Question 1

An equilibrium in which each player chooses its best strategy given the strategies chosen by the other players is called a Nash equilibrium.

Accepted Answer

A) True 
 B)False

Question 2

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 wan

Question 3

Figure 14-8  
-Refer to Figure 14-8 Use the decision tree to determine whether Microsoft should deter Toshiba from entering the market for electronic book readers (e-readers).Assume that each firm must earn a 20% return on investment to break even.Explain Microsoft's decision process.

Accepted Answer

If Microsoft charges $249 for its e-read

Question 4

Table 14-8   Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy. Each can choose either a high price or a low price. Table 14-8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts.
-Refer to Table 14-8.If the firms cooperate,what prices will they select?

Accepted Answer

A)  Both firms will select a low price. 
B)  Brawny Juice will select a high price, Power Fuel a low price. 
C)  Both firms will select a high price. 
D)  Brawny Juice will select a low price, Power Fuel a high price. 
A)  Both firms will select a low price. 
B)  Brawny Juice will select a high price, Power Fuel a low price. 
C)  Both firms will select a high price. 
D)  Brawny Juice will select a low price, Power Fuel a high price.

Question 5

There is much evidence to suggest that airlines are more likely to match price cuts than price increases.Which of the following best explains this evidence?

Accepted Answer

A)  The law of demand which states that an increase in price leads to a decrease in quantity demanded. 
B)  No one airline wants to be the first to renege on a tacit collusive agreement in which all airlines implicitly agree to match price cuts but not price increases. 
C)  An airline fears that if it does not match a price cut, its sales may fall considerably but if it does not match a price increase, it will be able to attract customers away from its rivals. 
D)  Airlines have different costs of production and therefore it is more difficult to agree on a price increase than on a price decrease. 
A)  The law of demand which states that an increase in price leads to a decrease in quantity demanded. 
B)  No one airline wants to be the first to renege on a tacit collusive agreement in which all airlines implicitly agree to match price cuts but not price increases. 
C)  An airline fears that if it does not match a price cut, its sales may fall considerably but if it does not match a price increase, it will be able to attract customers away from its rivals. 
D)  Airlines have different costs of production and therefore it is more difficult to agree on a price increase than on a price decrease.

Question 6

A game in which pursuing dominant strategies results in noncooperation that leaves all parties worse off is a

Accepted Answer

A)  prisoner's dilemma. 
B)  cooperative equilibrium. 
C)  first-price auction. 
D)  zero-sum game. 
A)  prisoner's dilemma. 
B)  cooperative equilibrium. 
C)  first-price auction. 
D)  zero-sum game.

Question 7

Figure 14-5   A few years ago Netflix (N) pioneered an online DVD rental service. Blockbuster (B), a brick and mortar DVD/video rental company, waited until Netflix had been in business for over a year before deciding whether to establish its own online rental service. At this point, Netflix had to decide whether or not to lower its subscription price in order to deter Blockbuster's entry into the market. Figure 14-5 shows the decision tree for the Netflix-Blockbuster entry game.
-Refer to Figure 14-5.If Netflix lowers its price will this deter Blockbuster from setting up an online DVD rental service?

Accepted Answer

A)  Yes, because Blockbuster stands to lose $1 million if it competes with Netflix. 
B)  Yes, because Blockbuster will make a smaller profit than Netflix if it chooses to compete. 
C)  No, because Blockbuster will make a profit if it competes with Netflix. 
D)  No, because Blockbuster will make a larger profit than Netflix if it chooses to compete. 
A)  Yes, because Blockbuster stands to lose $1 million if it competes with Netflix. 
B)  Yes, because Blockbuster will make a smaller profit than Netflix if it chooses to compete. 
C)  No, because Blockbuster will make a profit if it competes with Netflix. 
D)  No, because Blockbuster will make a larger profit than Netflix if it chooses to compete.

Question 8

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 9

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 10

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 11

Of all barriers to entry,the most important are those that are due to

Accepted Answer

A)  ownership of a key input. 
B)  economies of scale. 
C)  government-imposed barriers. 
D)  the Herfindahl-Hirschman Index. 
A)  ownership of a key input. 
B)  economies of scale. 
C)  government-imposed barriers. 
D)  the Herfindahl-Hirschman Index.

