Question 1

Which of the following is not a reason why government officials are willing to impose entry barriers?

Accepted Answer

A)  to raise revenue 
B)  to encourage innovation which may improve the standard of living in the long run 
C)  to increase economic efficiency 
D)  to promote an equitable distribution of income 
A)  to raise revenue 
B)  to encourage innovation which may improve the standard of living in the long run 
C)  to increase economic efficiency 
D)  to promote an equitable distribution of income

Question 2

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. Does Alistair have a dominant strategy and if so, what is it?

Accepted Answer

A)  Yes, Alistair should increase its advertising budget. 
B)  Yes, Alistair should keep its advertising budget as is. 
C)  There are two dominant strategies: If Baine increases its advertising budget, then Alistair's best bet is to keep its budget the same, but if Baine does not increase its spending, then Alistair should raise its advertising budget. 
D)  No, there is no dominant strategy. 
A)  Yes, Alistair should increase its advertising budget. 
B)  Yes, Alistair should keep its advertising budget as is. 
C)  There are two dominant strategies: If Baine increases its advertising budget, then Alistair's best bet is to keep its budget the same, but if Baine does not increase its spending, then Alistair should raise its advertising budget. 
D)  No, there is no dominant strategy.

Question 3

In economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms is called

Accepted Answer

A)  decision theory. 
B)  game theory. 
C)  market structure analysis. 
D)  profit analysis. 
A)  decision theory. 
B)  game theory. 
C)  market structure analysis. 
D)  profit analysis.

Question 4

An example of a barrier to entry is

Accepted Answer

A)  product differentiation. 
B)  high profits. 
C)  superior technological knowledge. 
D)  increasing marginal costs 
A)  product differentiation. 
B)  high profits. 
C)  superior technological knowledge. 
D)  increasing marginal costs

Question 5

Which of the following economists did not help to develop game theory analysis?

Accepted Answer

A)  Adam Smith 
B)  John Nash 
C)  John von Neumann 
D)  Oskar Morgenstern 
A)  Adam Smith 
B)  John Nash 
C)  John von Neumann 
D)  Oskar Morgenstern

Question 6

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. What is the Nash equilibrium in this game?

Accepted Answer

A)  In the Nash equilibrium, both Saudi Arabia and Nigeria produce a low output and earn a profit of $100 million and $20 million respectively. 
B)  In the Nash equilibrium, both Saudi Arabia and Nigeria produce a high output and earn a profit of $60 million and $20 million respectively. 
C)  In the Nash equilibrium, Saudi Arabia produces a low output and earns a profit of $80 million and Nigeria produces a high output and $30 million respectively. 
D)  There is no Nash equilibrium. 
A)  In the Nash equilibrium, both Saudi Arabia and Nigeria produce a low output and earn a profit of $100 million and $20 million respectively. 
B)  In the Nash equilibrium, both Saudi Arabia and Nigeria produce a high output and earn a profit of $60 million and $20 million respectively. 
C)  In the Nash equilibrium, Saudi Arabia produces a low output and earns a profit of $80 million and Nigeria produces a high output and $30 million respectively. 
D)  There is no Nash equilibrium.

Question 7

In the 1930s and 1940s, the Technicolor company was able to leverage its bargaining power over the movie industry because Technicolor was the sole producer of cameras and films needed to produce color films.

Accepted Answer

A) True 
 B)False

Question 8

The justification for occupational licensing laws is that they protect the public from incompetent practitioners (for example, lawyers and medical doctors), but the laws also result in

Accepted Answer

A)  higher prices and restrictions on the number of people who can enter the professions affected by the laws. 
B)  economies of scale. 
C)  ownership of a key input. 
D)  an increase in the amount of output required to achieve minimum efficient scale. 
A)  higher prices and restrictions on the number of people who can enter the professions affected by the laws. 
B)  economies of scale. 
C)  ownership of a key input. 
D)  an increase in the amount of output required to achieve minimum efficient scale.

