Question 1

How does the prisoners' dilemma game apply to real­life situations?

Accepted Answer

It illustrates how cooperation

Question 2

As a group, oligopolists would always be better off if they would act collectively

Accepted Answer

A)  as if they were each seeking to maximize their own individual profits. 
B)  in a manner that would prohibit collusive agreements. 
C)  as a single monopolist. 
D)  as a single perfectly competitive firm. 
A)  as if they were each seeking to maximize their own individual profits. 
B)  in a manner that would prohibit collusive agreements. 
C)  as a single monopolist. 
D)  as a single perfectly competitive firm.

Question 3

Table 17-12
The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost.  
-Refer to Table 17-12. If there are exactly five sellers of gasoline in Driveaway and if they collude, then which of the following outcomes is most likely?

Accepted Answer

A)  Each seller will sell 50 gallons and charge a price of $3. 
B)  Each seller will sell 40 gallons and charge a price of $4. 
C)  Each seller will sell 30 gallons and charge a price of $4. 
D)  Each seller will sell 30 gallons and charge a price of $5. 
A)  Each seller will sell 50 gallons and charge a price of $3. 
B)  Each seller will sell 40 gallons and charge a price of $4. 
C)  Each seller will sell 30 gallons and charge a price of $4. 
D)  Each seller will sell 30 gallons and charge a price of $5.

Question 4

Table 17-3
Imagine a small town in a remote area where only two residents, Maria and Miguel, own dairies that produce milk that is safe to drink. Each week Maria and Miguel work together to decide how many gallons of milk to produce. They bring milk to town and sell it at whatever price the market will bear. To keep things simple, suppose that Maria and Miguel can produce as much milk as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for milk is shown in the table below:  
-Refer to Table 17-3. If this market for milk were perfectly competitive instead of monopolistic, how many gallons of milk would be produced and sold?

Accepted Answer

A)  12 gallons 
B)  8 gallons 
C)  6 gallons 
D)  0 gallons 
A)  12 gallons 
B)  8 gallons 
C)  6 gallons 
D)  0 gallons

Question 5

An oligopolist will increase production if the output effect is

Accepted Answer

A)  less than the price effect. 
B)  equal to the price effect. 
C)  greater than the price effect. 
D)  The oligopolist never has an incentive to increase production. 
A)  less than the price effect. 
B)  equal to the price effect. 
C)  greater than the price effect. 
D)  The oligopolist never has an incentive to increase production.

Question 6

Table 17-11
Only two firms, ABC and XYZ, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost.  
-Refer to Table 17-11. If this market were perfectly competitive instead of oligopolistic, what quantity would be produced?

Accepted Answer

A)  25 
B)  35 
C)  50 
D)  70 
A)  25 
B)  35 
C)  50 
D)  70

Question 7

Table 17-9
The table shows the demand schedule for a particular product.  
-Refer to Table 17-9. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $0?

Accepted Answer

A)  $6 
B)  $8 
C)  $10 
D)  $12 
A)  $6 
B)  $8 
C)  $10 
D)  $12

Question 8

Suppose that Makemoney Movies produces two new films - The Hulk and The Piano. Makemoney offers theaters the two films together at a single price but will not supply the movies separately. What do economists call this business practice?

Accepted Answer

A)  predatory pricing 
B)  resale price maintenance 
C)  tying 
D)  leverage 
A)  predatory pricing 
B)  resale price maintenance 
C)  tying 
D)  leverage

Question 9

Table 17-19
Consider a small town that has two grocery stores from which residents can choose to buy a loaf of bread. The store owners each must make a decision to set a high bread price or a low bread price. The payoff table, showing profit per week, is provided below. The profit in each cell is shown as (Store 1, Store 2).  
-Refer to Table 17-19. What is grocery store 1's dominant strategy?

Accepted Answer

A)  Grocery store 1 does not have a dominant strategy. 
B)  Grocery store 1 should always set a low price. 
C)  Grocery store 1 should always set a high price. 
D)  Grocery store 1 should set a low price when grocery store 2 sets a low price, and grocery store 1 should set a high price when grocery store 2 sets a high price. 
A)  Grocery store 1 does not have a dominant strategy. 
B)  Grocery store 1 should always set a low price. 
C)  Grocery store 1 should always set a high price. 
D)  Grocery store 1 should set a low price when grocery store 2 sets a low price, and grocery store 1 should set a high price when grocery store 2 sets a high price.

Question 10

The equilibrium quantity in markets characterized by oligopoly is

Accepted Answer

A)  higher than in monopoly markets and higher than in perfectly competitive markets. 
B)  higher than in monopoly markets and lower than in perfectly competitive markets. 
C)  lower than in monopoly markets and higher than in perfectly competitive markets. 
D)  lower than in monopoly markets and lower than in perfectly competitive markets. 
A)  higher than in monopoly markets and higher than in perfectly competitive markets. 
B)  higher than in monopoly markets and lower than in perfectly competitive markets. 
C)  lower than in monopoly markets and higher than in perfectly competitive markets. 
D)  lower than in monopoly markets and lower than in perfectly competitive markets.

Question 11

For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is (are) true of the prisoners' dilemma?