Question 12

Suppose we want to use game theory to analyze how an oligopolist selects its optimal price.The cells of the payoff matrix show

Accepted Answer

A)  the profit that each producer can expect to earn by pursuing a single strategy. 
B)  the profit that each producer can expect to earn from every combination of strategies by the firms in the market. 
C)  the strategy that a firm must pursue to earn various levels of profit. 
D)  the expected profits of rival firms. 
A)  the profit that each producer can expect to earn by pursuing a single strategy. 
B)  the profit that each producer can expect to earn from every combination of strategies by the firms in the market. 
C)  the strategy that a firm must pursue to earn various levels of profit. 
D)  the expected profits of rival firms.

Question 13

Why are decision trees useful to managers who plan business strategies?

Accepted Answer

A)  Decision trees explain the level of concentration in an industry. 
B)  Decision trees can be used to increase the amount of product differentiation; this enables managers to charge higher prices for their products. 
C)  Decision trees provide a systematic way of thinking through the implications of a strategy. 
D)  Using a decision tree always leads to a dominant strategy. 
A)  Decision trees explain the level of concentration in an industry. 
B)  Decision trees can be used to increase the amount of product differentiation; this enables managers to charge higher prices for their products. 
C)  Decision trees provide a systematic way of thinking through the implications of a strategy. 
D)  Using a decision tree always leads to a dominant strategy.

Question 14

A baseball hat worn by the Boston Red Sox Hall of Fame outfielder Ted Williams was auctioned on eBay.The three highest bidders and their bids were: Roger Bulava $5,000
Tony Millasiti $4,900
Joe Albano $4,200
What price did Roger have to pay for the Ted Williams hat?

Accepted Answer

A)  $4,200 
B)  $4,700 (the average of the three highest bids) 
C)  $4,900 
D)  $5,000 
A)  $4,200 
B)  $4,700 (the average of the three highest bids) 
C)  $4,900 
D)  $5,000

Question 15

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 16

The Brooks Appliance Store and the Lefingwell Appliance Store (both are located in the same city)each sell an identical washer-dryer.The owner of each store considered offering the washer-dryer for $700,but decided on a price of $500.If this is a Nash equilibrium we can conclude that

Accepted Answer

A)  each store owner feared charging the higher price would result in being undercut by the other store charging the lower price. 
B)  the owners of the stores feared that charging $700 could be used as evidence of collusion. 
C)  charging $500 was the most profitable strategy for each store, regardless of what price was charged by the other store. 
D)  the stores were less concerned about making a profit from the washer-dryers than they were with attracting customers who would also buy other appliances. 
A)  each store owner feared charging the higher price would result in being undercut by the other store charging the lower price. 
B)  the owners of the stores feared that charging $700 could be used as evidence of collusion. 
C)  charging $500 was the most profitable strategy for each store, regardless of what price was charged by the other store. 
D)  the stores were less concerned about making a profit from the washer-dryers than they were with attracting customers who would also buy other appliances.

Question 17

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 18

An example of a supplier that used its bargaining power to charge high prices to its customers is

Accepted Answer

A)  Wal-Mart, which required many of its suppliers to alter their distribution systems to accommodate Wal-Mart's need to control the flow of goods to its stores. 
B)  the firms that supply paper napkins to McDonald's restaurants. 
C)  the Technicolor Company, the sole producer of cameras and film that movie studios needed to produce color movies in the 1930s and 1940s. 
D)  the publishers of the Encyclopedia Britannica. 
A)  Wal-Mart, which required many of its suppliers to alter their distribution systems to accommodate Wal-Mart's need to control the flow of goods to its stores. 
B)  the firms that supply paper napkins to McDonald's restaurants. 
C)  the Technicolor Company, the sole producer of cameras and film that movie studios needed to produce color movies in the 1930s and 1940s. 
D)  the publishers of the Encyclopedia Britannica.

Question 19

Assume that the four-firm concentration ratio in an industry is 85 percent.Which of the following statements uses one of the five competitive forces to argue that this industry may be more competitive than its concentration ratio suggests?

