Chapter 17

Chapter 17 Oligopoly
TRUE/FALSE 1. The essence of an oligopolistic market is that there are only a few sellers. ANS: T DIF: 1 REF: 1 !" NAT: Analytic #$%: $ligopoly T$&: $ligopoly 'S%: Definitional (. )ame theory is *+st as necessary for +n,erstan,ing competiti-e or monopoly markets as it is for +n,erstan,ing oligopolistic markets. ANS: F DIF: ( REF: 1 !" NAT: Analytic #$%: $ligopoly T$&: $ligopoly . )ame theory 'S%: Interpreti-e /. In a competiti-e market0 strategic interactions among the firms are not important. ANS: T DIF: 1 REF: 1 !" NAT: Analytic #$%: $ligopoly T$&: )ame theory . %ompetiti-e markets 'S%: Interpreti-e 1. For a firm0 strategic interactions with other firms in the market 2ecome more important as the n+m2er of firms in the market 2ecomes larger. ANS: F DIF: ( REF: 1 !" NAT: Analytic #$%: $ligopoly T$&: $ligopoly . )ame theory 'S%: Interpreti-e 3. S+ppose three firms form a cartel an, agree to charge a specific price for their o+tp+t. Each in,i-i,+al firm has an incenti-e to maintain the agreement 2eca+se the firm4s in,i-i,+al profits will 2e the greatest +n,er the cartel arrangement. ANS: F DIF: ( REF: 1 !1 NAT: Analytic #$%: $ligopoly T$&: %oll+sion 'S%: Interpreti-e 5. If firms in an oligopoly agree to pro,+ce accor,ing to the monopoly o+tcome0 they will pro,+ce the same le-el of o+tp+t as they wo+l, pro,+ce in a Nash e6+ili2ri+m. ANS: F DIF: 1 REF: 1 !1 NAT: Analytic #$%: $ligopoly T$&: $ligopoly . %ooperation 'S%: Interpreti-e . 7hether an oligopoly consists of / firms or 1" firms0 the le-el of o+tp+t likely will 2e the same. ANS: F DIF: ( REF: 1 !1 NAT: Analytic #$%: $ligopoly T$&: $ligopoly 'S%: Interpreti-e 8. %artels with a small n+m2er of firms ha-e a greater pro2a2ility of reaching the monopoly o+tcome than ,o cartels with a larger n+m2er of firms. ANS: T DIF: 1 REF: 1 !1 NAT: Analytic #$%: $ligopoly T$&: %artels 'S%: Interpreti-e 9. As the n+m2er of firms in an oligopoly 2ecomes -ery large0 the price effect ,isappears. ANS: T DIF: ( REF: 1 !1 NAT: Analytic #$%: $ligopoly T$&: $ligopoly 'S%: Interpreti-e 1". If all of the firms in an oligopoly s+ccessf+lly coll+,e an, form a cartel0 then total profit for the cartel is e6+al to what it wo+l, 2e if the market were a monopoly. ANS: T DIF: ( REF: 1 !1 NAT: Analytic #$%: $ligopoly T$&: %artels 'S%: Interpreti-e 11. As the n+m2er of firms in an oligopoly increases0 the magnit+,e of the price effect increases. ANS: F DIF: ( REF: 1 !1 NAT: Analytic #$%: $ligopoly T$&: $ligopoly 'S%: Interpreti-e
1(9
1/"
%hapter 1 :$ligopoly
1(. All e;amples of the prisoner4s ,ilemma game are characteri<e, 2y one an, only one Nash e6+ili2ri+m. ANS: F DIF: / REF: 1 !( NAT: Analytic #$%: $ligopoly T$&: Nash e6+ili2ri+m . &risoners= ,ilemma 'S%: Interpreti-e 1/. If two players engage, in a prisoner4s ,ilemma game are likely to repeat the game0 they are more likely to cooperate than if they play the game only once. ANS: T DIF: ( REF: 1 !( NAT: Analytic #$%: $ligopoly T$&: &risoners= ,ilemma 'S%: Interpreti-e 11. The story of the prisoners= ,ilemma contains a general lesson that applies to any gro+p trying to maintain cooperation among its mem2ers. ANS: T DIF: 1 REF: 1 !( NAT: Analytic #$%: $ligopoly T$&: &risoners= ,ilemma 'S%: Interpreti-e 13. In the prisoners= ,ilemma game0 one prisoner is always 2etter off confessing0 no matter what the other prisoner ,oes. ANS: T DIF: 1 REF: 1 !