Question 1

Competition from substitute goods is more of a threat when switching costs are high.

Accepted Answer

A) True 
 B)False

Question 2

Figure 14-2   
The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game.
-Refer to Figure 14-2.If the government delays Gigacom's entry and Xenophone moves first,what is the likely outcome in the market?

Accepted Answer

A)  Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million. 
B)  Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million. 
C)  Xenophone offers DSL internet service and earns a profit of $5 million while Gigacom offer internet service via cable line and earns a profit of $6.5 million. 
D)  Xenophone offers internet service via cable line and earns a profit of $4 million while Gigacom offers DSL internet service and earns a profit of $4.5 million. 
A)  Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million. 
B)  Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million. 
C)  Xenophone offers DSL internet service and earns a profit of $5 million while Gigacom offer internet service via cable line and earns a profit of $6.5 million. 
D)  Xenophone offers internet service via cable line and earns a profit of $4 million while Gigacom offers DSL internet service and earns a profit of $4.5 million.

Question 3

Figure 14-2   
The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 14-2 shows the decision tree for this game.
-Refer to Figure 14-2.If the government delays Gigacom's entry and Xenophone moves first,is a threat by Gigacom that it will provide DSL service if Gigacom provides cable service a credible threat?

Accepted Answer

A)  No, because Gigacom will lose $4.5 million in profits if it carries out its threat. 
B)  Yes, because Gigacom's DSL service will drive Xenophone out of business. 
C)  No, because as a second mover, it has no choice but to abide by the choices of the first mover. 
D)  Yes, Xenophone stands to lose $3 million in profit. 
A)  No, because Gigacom will lose $4.5 million in profits if it carries out its threat. 
B)  Yes, because Gigacom's DSL service will drive Xenophone out of business. 
C)  No, because as a second mover, it has no choice but to abide by the choices of the first mover. 
D)  Yes, Xenophone stands to lose $3 million in profit.

Question 4

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 5

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 6

A market comprised of only two firms is called a

Accepted Answer

A)  competitive market. 
B)  duopoly. 
C)  monopoly. 
D)  monopolistically competitive market. 
A)  competitive market. 
B)  duopoly. 
C)  monopoly. 
D)  monopolistically competitive market.

Question 7

All of the following are characteristics of game theory except

Accepted Answer

A)  rules that determine what actions are allowable. 
B)  payoffs that are the results of the interaction among players' strategies. 
C)  strategies that players employ to attain their objectives. 
D)  independence among players 
A)  rules that determine what actions are allowable. 
B)  payoffs that are the results of the interaction among players' strategies. 
C)  strategies that players employ to attain their objectives. 
D)  independence among players

Question 8

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 9

Suppose two firms in a duopoly implicitly collude and charge a high price.How might each firm benefit from advertising that it will match the lowest price offered by its competitor?

Accepted Answer

A)  The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact. 
B)  The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same. 
C)  The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion. 
D)  The advertisement is meant to suggest to consumers that the offered price is actually the lowest price available. 
A)  The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact. 
B)  The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same. 
C)  The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion. 
D)  The advertisement is meant to suggest to consumers that the offered price is actually the lowest price available.

Question 10

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)  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)  announce that each will match its rival's market price. 
D)  firms act altruistically to bring about the economically efficient outcome.

Question 11

An entry barrier exists when firms in an industry charge the lowest price possible for their products.

Accepted Answer

A) True 
 B)False

Question 12

Figure 14-4   
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 14-4 shows the decision tree for the Rainbow Writer-Odeon bargaining game.
-Refer to Figure 14-4.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 13

Which of the following is not necessarily a consequence of occupational licensing laws?

Accepted Answer

A)  They restrict competition. 
B)  Consumers pay higher prices for the services of licensed professions. 
C)  They result in a higher quality of service. 
D)  They ensure that licensed professionals meet some minimum qualifications. 
A)  They restrict competition. 
B)  Consumers pay higher prices for the services of licensed professions. 
C)  They result in a higher quality of service. 
D)  They ensure that licensed professionals meet some minimum qualifications.

Question 14

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 15

Airlines often engage in last-minute price cutting to fill remaining empty seats on a flight because this practice will generally

Accepted Answer

A)  prevent rival airlines from competing in that market. 
B)  increase marginal revenue more than marginal cost. 
C)  maximize marginal revenue. 
D)  discourage rivals from matching price cuts. 
A)  prevent rival airlines from competing in that market. 
B)  increase marginal revenue more than marginal cost. 
C)  maximize marginal revenue. 
D)  discourage rivals from matching price cuts.