Question 9

An equilibrium in a game in which players pursue their own self-interest is called

Accepted Answer

A)  a Nash equilibrium. 
B)  a cooperative equilibrium. 
C)  a noncooperative equilibrium. 
D)  a prisoner's dilemma. 
A)  a Nash equilibrium. 
B)  a cooperative equilibrium. 
C)  a noncooperative equilibrium. 
D)  a prisoner's dilemma.

Question 10

Collusion makes firms better off because if they act as a single entity (a cartel) they can reduce output and increase their prices and profits. But some cartels have failed and others are unstable. Which of the following is a reason why cartels often break down?

Accepted Answer

A)  Most cartels do not have a dominant strategy. 
B)  When a cartel is profitable, the amount of competition it faces increases. 
C)  Members of a cartel may resent having to share their profits equally. 
D)  Each member of a cartel has an incentive to "cheat" on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement. 
A)  Most cartels do not have a dominant strategy. 
B)  When a cartel is profitable, the amount of competition it faces increases. 
C)  Members of a cartel may resent having to share their profits equally. 
D)  Each member of a cartel has an incentive to "cheat" on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement.

Question 11

Economies of scale can lead to an oligopolistic market structure because

Accepted Answer

A)  if larger firms have lower costs, new small entrants will not be able to produce at the low costs achieved by the big established firms. 
B)  if economies of scale are insignificant, only a few firms are able to produce at the low costs achieved by the big established firms. 
C)  a few firms can force rivals to produce at low levels of output. 
D)  a few firms can use high profits to keep out new entrants. 
A)  if larger firms have lower costs, new small entrants will not be able to produce at the low costs achieved by the big established firms. 
B)  if economies of scale are insignificant, only a few firms are able to produce at the low costs achieved by the big established firms. 
C)  a few firms can force rivals to produce at low levels of output. 
D)  a few firms can use high profits to keep out new entrants.

Question 12

Explain how collusion makes firms better off. Given the incentives to collude, briefly explain why every industry does not become a cartel.

Accepted Answer

Collusion makes firms better off because

Question 13

Figure 14-3   Rainbow Writer (RW) is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 14-3 shows the decision tree for the Rainbow Writer-Odeon bargaining game.
-Refer to Figure 14-3. How will Rainbow Writer respond to Odeon's two possible offers?

Accepted Answer

A)  Rainbow Writer will reject either offer. 
B)  Rainbow Writer will only accept an offer of $30 per copy of the software package. 
C)  Rainbow Writer will only accept an offer of $40 per copy of the software package. 
D)  Rainbow Writer will accept either offer. 
A)  Rainbow Writer will reject either offer. 
B)  Rainbow Writer will only accept an offer of $30 per copy of the software package. 
C)  Rainbow Writer will only accept an offer of $40 per copy of the software package. 
D)  Rainbow Writer will accept either offer.

Question 14

In which of the following cartels is total cartel profit likely to be the highest?

Accepted Answer

A)  a cartel made up of equal sized firms each producing different quantities of a differentiated product 
B)  a cartel made up of firms of various sizes each producing different quantities of a homogeneous product 
C)  a cartel made up of firms of various sizes each producing the same quantity of a differentiated product 
D)  a cartel made up of identical firms each producing the same quantity of a homogeneous product 
A)  a cartel made up of equal sized firms each producing different quantities of a differentiated product 
B)  a cartel made up of firms of various sizes each producing different quantities of a homogeneous product 
C)  a cartel made up of firms of various sizes each producing the same quantity of a differentiated product 
D)  a cartel made up of identical firms each producing the same quantity of a homogeneous product

Question 15

Ocean Spray is considered to be an oligopoly firm because, until the 1990s, it faced little competition in the market for fresh and frozen cranberries. Why?

