Question 1

Cartels are difficult to maintain because

Accepted Answer

A)  antitrust laws are difficult to enforce. 
B)  cartel agreements are conducive to monopoly outcomes. 
C)  there is always tension between cooperation and self-interest in a cartel. 
D)  firms pay little attention to the decisions made by other firms. 
A)  antitrust laws are difficult to enforce. 
B)  cartel agreements are conducive to monopoly outcomes. 
C)  there is always tension between cooperation and self-interest in a cartel. 
D)  firms pay little attention to the decisions made by other firms.

Question 2

Game theory is necessary to understand which kinds of markets?

Accepted Answer

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

Question 3

When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes both parties to cooperate.

Accepted Answer

A) True 
 B)False

Question 4

Table 17-29
Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's energy drinks, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm W
Breaks agreement Maintains agreement
and advertises and does not advertise  
-Refer to Table 17-29. Which of the following statement(s) correctly characterizes the outcome of this game?

Accepted Answer

A)  There is a Nash equilibrium when both firms advertise. 
B)  Both Firm W and Firm H have a dominant strategy to advertise. 
C)  Although both firms collectively would earn higher profits by maintaining the agreement not to advertise, self- interest will cause each firm to break the agreement. 
D)  All of the above are correct. 
A)  There is a Nash equilibrium when both firms advertise. 
B)  Both Firm W and Firm H have a dominant strategy to advertise. 
C)  Although both firms collectively would earn higher profits by maintaining the agreement not to advertise, self- interest will cause each firm to break the agreement. 
D)  All of the above are correct.

Question 5

A special kind of imperfectly competitive market that has only two firms is called

Accepted Answer

A)  a two-tier competitive structure. 
B)  an incidental monopoly. 
C)  a doublet. 
D)  a duopoly. 
A)  a two-tier competitive structure. 
B)  an incidental monopoly. 
C)  a doublet. 
D)  a duopoly.

Question 6

Table 17-28
Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm A
Breaks agreement Maintains agreement
and advertises and does not advertise  
-Refer to Table 17-28. Does either Firm A or Firm B have a dominant strategy?

Accepted Answer

A)  Firm A has a dominant strategy, but Firm B does not. 
B)  Firm A does not have a dominant strategy, but Firm B does. 
C)  Neither Firm A nor Firm B has a dominant strategy. 
D)  Both Firm A and Firm B have a dominant strategy. 
A)  Firm A has a dominant strategy, but Firm B does not. 
B)  Firm A does not have a dominant strategy, but Firm B does. 
C)  Neither Firm A nor Firm B has a dominant strategy. 
D)  Both Firm A and Firm B have a dominant strategy.

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. If the marginal cost of production is $4 and the fixed cost is $6, the combined profit of the cartel will be

Accepted Answer

A)  $6 
B)  $12 
C)  $24 
D)  $32 
A)  $6 
B)  $12 
C)  $24 
D)  $32

Question 8

The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members.

Accepted Answer

A) True 
 B)False

Question 9

Table 17-1
Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below:   21.
-Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, what price will they charge?

Accepted Answer

A)  $25 
B)  $30 
C)  $35 
D)  $40 
A)  $25 
B)  $30 
C)  $35 
D)  $40

Question 10

As the number of firms in the oligopoly grows very large, the

Accepted Answer

A)  output effect disappears. 
B)  price effect disappears. 
C)  output effect equals the price effect. 
D)  price of the product greatly exceeds marginal cost. 
A)  output effect disappears. 
B)  price effect disappears. 
C)  output effect equals the price effect. 
D)  price of the product greatly exceeds marginal cost.

Question 11

Lori and Maya 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 $10,000. 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 $16,000 and the other will earn $6,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $30,000 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 Lori will

Accepted Answer

A)  advertise on TV and earn $10,000. 
B)  advertise on radio and earn $14,000. 
C)  not advertise at all and earn $20,000. 
D)  None of the above is correct. Lori and Maya do not have dominant strategies. 
A)  advertise on TV and earn $10,000. 
B)  advertise on radio and earn $14,000. 
C)  not advertise at all and earn $20,000. 
D)  None of the above is correct. Lori and Maya do not have dominant strategies.

Question 12

Which government entity is charged with investigating and enforcing antitrust laws?

