Question 1

A four-firm concentration ratio measures

Accepted Answer

A)  the extent to which industry sales are concentrated among the four largest firms in the industry. 
B)  the price elasticity of demand among the four largest firms in an industry. 
C)  the number of firms in an industry. 
D)  the price elasticity of demand in an industry. 
A)  the extent to which industry sales are concentrated among the four largest firms in the industry. 
B)  the price elasticity of demand among the four largest firms in an industry. 
C)  the number of firms in an industry. 
D)  the price elasticity of demand in an industry.

Question 2

Collusion between two firms occurs when

Accepted Answer

A)  the firms independently pursue strategies that could hurt each other. 
B)  firms explicitly or implicitly agree to adopt a uniform business strategy. 
C)  the firms announce that each will match its rival's market price. 
D)  firms act altruistically to bring about the economically efficient outcome. 
A)  the firms independently pursue strategies that could hurt each other. 
B)  firms explicitly or implicitly agree to adopt a uniform business strategy. 
C)  the firms announce that each will match its rival's market price. 
D)  firms act altruistically to bring about the economically efficient outcome.

Question 3

Figure 14-9  
-Refer to Figure 14-9. Uniguest, Inc. is a company that provides PCs with internet access and touch-sensitive screens to hotels. Suppose the Hard Rock Hotel and Casino in Las Vegas informs Uniguest that it is considering installing these systems in its hotel rooms. The Hard Rock expects to be able to charge higher prices for these rooms if it installs Uniguest's systems in its rooms. The two companies begin bargaining over what price the Hard Rock will pay Uniguest for its systems, and the decision tree shown above illustrates this bargaining game. Note that the profit figures listed in the decision tree are additional profits for the Hard Rock and total profits for Uniguest.
a. Suppose the Hard Rock offers Uniguest $1,200 per system. Will Uniguest accept or reject this offer? Why?
b. Suppose the Hard Rock offers Uniguest $800 per system. Will Uniguest accept or reject this offer? Why?
c. Suppose Uniguest attempts to obtain a favorable outcome from the bargaining by telling the Hard Rock it will reject an $800-per-system offer. If the Hard Rock does not believe the threat is credible, what will it do? Why? What will Uniguest do? Why?
d. Is there a sub-game perfect equilibrium in this situation? Explain.

Accepted Answer

a. If the Hard Rock offers Uniguest $1,2

Question 4

Collusion occurs when

Accepted Answer

A)  a firm chooses a level of output to maximize its own profit. 
B)  two firms' price and output decisions come into conflict. 
C)  there is an agreement among firms to charge the same price or otherwise not to compete. 
D)  firms refuse to follow their price leaders. 
A)  a firm chooses a level of output to maximize its own profit. 
B)  two firms' price and output decisions come into conflict. 
C)  there is an agreement among firms to charge the same price or otherwise not to compete. 
D)  firms refuse to follow their price leaders.

Question 5

Which of the following is not one of the five competitive forces?

Accepted Answer

A)  the threat from potential entrants 
B)  the bargaining power of buyers 
C)  the firm's ability to differentiate its product 
D)  the bargaining power of suppliers 
A)  the threat from potential entrants 
B)  the bargaining power of buyers 
C)  the firm's ability to differentiate its product 
D)  the bargaining power of suppliers

Question 6

Sequential games are used to analyze

Accepted Answer

A)  firms that are subject to the prisoner's dilemma. 
B)  cartels. 
C)  second-price auctions. 
D)  situations in which one firm acts and other firms respond. 
A)  firms that are subject to the prisoner's dilemma. 
B)  cartels. 
C)  second-price auctions. 
D)  situations in which one firm acts and other firms respond.

Question 7

Competition in the form of advertising, better customer service, or longer warranties can also reduce profits by raising costs.

Accepted Answer

A) True 
 B)False

Question 8

A reason why there is more competition among restaurants than among large discount department stores is that restaurants

Accepted Answer

A)  have to cater to a variety of consumer tastes while department stores do not. 
B)  unlike department stores, have to abide by government sanitation rules. 
C)  unlike department stores, do not have significant economies of scale. 
D)  have more elastic demand for their product compared to department stores. 
A)  have to cater to a variety of consumer tastes while department stores do not. 
B)  unlike department stores, have to abide by government sanitation rules. 
C)  unlike department stores, do not have significant economies of scale. 
D)  have more elastic demand for their product compared to department stores.