( NAT: Analytic #$%: $ligopoly T$&: &risoners= ,ilemma 'S%: Interpreti-e 15. In the prisoners= ,ilemma game0 confessing is a ,ominant strategy for each of the two prisoners. ANS: T DIF: ( REF: 1 !( NAT: Analytic #$%: $ligopoly T$&: &risoners= ,ilemma . Dominant strategy 'S%: Interpreti-e 1 . The game that oligopolists play in trying to reach the oligopoly o+tcome is similar to the game that the two prisoners play in the prisoners= ,ilemma. ANS: T DIF: 1 REF: 1 !( NAT: Analytic #$%: $ligopoly T$&: )ame theory 'S%: Interpreti-e 18. In the case of oligopolistic markets0 self!interest makes cooperation ,iffic+lt an, it often lea,s to an +n,esira2le o+tcome for the firms that are in-ol-e,. ANS: T DIF: 1 REF: 1 !( NAT: Analytic #$%: $ligopoly T$&: )ame theory 'S%: Interpreti-e 19. 7hen prisoners= ,ilemma games are repeate, o-er an, o-er0 sometimes the threat of penalty ca+ses 2oth parties to cooperate. ANS: T DIF: ( REF: 1 !( NAT: Analytic #$%: $ligopoly T$&: &risoners= ,ilemma 'S%: Interpreti-e (". A tit-for-tat strategy0 in a repeate, game0 is one in which a player starts 2y cooperating an, then ,oes whate-er the other player ,i, last time. ANS: T DIF: ( REF: 1 !( NAT: Analytic #$%: $ligopoly T$&: )ame theory 'S%: Definitional (1. $ne way that p+2lic policy enco+rages cooperation among oligopolists is thro+gh antitr+st law. ANS: F DIF: 1 REF: 1 !/ NAT: Analytic #$%: $ligopoly T$&: Antitr+st 'S%: Interpreti-e ((. The Sherman Antitr+st Act prohi2its competing firms from e-en talking a2o+t fi;ing prices. ANS: T DIF: 1 REF: 1 !/ NAT: Analytic #$%: $ligopoly T$&: Sherman Antitr+st Act of 189" 'S%: Interpreti-e
(/. Resale price maintenance pre-ents retailers from competing on price. ANS: T DIF: 1 REF: 1 !/ NAT: Analytic #$%: $ligopoly T$&: Resale price maintenance 'S%: Interpreti-e (1. Some 2+siness practices that appear to re,+ce competition0 s+ch as resale price maintenance0 may ha-e legitimate economic p+rposes. ANS: T DIF: ( REF: 1 !/ NAT: Analytic #$%: $ligopoly T$&: Resale price maintenance 'S%: Interpreti-e (3.
1/1
In ("" the >.S. S+preme %o+rt r+le, that it was not necessary illegal for man+fact+rers an, ,istri2+tors to agree on minim+m retail prices. ANS: T DIF: ( REF: 1 !/ NAT: Analytic #$%: $ligopoly T$&: Resale price maintenance 'S%: Definitional (5. Tying can 2e tho+ght of as a form of price ,iscrimination. ANS: T DIF: 1 REF: 1 !/ NAT: Analytic #$%: $ligopoly T$&: Tying ( .
'S%: Interpreti-e
&olicymakers sho+l, 2e aggressi-e in +sing their powers to place limits on firm 2eha-ior0 2eca+se 2+siness practices that appear to re,+ce competition ne-er ha-e any legitimate p+rposes. ANS: F DIF: ( REF: 1 !1 NAT: Analytic #$%: The role of go-ernment T$&: Antitr+st 'S%: Interpreti-e SHORT ANSWER 1. E-en when allowe, to coll+,e0 firms in an oligopoly may choose to cheat on their agreements with the rest of the cartel. 7hy?
ANS: In,i-i,+al profits can 2e increase, at the e;pense of gro+p profits if in,i-i,+als cheat on the cartel=s cooperati-e agreement. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels NAT: Analytic 'S%: Interpreti-e
(. 7hat effect ,oes the n+m2er of firms in an oligopoly ha-e on the characteristics of the market? ANS: As the n+m2er of firms increases0 the e6+ili2ri+m 6+antity of goo,s pro-i,e, increases an, price falls@ the market 2egins to resem2le a competiti-e one. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly NAT: Analytic 'S%: Analytical
1/(
/.