Accepted Answer

A)  The high concentration may be due to patents owned by the largest firms but competition will increase when patent rights expire. 
B)  If high concentration is the result of large firms owning much of the available supply of a key input, the industry will become more competitive when new sources of the input are discovered by other firms. 
C)  Even though concentration is high, large firms in the industry may act competitively by spending large sums on advertising. 
D)  The threat of entry into this industry can cause firms in the industry to lower their prices and profits in order to deter entry. 
A)  The high concentration may be due to patents owned by the largest firms but competition will increase when patent rights expire. 
B)  If high concentration is the result of large firms owning much of the available supply of a key input, the industry will become more competitive when new sources of the input are discovered by other firms. 
C)  Even though concentration is high, large firms in the industry may act competitively by spending large sums on advertising. 
D)  The threat of entry into this industry can cause firms in the industry to lower their prices and profits in order to deter entry.

Question 20

A patent is an example of

Accepted Answer

A)  how ownership of a key input creates a barrier to entry. 
B)  a government-imposed barrier to entry. 
C)  occupational licensing. 
D)  how market failure can lead to oligopoly. 
A)  how ownership of a key input creates a barrier to entry. 
B)  a government-imposed barrier to entry. 
C)  occupational licensing. 
D)  how market failure can lead to oligopoly.

An equilibrium in which each player chooses its best strategy given the strategies chosen by the other players is called a Nash equilibrium.

Figure 14-8 -Refer to Figure 14-8 Use the decision tree to determine whether Microsoft should deter Toshiba from entering the market for electronic book readers (e-readers).Assume that each firm must earn a 20% return on investment to break even.Explain Microsoft's decision process.

There is much evidence to suggest that airlines are more likely to match price cuts than price increases.Which of the following best explains this evidence?

A game in which pursuing dominant strategies results in noncooperation that leaves all parties worse off is a

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.

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.

Of all barriers to entry,the most important are those that are due to

Suppose we want to use game theory to analyze how an oligopolist selects its optimal price.The cells of the payoff matrix show

Why are decision trees useful to managers who plan business strategies?

A baseball hat worn by the Boston Red Sox Hall of Fame outfielder Ted Williams was auctioned on eBay.The three highest bidders and their bids were: Roger Bulava $5,000 Tony Millasiti $4,900 Joe Albano $4,200 What price did Roger have to pay for the Ted Williams hat?

In an oligopoly,firms can increase their market power by

The Brooks Appliance Store and the Lefingwell Appliance Store (both are located in the same city)each sell an identical washer-dryer.The owner of each store considered offering the washer-dryer for $700,but decided on a price of $500.If this is a Nash equilibrium we can conclude that

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

An example of a supplier that used its bargaining power to charge high prices to its customers is

Assume that the four-firm concentration ratio in an industry is 85 percent.Which of the following statements uses one of the five competitive forces to argue that this industry may be more competitive than its concentration ratio suggests?

A patent is an example of

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

Filters

Exam 14: Oligopoly: Firms in Less Competitive Markets

An equilibrium in which each player chooses its best strategy given the strategies chosen by the other players is called a Nash equilibrium.

Figure 14-8 -Refer to Figure 14-8 Use the decision tree to determine whether Microsoft should deter Toshiba from entering the market for electronic book readers (e-readers).Assume that each firm must earn a 20% return on investment to break even.Explain Microsoft's decision process.

There is much evidence to suggest that airlines are more likely to match price cuts than price increases.Which of the following best explains this evidence?

A game in which pursuing dominant strategies results in noncooperation that leaves all parties worse off is a

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.

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.

Of all barriers to entry,the most important are those that are due to

Suppose we want to use game theory to analyze how an oligopolist selects its optimal price.The cells of the payoff matrix show

Why are decision trees useful to managers who plan business strategies?

A baseball hat worn by the Boston Red Sox Hall of Fame outfielder Ted Williams was auctioned on eBay.The three highest bidders and their bids were: Roger Bulava $5,000 Tony Millasiti $4,900 Joe Albano $4,200 What price did Roger have to pay for the Ted Williams hat?

In an oligopoly,firms can increase their market power by

The Brooks Appliance Store and the Lefingwell Appliance Store (both are located in the same city)each sell an identical washer-dryer.The owner of each store considered offering the washer-dryer for $700,but decided on a price of $500.If this is a Nash equilibrium we can conclude that

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

An example of a supplier that used its bargaining power to charge high prices to its customers is

Assume that the four-firm concentration ratio in an industry is 85 percent.Which of the following statements uses one of the five competitive forces to argue that this industry may be more competitive than its concentration ratio suggests?

A patent is an example of

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

Filters