Question 9

Article Summary
According to Edmunds.com, incentives for the purchase of automobiles rose to an average of $2,500 per vehicle in the United States in May 2013, or about 8 percent of market value. The incentives offered by the big 3 U.S. auto companies were higher than the average, with Chrysler at 10.3 percent of market value, General Motors at 10 percent, and Ford at 9 percent. Despite the increase in incentives, there was little change in sales volume for the first half of 2013.
Source: Kyle Stock, "Lauderdale CVB ramps up LGBT summer marketing," Bloomberg Businessweek, June 11, 2013.
-Refer to the Article Summary. What happens to the profit a car company makes on each car sold if it offers incentives such as cash rebates to customers? What happens to the company's profit per car if it offers zero percent financing as an incentive? How might a car company decide which of these strategies to use?

Accepted Answer

Offering cash rebates and offering zero

Question 10

Table 14-5   Ming and Henri each run one of the two dry cleaning facilities in the town of Scaraby. Both consider offering free pickup and delivery services. Table 14-5 shows the payoff matrix containing the expected quarterly profits for each firm.
-Refer to Table 14-5. Does Ming have a dominant strategy? If yes, what is it?

Accepted Answer

A)  Yes, Ming's dominant strategy is to offer free pickup and delivery. 
B)  No, Ming does not a dominant strategy-his best outcome depends on what Henri does. 
C)  Yes, Ming's dominant strategy is to not to offer free pickup and delivery. 
D)  Yes, Ming's dominant strategy is to wait to see what Henri does first. 
A)  Yes, Ming's dominant strategy is to offer free pickup and delivery. 
B)  No, Ming does not a dominant strategy-his best outcome depends on what Henri does. 
C)  Yes, Ming's dominant strategy is to not to offer free pickup and delivery. 
D)  Yes, Ming's dominant strategy is to wait to see what Henri does first.

Question 11

Which of the following is an example of implicit collusion?

Accepted Answer

A)  product differentiation 
B)  a retaliation strategy 
C)  a second-price auction 
D)  price leadership 
A)  product differentiation 
B)  a retaliation strategy 
C)  a second-price auction 
D)  price leadership

Question 12

According to Porter's Five Competitive Forces Model, similar products produced by different firms within the industry affects a firm's ability to raise prices far more than substitutable products produced outside the industry.

Accepted Answer

A) True 
 B)False

Question 13

Assume that two interior design companies, Alistair and Baine, are competing for customers and if they both advertise, they would each earn $30 million in profits. If neither advertises, they each earn $50 million in profits. If one advertises and the other doesn't, the firm that advertises earns $40 million in profit while the other earns $20 million in profit.
a. Present the information above in the form of a payoff matrix. Let Baine be the row player and Alistair the column player.
b. Does each firm have a dominant strategy and if so what is it?
c. What is the Nash equilibrium?

Accepted Answer

a. See the table below. @#IMG-DLM& b. No, there is

Question 14

Table 14-5   Ming and Henri each run one of the two dry cleaning facilities in the town of Scaraby. Both consider offering free pickup and delivery services. Table 14-5 shows the payoff matrix containing the expected quarterly profits for each firm.
-Refer to Table 14-5. What is the Nash equilibrium in this game?

Accepted Answer

A)  There is no Nash equilibrium. 
B)  Ming offers free pickup and delivery, but Henri does not. 
C)  Henri offers free pickup and delivery, but Ming does not. 
D)  Both Ming and Henri offer free pickup and delivery. 
A)  There is no Nash equilibrium. 
B)  Ming offers free pickup and delivery, but Henri does not. 
C)  Henri offers free pickup and delivery, but Ming does not. 
D)  Both Ming and Henri offer free pickup and delivery.

Question 15

Prisoner's dilemma games imply that cooperative behavior between two people or two firms always breaks down. But reality teaches us that people and firms often cooperate successfully to achieve their goals. Why do the results from prisoner's dilemma games fail to predict real world results?

