X,the first player's best outcome is to select X.If the second player chooses Strategy Y,the first player's best outcome is to select X.For the first player,Strategy X is called a

Which of the following statements is (are)true of the prisoners' dilemma?

Games that are played more than once generally

The practice of tying is illegal on the grounds that

In 2007 the U.S.Supreme Court ruled that it was not necessary illegal for manufacturers and distributors to agree on minimum retail prices.

Resale price maintenance involves a firm

The paradoxical nature of oligopoly can be demonstrated by the fact that,even though the monopoly outcome is best for the oligopolists,

A tit-for-tat strategy,in a repeated game,is one in which a player starts by cooperating and then does whatever the other player did last time.

The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that the two prisoners play in the prisoners' dilemma.

The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members.

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 Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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