Ass+me that ,eman, for a pro,+ct that is pro,+ce, at <ero marginal cost is reflecte, in the ta2le 2elow.
Quantity " ("" 1"" 5"" 8"" 1""" 1("" 11"" 15"" 18"" (""" (("" (1"" a. 2. ANS: a. 2. B C 1("" B C 15""0 & C 1( REF: T$&:
ri!e A/5 A// A/" A( A(1 A(1 A18 A13 A1( A9 A5 A/ A"
7hat is the profit!ma;imi<ing le-el of pro,+ction for a gro+p of oligopolistic firms that operate as a cartel? Ass+me that this market is characteri<e, 2y a ,+opoly in which coll+si-e agreements are illegal. 7hat market price an, 6+antity will 2e associate, with a Nash e6+ili2ri+m?
DIF: / #$%: $ligopoly 1.
1 !1 %artels
NAT: Analytic 'S%: Applicati-e
Descri2e the so+rce of tension 2etween cooperation an, self!interest in a market characteri<e, 2y oligopoly. >se an e;ample of an act+al cartel arrangement to ,emonstrate why this tension creates insta2ility in cartels.
ANS: The so+rce of the tension e;ists 2eca+se total profits are ma;imi<e, when oligopolists cooperate on price an, 6+antity 2y operating as a monopolist. Dowe-er0 in,i-i,+al profits can 2e gaine, 2y in,i-i,+als cheating on their cooperati-e agreement. This is why cooperati-e agreements among mem2ers of a cartel are inherently +nsta2le. This is e-i,ent in the pro2lem $&E% e;periences in enforcing the cooperati-e agreement on pro,+ction an, price of cr+,e oil. DIF: ( #$%: $ligopoly 3. REF: T$&: 1 !1 %artels NAT: Analytic 'S%: Interpreti-e
Descri2e the o+tp+t an, price effects that infl+ence the profit!ma;imi<ing ,ecision face, 2y a firm in an oligopoly market. Dow ,oes this ,iffer from o+tp+t an, price effects in a monopoly market?
ANS: $+tp+t effect: &rice E 'arginal cost CE increase, o+tp+t will a,, to profit &rice effect: increase, 6+antity is sol, at a lower price CE lower re-en+e Fprofit?G An oligopolist m+st take into acco+nt how the o+tp+t an, price effects will 2e infl+ence, 2y competitors= pro,+ction ,ecisions0 or it m+st ass+me competitors= pro,+ction will not change in response to its own actions. DIF: / #$%: $ligopoly REF: T$&: 1 !1 NAT: Analytic &rofit ma;imi<ation . $ligopoly 'S%: Interpreti-e
5. E;plain how the o+tp+t effect an, the price effect infl+ence the pro,+ction ,ecision of the in,i-i,+al oligopolist.
1//
ANS: Since the in,i-i,+al oligopolist faces a ,ownwar,!sloping ,eman, c+r-e0 she reali<es that if she increases o+tp+t0 all o+tp+t m+st 2e sol, at a lower market price. As s+ch0 the re-en+e from selling the a,,itional +nits at the lower market price m+st e;cee, the loss in re-en+e from selling all pre-io+s +nits at the new lower price. $therwise0 profits will fall as o+tp+t Fpro,+ctionG is increase,. DIF: ( #$%: $ligopoly . REF: T$&: 1 !1 NAT: Analytic &rofit ma;imi<ation . $ligopoly 'S%: Interpreti-e
For, an, )eneral 'otors are consi,ering e;pan,ing into the Hietnamese a+tomo2ile market. De-ise a simple prisoners= ,ilemma game to ,emonstrate the strategic consi,erations that are rele-ant to this ,ecision.
