Question 1

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 2

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. If Lexus lowers its price, will this deter BMW from entering the market?

Accepted Answer

A)  Yes, because BMW stands to lose $100 million if it competes with Lexus. 
B)  Yes, because BMW will make a smaller profit than Lexus if it chooses to compete. 
C)  No, because BMW will still make a profit of $120 if it competes with Lexus. 
D)  No, because BMW will be able to break Lexus' first mover advantage. 
A)  Yes, because BMW stands to lose $100 million if it competes with Lexus. 
B)  Yes, because BMW will make a smaller profit than Lexus if it chooses to compete. 
C)  No, because BMW will still make a profit of $120 if it competes with Lexus. 
D)  No, because BMW will be able to break Lexus' first mover advantage.

Question 3

Figure 14-6  
-Refer to Figure 14-6. Use the decision tree to determine whether Pizza Hut should deter Domino's from entering the market for pasta salad. Assume that each firm must earn a 25% return on investment to break even. Explain Pizza Hut's decision process.

Accepted Answer

If Pizza Hut charges $7.49 for its pasta

Question 4

List the competitive forces in the five competitive forces model.

Accepted Answer

The five competitive forces are 1) compe

Question 5

If the painting firms in a city sign a contract outlining a pricing plan, they are involved in

Accepted Answer

A)  price competition. 
B)  a legal form of business contract in the United States. 
C)  collusion. 
D)  price regulation. 
A)  price competition. 
B)  a legal form of business contract in the United States. 
C)  collusion. 
D)  price regulation.

Question 6

Because of the flaws of the concentration ratio as a measure of the extent of competition in an industry, some economists prefer another measure of competition, the Herfindahl-Hirschman Index.

Accepted Answer

A) True 
 B)False

Question 7

A table that shows the possible payoffs each firm earns from every combination of strategies by all firms is called

Accepted Answer

A)  an earnings table. 
B)  a payoff table. 
C)  a payoff matrix. 
D)  a strategic matrix. 
A)  an earnings table. 
B)  a payoff table. 
C)  a payoff matrix. 
D)  a strategic matrix.

Question 8

Table 14-3   Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 14-3 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
-Refer to Table 14-3. Is there a dominant strategy for Saudi Arabia and, if so, what is it?

Accepted Answer

A)  Yes, the dominant strategy is to produce a high output. 
B)  Yes, the dominant strategy is to produce a low output. 
C)  No, there is no dominant strategy. 
D)  Yes, it has a dominant strategy depending on what Nigeria does. 
A)  Yes, the dominant strategy is to produce a high output. 
B)  Yes, the dominant strategy is to produce a low output. 
C)  No, there is no dominant strategy. 
D)  Yes, it has a dominant strategy depending on what Nigeria does.

Question 9

An equilibrium in a game in which players pursue their own self-interests and do not cooperate is called a

Accepted Answer

A)  cartel equilibrium. 
B)  noncooperative equilibrium. 
C)  prisoner's dilemma equilibrium. 
D)  dominant strategy equilibrium. 
A)  cartel equilibrium. 
B)  noncooperative equilibrium. 
C)  prisoner's dilemma equilibrium. 
D)  dominant strategy equilibrium.

Question 10

Consider two single-malt whiskey distillers, Laphroaig and Knockando. If they advertise, they can both sell more whiskey and increase their revenue. However, the cost of advertising more than offsets the increased revenue so that each distiller ends up with a lower profit than if they do not advertise. On the other hand, if only one advertises, that distiller increases its market share and also its profit.
a. Construct a payoff matrix using the following hypothetical information: If neither distiller advertises, each earns a profit of $35 million per year. If both advertise, each earns a profit of $20 million per year. If one advertises and the other does not, the distiller who advertises earns a profit of $50 million and the distiller who does not advertise earns a profit of $9 million.
b. If Laphroaig wants to maximize profit, will it advertise? Briefly explain.
c. If Knockando 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 Laphroaig w

Question 11

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 12

Figure 15-18  
-An oligopolist differs from a perfect competitor in that

Accepted Answer

A)  there is cutthroat competition in perfect competition but little competition in oligopoly because firms have significant market power. 
B)  firms in an oligopoly do not produce homogeneous products while firms in perfect competition do. 
C)  the market demand curve for a perfectly competitive industry is perfectly elastic, but it is downward sloping in an oligopolistic industry. 
D)  there are no entry barriers in perfect competition but there are entry barriers in oligopoly. 
A)  there is cutthroat competition in perfect competition but little competition in oligopoly because firms have significant market power. 
B)  firms in an oligopoly do not produce homogeneous products while firms in perfect competition do. 
C)  the market demand curve for a perfectly competitive industry is perfectly elastic, but it is downward sloping in an oligopolistic industry. 
D)  there are no entry barriers in perfect competition but there are entry barriers in oligopoly.

Question 13

Table 14-1   Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game.
-Refer to Table 14-1. Let's suppose the game starts with each firm adhering to its original budget so that Godrickporter earns a profit of $6,000 and Star Connections earns a profit of $12,000. Is there an incentive for any one firm to increase its advertising budget?