Accepted Answer

A)  (ii) only 
B)  (ii) and (iii) 
C)  (i) and (iii) 
D)  (i), (ii), and (iii) 
A)  (ii) only 
B)  (ii) and (iii) 
C)  (i) and (iii) 
D)  (i), (ii), and (iii)

Question 13

Juan Pablo and Zak are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $8,000. If they both advertise on radio, each will earn a profit of $14,000. If neither advertises at all, each will earn a profit of $20,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $12,000 and the other will earn $10,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $22,000 and the other will earn $4,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $24,000 and the other will earn $8,000. If both follow their dominant strategy, then Juan Pablo will

Accepted Answer

A)  advertise on TV and earn $8,000. 
B)  advertise on radio and earn $14,000. 
C)  advertise on TV and earn $22,000. 
D)  not advertise and earn $20,000. 
A)  advertise on TV and earn $8,000. 
B)  advertise on radio and earn $14,000. 
C)  advertise on TV and earn $22,000. 
D)  not advertise and earn $20,000.

Question 14

Very often, the reason that players can solve the prisoners' dilemma and reach the most profitable outcome is that

Accepted Answer

A)  each player tries to capture a large portion of the market share. 
B)  the players play the game not once but many times. 
C)  the game becomes more competitive. 
D)  self interest results in the Nash equilibrium which is the best outcome for the players. 
A)  each player tries to capture a large portion of the market share. 
B)  the players play the game not once but many times. 
C)  the game becomes more competitive. 
D)  self interest results in the Nash equilibrium which is the best outcome for the players.

Question 15

To be successful, a cartel must

Accepted Answer

A)  find a way to encourage members to produce more than they would otherwise produce. 
B)  agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. 
C)  agree on the total level of production and on the amount produced by each member. 
D)  agree on the prices charged by each member, but they need not agree on amounts produced. 
A)  find a way to encourage members to produce more than they would otherwise produce. 
B)  agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. 
C)  agree on the total level of production and on the amount produced by each member. 
D)  agree on the prices charged by each member, but they need not agree on amounts produced.

Question 16

Scenario 17-6
Assume that a local telecommunications company sells high speed internet access and cable television. The company's only two customers are Taylor and Tim. Taylor is willing to pay $50 per month for high speed internet access and $50 per month for cable television. Tim is willing to pay only $20 per month for high speed internet access, but is willing to pay $70 per month for cable television. Assume that the telecommunications company can provide each of these products at zero marginal cost.
-Refer to Scenario 17-6. How much additional profit can the telecommunications company earn by switching to the use of a tying strategy to price high speed internet access and cable television rather than pricing these goods separately?

Accepted Answer

The answer of Scenario 17-6
Assume that a local telecommunications company...

Question 17

Figure 17-2. Two companies, Acme and Pinnacle, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.  
-Refer to Figure 17-2. The more frequently this game is played, the more likely it is that

Accepted Answer

A)  both firms will produce a good quality product. 
B)  both firms will produce a poor quality product. 
C)  both firms experience a reduction in profits compared to the Nash equilibrium outcome. 
D)  one firm will experience an increase in profits and the other will experience a decrease in profits. 
A)  both firms will produce a good quality product. 
B)  both firms will produce a poor quality product. 
C)  both firms experience a reduction in profits compared to the Nash equilibrium outcome. 
D)  one firm will experience an increase in profits and the other will experience a decrease in profits.

Question 18

Policymakers should be aggressive in using their powers to place limits on firm behavior, because business practices that appear to reduce competition never have any legitimate purposes.

Accepted Answer

A) True 
 B)False

Question 19

Table 17-17
This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B).  
-Refer to Table 17-17. In this game,

Accepted Answer

A)  neither player has a dominant strategy. 
B)  both players have a dominant strategy. 
C)  Firm A has a dominant strategy, but Firm B does not have a dominant strategy. 
D)  Firm B has a dominant strategy, but Firm A does not have a dominant strategy. 
A)  neither player has a dominant strategy. 
B)  both players have a dominant strategy. 
C)  Firm A has a dominant strategy, but Firm B does not have a dominant strategy. 
D)  Firm B has a dominant strategy, but Firm A does not have a dominant strategy.

Question 20

Scenario 17-4.
Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million.
-Refer to Scenario 17-4. The likely outcome of this game is that PM Inc. earns

Accepted Answer

A)  $30 million and Brown Inc. earns $60 million. 
B)  $40 million and Brown Inc. earns $40 million. 
C)  $50 million and Brown Inc. earns $50 million. 
D)  $60 million and Brown Inc. earns $30 million. 
A)  $30 million and Brown Inc. earns $60 million. 
B)  $40 million and Brown Inc. earns $40 million. 
C)  $50 million and Brown Inc. earns $50 million. 
D)  $60 million and Brown Inc. earns $30 million.

Exam 17: Oligopoly

How does the prisoners' dilemma game apply to real­life situations?

As a group, oligopolists would always be better off if they would act collectively

An oligopolist will increase production if the output effect is

Table 17-9 The table shows the demand schedule for a particular product. -Refer to Table 17-9. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $0?

Suppose that Makemoney Movies produces two new films - The Hulk and The Piano. Makemoney offers theaters the two films together at a single price but will not supply the movies separately. What do economists call this business practice?

The equilibrium quantity in markets characterized by oligopoly is

For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.

Which of the following statements is (are) true of the prisoners' dilemma?

Very often, the reason that players can solve the prisoners' dilemma and reach the most profitable outcome is that

To be successful, a cartel must

Policymakers should be aggressive in using their powers to place limits on firm behavior, because business practices that appear to reduce competition never have any legitimate purposes.

Table 17-17 This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B). -Refer to Table 17-17. In this game,

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Application: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

Filters

How does the prisoners' dilemma game apply to reallife situations?