ANS: The answer sho+l, present two strategies for each company0 s+ch as IE;pan,J an, IDon4t E;pan,.J To 2e a prisoner4s ,ilemma0 each firm nee,s a ,ominant strategy0 2+t each firm choosing its ,ominant strategy res+lts in an o+tcome that is *ointly worse than if they 2oth chose their other strategy. A possi2le payoff ta2le with payoffs FFor,0 )'G is "# For$ DIF: / #$%: $ligopoly 8. REF: T$&: Expand Dont Expand Expand F(0 (G F10 1G Dont Expand F10 1G F/0 /G 'S%: Applicati-e
1 !( NAT: Analytic &risoners= ,ilemma
Nike an, Ree2ok Fathletic shoe companiesG are consi,ering whether or not to a,-ertise ,+ring the S+per Kowl. De-ise a simple prisoners= ,ilemma game to ,emonstrate the strategic consi,erations that are rele-ant to this ,ecision. Does the repeate, game scenario ,iffer from a single perio, game? Is it possi2le that a repeate, game Fwitho+t coll+si-e agreementsG co+l, lea, to an o+tcome that is 2etter than a single!perio, game? E;plain the circ+mstances in which this may 2e tr+e.
ANS: The answer sho+l, show that if 2oth shoe companies ,eci,e to a,-ertise they will 2oth 2e worse off than if they ,i, not. It sho+l, also show that each company has the in,i-i,+al incenti-e to a,-ertise. The ,ominant strategy of 2oth companies will 2e to a,-ertise0 regar,less of what the other is ,oing. If the game is repeate, more than once it is possi2le that the shoe companies will ,eci,e not to a,-ertise in the hopes that the other company a,e6+ately +n,erstan,s the m+t+ally 2eneficial gains that come from not a,-ertising. DIF: / #$%: $ligopoly REF: T$&: 1 !( NAT: Analytic &risoners= ,ilemma 'S%: Applicati-e
9. $+tline the p+rpose of antitr+st laws. 7hat ,o they accomplish? ANS: The p+rpose of antitr+st laws is to mo-e markets towar, a competiti-e e6+ili2ri+m o+tcome. These laws are +se, to pre-ent 2eha-ior that wo+l, lea, to e;cessi-e market power 2y any single firm. DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Antitr+st NAT: Analytic 'S%: Interpreti-e
1". E;plain the practice of resale price maintenance an, ,isc+ss why it is contro-ersial. ANS: Resale price maintenance is a re6+irement 2y pro,+cers that retailers sell their pro,+ct for a price specifie, 2y the man+fact+rer. It is contro-ersial 2eca+se on the s+rface it appears to limit the a2ility of retailers to compete on the 2asis of price. Dowe-er0 if the man+fact+rer ,oes not e;ercise resale price maintenance a free!ri,er pro2lem may 2ecome e-i,ent among the retailers an, +ltimately lea, to lower profits for the man+fact+rer. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: 'S%: Interpreti-e NAT: Analytic Resale price maintenance
1/1
11. E;plain the practice of tying an, ,isc+ss why it is contro-ersial. ANS: Tying is the practice of 2+n,ling goo,s for sale. It is contro-ersial 2eca+se it is percei-e, as a tool for e;pan,ing the market power of firms 2y forcing cons+mers to p+rchase a,,itional pro,+cts. Dowe-er0 economists are skeptical that a 2+yer=s willingness to pay increases *+st 2eca+se two pro,+cts are 2+n,le, together. In other wor,s0 simply 2+n,ling two pro,+cts together ,oesn=t necessarily a,, any -al+e. It is more acc+rately 2elie-e, to 2e a form of price ,iscrimination. DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Tying NAT: Analytic 'S%: Interpreti-e
Se!%% & Oligopoly

#ULT' LE CHO'CE 1. In the lang+age of game theory0 a sit+ation in which each person m+st consi,er how others might respon, to his or her own actions is calle, a a. 6+antifia2le sit+ation. 2. cooperati-e sit+ation. c. strategic sit+ation. ,. tactical sit+ation. DIF: 1 #$%: $ligopoly REF: T$&: 1 !" )ame theory 'S%: Definitional
ANS: % NAT: Analytic (.
In general0 game theory is the st+,y of a. how people 2eha-e in strategic sit+ations. 2. how people 2eha-e when the possi2le actions of other people are irrele-ant. c. oligopolistic markets. ,. all types of markets0 incl+,ing competiti-e markets0 monopolistic markets0 an, oligopolistic markets. DIF: ( #$%: $ligopoly REF: T$&: 1 !" )ame theory 'S%: Definitional
ANS: A NAT: Analytic /.