Accepted Answer

A)  Ocean Spray had a patent on the production of cranberries that gave the company the exclusive right to market its product for 20 years. The 20-year period ended in the 1990s. 
B)  Until the 1990s, Ocean Spray controlled almost the entire supply of cranberries. 
C)  Ocean Spray was able to achieve significant economies of scale in the production of cranberries. Beginning in the 1990s, other firms finally achieved economies of scale as well, but Ocean Spray still controls about 80 percent of the cranberry market. 
D)  The federal government imposed a high tariff on cranberry imports. During the 1990s the tariff was eliminated, but Ocean Spray still controls about 80 percent of the cranberry market. 
A)  Ocean Spray had a patent on the production of cranberries that gave the company the exclusive right to market its product for 20 years. The 20-year period ended in the 1990s. 
B)  Until the 1990s, Ocean Spray controlled almost the entire supply of cranberries. 
C)  Ocean Spray was able to achieve significant economies of scale in the production of cranberries. Beginning in the 1990s, other firms finally achieved economies of scale as well, but Ocean Spray still controls about 80 percent of the cranberry market. 
D)  The federal government imposed a high tariff on cranberry imports. During the 1990s the tariff was eliminated, but Ocean Spray still controls about 80 percent of the cranberry market.

Question 16

Why do economists refer to the pricing strategies of oligopoly firms as a prisoner's dilemma game?

Accepted Answer

A prisoner's dilemma is a game in which

Question 17

All of the following are examples of oligopolistic markets except

Accepted Answer

A)  the broadcasting industry. 
B)  aircraft manufacture. 
C)  college bookstores. 
D)  seafood restaurant chains. 
A)  the broadcasting industry. 
B)  aircraft manufacture. 
C)  college bookstores. 
D)  seafood restaurant chains.

Question 18

The prisoner's dilemma is used to analyze business situations in which one firm acts first and then other firms respond.

Accepted Answer

A) True 
 B)False

Question 19

In an oligopoly market

Accepted Answer

A)  the pricing decisions of all other firms have no effect on an individual firm. 
B)  individual firms pay no attention to the behavior of other firms. 
C)  advertising of one firm has no effect on all other firms. 
D)  one firm's pricing decision affects all the other firms. 
A)  the pricing decisions of all other firms have no effect on an individual firm. 
B)  individual firms pay no attention to the behavior of other firms. 
C)  advertising of one firm has no effect on all other firms. 
D)  one firm's pricing decision affects all the other firms.

Question 20

A subgame is a simultaneous game embedded in a sequential game.

Accepted Answer

A) True 
 B)False

Exam 14: Oligopoly: Firms in Less Competitive Markets

Which of the following is not a reason why government officials are willing to impose entry barriers?

In economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms is called

An example of a barrier to entry is

Which of the following economists did not help to develop game theory analysis?

In the 1930s and 1940s, the Technicolor company was able to leverage its bargaining power over the movie industry because Technicolor was the sole producer of cameras and films needed to produce color films.

The justification for occupational licensing laws is that they protect the public from incompetent practitioners (for example, lawyers and medical doctors), but the laws also result in

An equilibrium in a game in which players pursue their own self-interest is called

Collusion makes firms better off because if they act as a single entity (a cartel) they can reduce output and increase their prices and profits. But some cartels have failed and others are unstable. Which of the following is a reason why cartels often break down?

Economies of scale can lead to an oligopolistic market structure because

Explain how collusion makes firms better off. Given the incentives to collude, briefly explain why every industry does not become a cartel.

In which of the following cartels is total cartel profit likely to be the highest?

Ocean Spray is considered to be an oligopoly firm because, until the 1990s, it faced little competition in the market for fresh and frozen cranberries. Why?

Why do economists refer to the pricing strategies of oligopoly firms as a prisoner's dilemma game?

All of the following are examples of oligopolistic markets except

The prisoner's dilemma is used to analyze business situations in which one firm acts first and then other firms respond.

In an oligopoly market

A subgame is a simultaneous game embedded in a sequential game.

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

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