Question 1

Economies of scale and limited demand can form a natural barrier to entry that can create a natural oligopoly.

Accepted Answer

A) True 
 B)False

Question 2

Bob 
-The table above displays the possible outcomes for Bob and Joe, who have been arrested for armed robbery and car theft. Which of the following is true?

Accepted Answer

A)  If Joe confesses, Bob should not confess. 
B)  If Bob confesses, Joe should confess. 
C)  The dominant equilibrium is that Joe and Bob both serve 2 years. 
D)  If Joe does not confess, Bob should not confess.

Question 3

Market share in the Widget industry 
-In the table above, the Herfindahl-Hirschman Index in the widget industry is

Accepted Answer

A)  100 points. 
B)  742 points. 
C)  2842 points. 
D)  4182 points.

Question 4

The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 2175 and two of the competing banks have considered merging. Because the merger would raise the HHI by 25 points, the Federal Trade Commission would likely

Accepted Answer

A)  challenge the merger. 
B)  not challenge the merger. 
C)  allow the merger under the condition that HHI does not rise by more than 25 points as promised. 
D)  allow the merger under the condition that the HHI remain at the premerger level of 2175.

Question 5

Nimbus, Inc., and Cleansweep, Inc., are the only producers of flying brooms. Each firm has two strategies: Spend 30,000 galleons a year on research and development (R&D) or spend nothing on R&D. If neither firm spends on R&D, Nimbus' economic profit is 80, 000 galleons and Cleansweep's economic profit is 40,000 galleons. If each firm conducts R&D, market shares are maintained, but each firm's profit is lower by the amount spent on R&D. If Nimbus conducts R&D and Cleansweep does not, Nimbus makes an economic profit of 120,000 galleons, while Cleansweep incurs an economic loss of 20,000 galleons. If Cleansweep conducts R&D and Nimbus does not, Cleansweep makes a profit of 60,000 galleons while Nimbus loses 10,000 galleons.
a) Construct a payoff matrix for the game that Nimbus and Cleansweep must play.
b) Find the Nash equilibrium. In the Nash equilibrium, what is each firm's equilibrium profit?
c) What is the cooperative outcome? Would the firms make more economic profit if they collude to achieve the cooperative outcome?

Accepted Answer

The answer of Nimbus, Inc., and Cleansweep, Inc., are the...

Question 6

Game theory is a tool for studying competitive behavior between firms in monopolistic competition because of the mutual interdependence among the firms.

Accepted Answer

A) True 
 B)False

Question 7

Why do most collusive agreements have difficulty surviving?

Accepted Answer

The answer of Why do most collusive agreements have difficulty...

Question 8

As the Federal Trade Commission currently interprets the Herfindahl-Hirschman index (HHI), an industry is considered to be moderately concentrated if the HHI value is

Accepted Answer

A)  between 100 and 1,500. 
B)  between 1,500 and 2,500. 
C)  between 1,000 and 3,500. 
D)  between 3,000 and 6,000.

Question 9

The first antitrust law passed was the ________.

Accepted Answer

A)  Federal Trade Commission Act 
B)  Sherman Act 
C)  Clayton Act 
D)  Robinson-Patman Amendment

Question 10

What is a natural oligopoly? How does it arise? Give an example.

Accepted Answer

The answer of What is a natural oligopoly? How does...

Question 11

Ann and Lynn have been arrested by the police, who have evidence that will convict them of robbing a bank. If convicted, each will receive a sentence of 6 years for the robbery. During questioning, the police suspect that Ann and Lynn are responsible for a series of bank robberies. If both confess to the series, each will receive 12 years in jail. If only one confesses, she will receive 4 years and the one who does not confess will receive 14 years. What is the equilibrium for this game?

Accepted Answer

A)  Both confess. 
B)  Ann confesses and Lynn does not confess. 
C)  Lynn confesses and Ann does not confess. 
D)  Neither confess.

Question 12

A market structure in which a small number of firms compete is called ________.

Accepted Answer

A)  a monopoly 
B)  a small-number market 
C)  an oligopoly 
D)  monopolistic competition

Question 13

A contestable market is one in which

Accepted Answer

A)  one dominant firm sets the market price, and all other firms are price takers. 
B)  if a firm cuts its price, all other firms will follow the price cut. 
C)  one or a small number of firms operate, but faces competition from potential entrants. 
D)  a group of firms enter into an agreement to restrict output and raise prices.

Question 14

A cartel usually has a collusive agreement to

Accepted Answer

A)  restrict output. 
B)  boost output. 
C)  lower the price. 
D)  increase the number of firms in the industry.

Question 15

The prisoners' dilemma describes a single-play game that features

Accepted Answer

A)  an outcome in which the participants collude. 
B)  a large number of rivals cooperating with each other. 
C)  a situation in which one player has better odds than the other. 
D)  two players who are unable to communicate with each other.

Question 16

An equilibrium in game theory in which the players make and share the monopoly profit is called

Accepted Answer

A)  the Nash equilibrium. 
B)  the cooperative equilibrium. 
C)  a contestable market equilibrium. 
D)  limit pricing.

Question 17

In a prisoner's dilemma, the Nash equilibrium occurs where

Accepted Answer

A)  neither person ends up with their best outcome. 
B)  both end up with their best outcome. 
C)  only one ends up with his best outcome. 
D)  the one who goes first ends up with his best outcome.

Question 18

For a Nash equilibrium to be possible, all players must ________.

Accepted Answer

A)  be able to predict their outcomes associated with all possible actions of the other players 
B)  have a way to communicate with the other players 
C)  have a strategy which allows for collusion 
D)  Both A and B

Question 19

In a collusive agreement between two duopolists in an oligopoly, each firm has an incentive to cheat on the agreement because the firm's price

Accepted Answer

A)  exceeds its marginal cost. 
B)  exceeds its marginal revenue. 
C)  is less than its average total cost. 
D)  None of the above answers is correct.

Question 20

Disney 
-Disney and Fox must decide when to release their next films. The revenues received by each studio depend in part on when the other studio releases its film. Each studio can release its film at Thanksgiving or at Christmas. The revenues received by each studio, in millions of dollars, are depicted in the payoff matrix above. Which of the following statements correctly describes Fox's strategy given what Disney's release choice may be?

Accepted Answer

A)  If Disney chooses a Thanksgiving release, Fox should choose a Christmas release. 
B)  If Disney chooses a Christmas release, Fox should choose a Thanksgiving release. 
C)  Fox should release on Christmas regardless of what Disney does. 
D)  Both answers A and B are correct.

Exam 15: Oligopoly