7hich of the following statements is correct? a. Strategic sit+ations are more likely to arise when the n+m2er of ,ecision!makers is -ery large rather than -ery small. 2. Strategic sit+ations are more likely to arise in monopolistically competiti-e markets than in oligopolistic markets. c. )ame theory is +sef+l in +n,erstan,ing certain 2+siness ,ecisions0 2+t it is not really applica2le to or,inary games s+ch as chess or tic!tac!toe. ,. )ame theory is not necessary for +n,erstan,ing competiti-e or monopoly markets. DIF: ( #$%: $ligopoly REF: T$&: 1 !" )ame theory 'S%: Interpreti-e
ANS: D NAT: Analytic 1.
In which of the following markets are strategic interactions among firms most likely to occ+r? a. markets to which patent an, copyright laws apply 2. the market for piano lessons c. the market for tennis 2alls ,. the market for corn DIF: ( #$%: $ligopoly REF: T$&: 1 !" )ame theory 'S%: Interpreti-e
ANS: % NAT: Analytic
Se!%1 & Oligopoly & #ar(et) *ith Only a Fe* Seller)

#ULT' LE CHO'CE 1. A ,isting+ishing feat+re of an oligopolistic in,+stry is the tension 2etween a. profit ma;imi<ation an, cost minimi<ation. 2. cooperation an, self interest. c. pro,+cing a small amo+nt of o+tp+t an, charging a price a2o-e marginal cost. ,. short!r+n ,ecisions an, long!r+n ,ecisions.
ANS: K NAT: Analytic (. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
1/3
In st+,ying oligopolistic markets0 economists ass+me that a. there is no conflict or tension 2etween cooperation an, self!interest. 2. it is easy for a gro+p of firms to cooperate an, there2y esta2lish an, maintain a monopoly o+tcome. c. each oligopolist cares only a2o+t its own profit. ,. strategic ,ecisions ,o not play a role in s+ch markets. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . %ooperation
ANS: % NAT: Analytic 'S%: Interpreti-e /.
The simplest type of oligopoly is a. monopoly. 2. ,+opoly. c. monopolistic competition. ,. oligopolistic competition. DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Interpreti-e
ANS: K NAT: Analytic 1.
A special kin, of imperfectly competiti-e market that has only two firms is calle, a. a two!tier competiti-e str+ct+re. 2. an inci,ental monopoly. c. a ,o+2let. ,. a ,+opoly. DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Definitional
An agreement 2etween two ,+opolists to f+nction as a monopolist +s+ally 2reaks ,own 2eca+se a. they cannot agree on the price that a monopolist wo+l, charge. 2. they cannot agree on the o+tp+t that a monopolist wo+l, pro,+ce. c. each ,+opolist wants a larger share of the market in or,er to capt+re more profit. ,. each ,+opolist wants to charge a higher price than the monopoly price. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Interpreti-e
ANS: % NAT: Analytic 5.
7hich of the following statements is correct? a. If ,+opolists s+ccessf+lly coll+,e0 then their com2ine, o+tp+t will 2e e6+al to the o+tp+t that wo+l, 2e o2ser-e, if the market were a monopoly. 2. Altho+gh the logic of self!interest ,ecreases a ,+opoly4s price 2elow the monopoly price0 it ,oes not p+sh the ,+opolists to reach the competiti-e price. c. Altho+gh the logic of self!interest increases a ,+opoly4s le-el of o+tp+t a2o-e the monopoly le-el0 it ,oes not p+sh the ,+opolists to reach the competiti-e le-el. ,. All of the a2o-e are correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Interpreti-e
ANS: D NAT: Analytic .
S+ppose that Sonny an, %her are ,+opolists in the m+sic in,+stry. In Lan+ary0 they agree to work together as a monopolist0 charging the monopoly price for their m+sic an, pro,+cing the monopoly 6+antity of songs. Ky Fe2r+ary0 each singer is consi,ering 2reaking the agreement. 7hat wo+l, yo+ e;pect to happen ne;t? a. Sonny an, %her will ,etermine that it is in each singer4s 2est self interest to maintain the agreement. 2. Sonny an, %her will each 2reak the agreement. The new e6+ili2ri+m 6+antity of songs will increase0 an, the new e6+ili2ri+m price will ,ecrease. c. Sonny an, %her will each 2reak the agreement. The new e6+ili2ri+m 6+antity of songs will ,ecrease0 an, the new e6+ili2ri+m price will increase. ,. Sonny an, %her will each 2reak the agreement. The new e6+ili2ri+m 6+antity of songs will increase0 an, the new e6+ili2ri+m price also will increase.