Question 16

The equilibrium in the prisoner's dilemma is a dominant strategy Nash equilibrium.

Accepted Answer

A) True 
 B)False

Question 17

Figure 14-4   
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 14-4 shows the decision tree for the Rainbow Writer-Odeon bargaining game.
-Refer to Figure 14-4.What is the equilibrium outcome in this game and is this a subgame-perfect equilibrium?

Accepted Answer

A)  In the equilibrium, neither offer is accepted as Rainbow Writer holds out for a better deal. The two rejection outcomes are subgame-perfect equilibria. 
B)  In the equilibrium, Odeon offers $40 per copy of the software package and is accepted but this is not a subgame-perfect equilibrium. 
C)  Either offer of $30 or $40 per copy of the software package is accepted and these two equilibria are subgame-perfect equilibria. 
D)  Either offer of $30 or $40 per copy of the software package is accepted but these are not are subgame-perfect equilibria. 
A)  In the equilibrium, neither offer is accepted as Rainbow Writer holds out for a better deal. The two rejection outcomes are subgame-perfect equilibria. 
B)  In the equilibrium, Odeon offers $40 per copy of the software package and is accepted but this is not a subgame-perfect equilibrium. 
C)  Either offer of $30 or $40 per copy of the software package is accepted and these two equilibria are subgame-perfect equilibria. 
D)  Either offer of $30 or $40 per copy of the software package is accepted but these are not are subgame-perfect equilibria.

Question 18

What is a prisoner's dilemma?

Accepted Answer

A)  a game that involves no dominant strategies 
B)  a game in which prisoners are stumped because they cannot communicate with each other 
C)  a game in which players act in rational, self-interested ways that leave everyone worse off 
D)  a game in which players collude to outfox authorities 
A)  a game that involves no dominant strategies 
B)  a game in which prisoners are stumped because they cannot communicate with each other 
C)  a game in which players act in rational, self-interested ways that leave everyone worse off 
D)  a game in which players collude to outfox authorities

Question 19

In Porter's Five Competitive Forces model,"competition from substitute goods or services" refers to

Accepted Answer

A)  substitute products that come from outside the industry. 
B)  substitute products that come from domestic competitors in the same industry. 
C)  substitute products that come from foreign competitors in the same industry. 
D)  competition from producers of substitutes who outsource their production. 
A)  substitute products that come from outside the industry. 
B)  substitute products that come from domestic competitors in the same industry. 
C)  substitute products that come from foreign competitors in the same industry. 
D)  competition from producers of substitutes who outsource their production.

Question 20

Consider two oligopolistic industries selling the same product in different locations.In the first industry,firms always match price changes by any other firm in the industry.In the second industry,firms always ignore price changes by any other firm.which of the following statements is true about these two industries,holding everything else constant?

Accepted Answer

A)  Market prices are likely to be higher in the first industry in which firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. 
B)  Market prices are likely to be lower in the first industry where firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. 
C)  Market prices are likely to be the same in both markets because they are both oligopolistic markets. 
D)  No conclusions can be drawn about the pricing behavior under these very different firm behaviors. 
A)  Market prices are likely to be higher in the first industry in which firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. 
B)  Market prices are likely to be lower in the first industry where firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. 
C)  Market prices are likely to be the same in both markets because they are both oligopolistic markets. 
D)  No conclusions can be drawn about the pricing behavior under these very different firm behaviors.

Exam 14: Oligopoly: Firms in Less Competitive Markets

Competition from substitute goods is more of a threat when switching costs are high.

The bargaining power of suppliers increases if

All of the following are examples of oligopolistic markets except

A market comprised of only two firms is called a

All of the following are characteristics of game theory except

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

Suppose two firms in a duopoly implicitly collude and charge a high price.How might each firm benefit from advertising that it will match the lowest price offered by its competitor?

Collusion between two firms occurs when

An entry barrier exists when firms in an industry charge the lowest price possible for their products.

Which of the following is not necessarily a consequence of occupational licensing laws?

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

Airlines often engage in last-minute price cutting to fill remaining empty seats on a flight because this practice will generally

The equilibrium in the prisoner's dilemma is a dominant strategy Nash equilibrium.

What is a prisoner's dilemma?

In Porter's Five Competitive Forces model,"competition from substitute goods or services" refers to

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

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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

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Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

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Monetary Policy

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Inflation, unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

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