Accepted Answer

A)  Prisoner's dilemma games do not keep people or firms from reneging on agreements, which often occurs in real word situations. 
B)  The prisoner's dilemma does not apply to most business situations that are repeated over and over. 
C)  Prisoner's dilemma games predict the behavior of people and firms that engage in illegal activity; most people and firms do not resort to illegal activity. 
D)  Most real world situations involve more than two people or firms; the prisoner's dilemma is only applicable to situations that involve two parties. 
A)  Prisoner's dilemma games do not keep people or firms from reneging on agreements, which often occurs in real word situations. 
B)  The prisoner's dilemma does not apply to most business situations that are repeated over and over. 
C)  Prisoner's dilemma games predict the behavior of people and firms that engage in illegal activity; most people and firms do not resort to illegal activity. 
D)  Most real world situations involve more than two people or firms; the prisoner's dilemma is only applicable to situations that involve two parties.

Question 16

Figure 15-18  
-An oligopolistic industry is characterized by all of the following except

Accepted Answer

A)  existence of entry barriers. 
B)  the possibility of reaping long-run economic profits. 
C)  firms pursuing aggressive business strategies, independent of rivals' strategies. 
D)  production of standardized products. 
A)  existence of entry barriers. 
B)  the possibility of reaping long-run economic profits. 
C)  firms pursuing aggressive business strategies, independent of rivals' strategies. 
D)  production of standardized products.

Question 17

The bargaining power of suppliers increases if

Accepted Answer

A)  the cost of switching suppliers is relatively low. 
B)  there are only a few competitors to the supplier. 
C)  the input in question is not a critical component of production. 
D)  the input supplied is relatively standardized. 
A)  the cost of switching suppliers is relatively low. 
B)  there are only a few competitors to the supplier. 
C)  the input in question is not a critical component of production. 
D)  the input supplied is relatively standardized.

Question 18

The barrier to entry that allowed Alcoa to make persistent economic profits was ownership of an essential input.

Accepted Answer

A) True 
 B)False

Question 19

As a measure of competition in an industry, concentration ratios have several flaws. One of these flaws is that concentration ratios

Accepted Answer

A)  assume that all industries have low barriers to entry. 
B)  assume that a ratio less than 40 percent means an industry is perfectly competitive. 
C)  assume there are only four firms in an industry. 
D)  are calculated for the national market, even though competition in some industries is mainly local. 
A)  assume that all industries have low barriers to entry. 
B)  assume that a ratio less than 40 percent means an industry is perfectly competitive. 
C)  assume there are only four firms in an industry. 
D)  are calculated for the national market, even though competition in some industries is mainly local.

Question 20

All of the following are ways by which existing firms can deter the entry of new firms into an industry except

Accepted Answer

A)  continuously producing new and improved products. 
B)  earning less than maximum profit. 
C)  advertising products aggressively. 
D)  threatening to raise prices. 
A)  continuously producing new and improved products. 
B)  earning less than maximum profit. 
C)  advertising products aggressively. 
D)  threatening to raise prices.

Exam 14: Oligopoly: Firms in Less Competitive Markets

A four-firm concentration ratio measures

Collusion between two firms occurs when

Collusion occurs when

Which of the following is not one of the five competitive forces?

Sequential games are used to analyze

Competition in the form of advertising, better customer service, or longer warranties can also reduce profits by raising costs.

A reason why there is more competition among restaurants than among large discount department stores is that restaurants

Which of the following is an example of implicit collusion?

According to Porter's Five Competitive Forces Model, similar products produced by different firms within the industry affects a firm's ability to raise prices far more than substitutable products produced outside the industry.

Prisoner's dilemma games imply that cooperative behavior between two people or two firms always breaks down. But reality teaches us that people and firms often cooperate successfully to achieve their goals. Why do the results from prisoner's dilemma games fail to predict real world results?

Figure 15-18 -An oligopolistic industry is characterized by all of the following except

The bargaining power of suppliers increases if

The barrier to entry that allowed Alcoa to make persistent economic profits was ownership of an essential input.

As a measure of competition in an industry, concentration ratios have several flaws. One of these flaws is that concentration ratios

All of the following are ways by which existing firms can deter the entry of new firms into an industry except

Economics: Foundations and Models

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