Accepted Answer

A)  No, neither firm has an incentive to raise its advertising spending. 
B)  Yes, both firms have an incentive to raise their advertising budgets. 
C)  Yes, Star Connections has an incentive to increase its advertising budget, but Godrickporter does not. 
D)  Yes, Godrickporter has an incentive to increase its advertising budget, but Star Connections does not. 
A)  No, neither firm has an incentive to raise its advertising spending. 
B)  Yes, both firms have an incentive to raise their advertising budgets. 
C)  Yes, Star Connections has an incentive to increase its advertising budget, but Godrickporter does not. 
D)  Yes, Godrickporter has an incentive to increase its advertising budget, but Star Connections does not.

Question 14

Oligopoly differs from perfect competition and monopolistic competition in that

Accepted Answer

A)  barriers to entry are lower in oligopoly industries than they are in perfectly competitive and monopolistically competitive industries. 
B)  demand and marginal revenue curves are more useful for analyzing oligopoly than they are for analyzing perfect competition and monopolistic competition. 
C)  because oligopoly firms often react when other firms in their industry change their prices, it is difficult to know what the oligopolist's demand curve looks like. 
D)  the concentration ratios of oligopoly industries are lower than they are for perfectly competitive and monopolistically competitive firms. 
A)  barriers to entry are lower in oligopoly industries than they are in perfectly competitive and monopolistically competitive industries. 
B)  demand and marginal revenue curves are more useful for analyzing oligopoly than they are for analyzing perfect competition and monopolistic competition. 
C)  because oligopoly firms often react when other firms in their industry change their prices, it is difficult to know what the oligopolist's demand curve looks like. 
D)  the concentration ratios of oligopoly industries are lower than they are for perfectly competitive and monopolistically competitive firms.

Question 15

Table 14-2   Table 14-2 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3. 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 Wal-Mart 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 16

A member of a cartel earns more profits by producing more than its quota and selling at a price higher than the cartel's price.

Accepted Answer

A) True 
 B)False

Question 17

In an oligopoly, firms can increase their market power by

Accepted Answer

A)  selling to buyers who have market power. 
B)  pursuing dominant strategies. 
C)  colluding to set prices. 
D)  undertaking heavy advertising expenditure. 
A)  selling to buyers who have market power. 
B)  pursuing dominant strategies. 
C)  colluding to set prices. 
D)  undertaking heavy advertising expenditure.

Question 18

A cooperative equilibrium results when firms

Accepted Answer

A)  choose the best strategy regardless of what other players do. 
B)  choose the strategy that maximizes the total game payoff. 
C)  choose the strategy that minimizes the payoff to other players. 
D)  choose a strategy by random chance. 
A)  choose the best strategy regardless of what other players do. 
B)  choose the strategy that maximizes the total game payoff. 
C)  choose the strategy that minimizes the payoff to other players. 
D)  choose a strategy by random chance.

Question 19

A cartel is

Accepted Answer

A)  a temporary storage facility for automobiles. 
B)  a group of firms that enter into an informal agreement to fix prices to maximize joint profits. 
C)  a group of firms that enter into a formal agreement to fix prices to maximize joint profits. 
D)  an example of a group of firms that collectively regulate a competitive industry. 
A)  a temporary storage facility for automobiles. 
B)  a group of firms that enter into an informal agreement to fix prices to maximize joint profits. 
C)  a group of firms that enter into a formal agreement to fix prices to maximize joint profits. 
D)  an example of a group of firms that collectively regulate a competitive industry.

Question 20

Table 14-4   Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 14-4 shows the payoff matrix for this advertising game.
-Refer to Table 14-4. How are the firms in this advertising game caught in a prisoner's dilemma?

Accepted Answer

A)  They are not in a prisoner's dilemma because there is one clear strategy for each. 
B)  They would be more profitable if they refrained from advertising, but each fears that if it does not advertise, it will lose customers. 
C)  Since each firm is uncertain about the other's behavior, each will adopt a wait-and-see attitude which results in no increase in market share and no new customers. 
D)  Only the first mover is caught in a prisoner's dilemma because the second has a chance to observe and respond. 
A)  They are not in a prisoner's dilemma because there is one clear strategy for each. 
B)  They would be more profitable if they refrained from advertising, but each fears that if it does not advertise, it will lose customers. 
C)  Since each firm is uncertain about the other's behavior, each will adopt a wait-and-see attitude which results in no increase in market share and no new customers. 
D)  Only the first mover is caught in a prisoner's dilemma because the second has a chance to observe and respond.

Exam 14: Oligopoly: Firms in Less Competitive Markets

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

Figure 14-6 -Refer to Figure 14-6. Use the decision tree to determine whether Pizza Hut should deter Domino's from entering the market for pasta salad. Assume that each firm must earn a 25% return on investment to break even. Explain Pizza Hut's decision process.

List the competitive forces in the five competitive forces model.

If the painting firms in a city sign a contract outlining a pricing plan, they are involved in

Because of the flaws of the concentration ratio as a measure of the extent of competition in an industry, some economists prefer another measure of competition, the Herfindahl-Hirschman Index.

A table that shows the possible payoffs each firm earns from every combination of strategies by all firms is called

An equilibrium in a game in which players pursue their own self-interests and do not cooperate is called a

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

Figure 15-18 -An oligopolist differs from a perfect competitor in that

Oligopoly differs from perfect competition and monopolistic competition in that

A member of a cartel earns more profits by producing more than its quota and selling at a price higher than the cartel's price.

In an oligopoly, firms can increase their market power by

A cooperative equilibrium results when firms

A cartel is

Economics: Foundations and Models

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