Accepted Answer

A)  the U.S. Justice Department 
B)  the U.S. Commerce Department 
C)  the U.S. Treasury Department 
D)  the Bureau of Alcohol, Tobacco, and Firearms 
A)  the U.S. Justice Department 
B)  the U.S. Commerce Department 
C)  the U.S. Treasury Department 
D)  the Bureau of Alcohol, Tobacco, and Firearms

Question 13

Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly. Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.

Accepted Answer

The source of the tension exists because

Question 14

Assume that demand for a product that is produced at zero marginal cost is reflected in the table below.   
a. What is the profit-maximizing level of production for a group of oligopolistic firms that operate as a cartel?
b. Assume that this market is characterized by a duopoly in which collusive agreements are illegal.
What market price and quantity will be associated with a Nash equilibrium?

Accepted Answer

a. Q = 120

Question 15

Scenario 17-2.
Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a common pool of oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million in revenue - $5 million in costs). Assume that having X percent of the total wells means that a company will collect X percent of the total revenue.
-Refer to Scenario 17-2. If each firm is permitted to drill two wells at most, the firms are in a Nash equilibrium when

Accepted Answer

A)  BQ drills one well and Exxoff drills two wells. 
B)  BQ drills two wells and Exxoff drills one well. 
C)  both firms drill one well. 
D)  both firms drill two wells. 
A)  BQ drills one well and Exxoff drills two wells. 
B)  BQ drills two wells and Exxoff drills one well. 
C)  both firms drill one well. 
D)  both firms drill two wells.

Question 16

Predatory pricing occurs when a firm

Accepted Answer

A)  exercises its oligopoly power by raising its price through the formation of a cartel. 
B)  exercises its monopoly power by raising its price. 
C)  cuts its prices in order make itself more competitive. 
D)  cuts its prices temporarily in order to drive out any competition. 
A)  exercises its oligopoly power by raising its price through the formation of a cartel. 
B)  exercises its monopoly power by raising its price. 
C)  cuts its prices in order make itself more competitive. 
D)  cuts its prices temporarily in order to drive out any competition.

Question 17

Table 17-6
Imagine a small town in which only two residents, Kunal and Naj, own wells that produce safe drinking water. Each week Kunal and Naj work together to decide how many gallons of water to pump, to bring the water to town, and to sell it at whatever price the market will bear. Assume Kunal and Naj can pump as much water as they want without cost so that the marginal cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water are shown in the table below.  
-Refer to Table 17-6. Suppose the town enacts new antitrust laws that prohibit Kunal and Naj from operating as a monopolist. What will the new price of water be once the Nash equilibrium is reached?

Accepted Answer

A)  $3 
B)  $4 
C)  $5 
D)  $6 
A)  $3 
B)  $4 
C)  $5 
D)  $6

Question 18

Table 17-6
Imagine a small town in which only two residents, Kunal and Naj, own wells that produce safe drinking water. Each week Kunal and Naj work together to decide how many gallons of water to pump, to bring the water to town, and to sell it at whatever price the market will bear. Assume Kunal and Naj can pump as much water as they want without cost so that the marginal cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water are shown in the table below.  
-Refer to Table 17-6. As long as Kunal and Naj operate as a profit-maximizing monopoly, what will their combined weekly revenue amount to?

Accepted Answer

A)  $450 
B)  $675 
C)  $875 
D)  $900 
A)  $450 
B)  $675 
C)  $875 
D)  $900

Question 19

Game theory is necessary to understand which kinds of markets?

Accepted Answer

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

Question 20

Ford and General Motors are considering expanding into the Vietnamese automobile market. Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision.

Accepted Answer

The answer should present two strategies

Exam 17: Oligopoly

Cartels are difficult to maintain because

Game theory is necessary to understand which kinds of markets?

When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes both parties to cooperate.

A special kind of imperfectly competitive market that has only two firms is called

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. If the marginal cost of production is $4 and the fixed cost is $6, the combined profit of the cartel will be

The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members.

As the number of firms in the oligopoly grows very large, the

Which government entity is charged with investigating and enforcing antitrust laws?

Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly. Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.

Predatory pricing occurs when a firm

Game theory is necessary to understand which kinds of markets?

Ford and General Motors are considering expanding into the Vietnamese automobile market. Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision.

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

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