1/5
DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Interpreti-e
As the n+m2er of firms in an oligopoly increases0 the a. price approaches marginal cost0 an, the 6+antity approaches the socially efficient le-el. 2. price an, 6+antity approach the monopoly le-els. c. price effect e;cee,s the o+tp+t effect. ,. in,i-i,+al firms4 profits increase. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
ANS: A NAT: Analytic 9.
If a certain market were a monopoly0 then the monopolist wo+l, ma;imi<e its profit 2y pro,+cing 10""" +nits of o+tp+t. If0 instea,0 that market were a ,+opoly0 then which of the following o+tcomes wo+l, 2e most likely if the ,+opolists s+ccessf+lly coll+,e? a. Each ,+opolist pro,+ces 10""" +nits of o+tp+t. 2. Each ,+opolist pro,+ces 5"" +nits of o+tp+t. c. $ne ,+opolist pro,+ces 1"" +nits of o+tp+t an, the other pro,+ces 5"" +nits of o+tp+t. ,. $ne ,+opolist pro,+ces 8"" +nits of o+tp+t an, the other pro,+ces 1"" +nits of o+tp+t. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Applicati-e
Table 17-1 Imagine a small town in which only two resi,ents0 #isa an, 'ark0 own wells that pro,+ce safe ,rinking water. Each week #isa an, 'ark work together to ,eci,e how many gallons of water to p+mp. They 2ring the water to town an, sell it at whate-er price the market will 2ear. To keep things simple0 s+ppose that #isa an, 'ark can p+mp as m+ch water as they want witho+t cost so that the marginal cost of water e6+als <ero. The weekly town ,eman, sche,+le an, total re-en+e sche,+le for water is shown in the ta2le 2elow: Quantity +in gallon), " 1"" ("" /"" 1"" 3"" 5"" "" 8"" 9"" 10""" 101"" 10("" 1". ri!e A1(" 11" 1"" 9" 8" " 5" 3" 1" /" (" 1" " Total Re-enue +an$ Total ro.it, A" 110""" ("0""" ( 0""" /(0""" /30""" /50""" /30""" /(0""" ( 0""" ("0""" 110""" "
Re.er to Ta/le 17&10 If #isa an, 'ark operate as a profit!ma;imi<ing monopoly in the market for water0 what price will they charge? a. A(" 2. A1" c. A5" ,. A " DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . 'onopoly
ANS: % NAT: Analytic 'S%: Applicati-e
11.
1/
Re.er to Ta/le 17&10 If #isa an, 'ark operate as a profit!ma;imi<ing monopoly in the market for water0 how many gallons of water will 2e pro,+ce, an, sol,? a. " 2. 3"" c. 5"" ,. 10("" DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . 'onopoly
ANS: % NAT: Analytic 'S%: Applicati-e 1(.
Re.er to Ta/le 17&10 If #isa an, 'ark operate as a profit!ma;imi<ing monopoly in the market for water0 how m+ch profit will each of them earn? a. A" 2. A180""" c. A/(0""" ,. A/50""" DIF: / #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . 'onopoly
ANS: K NAT: Analytic 'S%: Applicati-e 1/.
Re.er to Ta/le 17&10 If the market for water were perfectly competiti-e instea, of monopolistic0 how many gallons of water wo+l, 2e pro,+ce, an, sol,? a. " 2. 5"" c. 9"" ,. 10("" DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %ompetiti-e markets
ANS: D NAT: Analytic 'S%: Applicati-e 11.
Re.er to Ta/le 17&10 7hat is the socially efficient 6+antity of water? a. " gallons 2. 5"" gallons c. 9"" gallons ,. 10("" gallons DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %ompetiti-e markets
Re.er to Ta/le 17&10 If this market for water were perfectly competiti-e instea, of monopolistic0 what price wo+l, 2e charge,? a. A" 2. A3" c. A5" ,. A1(" DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %ompetiti-e markets
ANS: A NAT: Analytic 'S%: Applicati-e 15.
Re.er to Ta/le 17&10 S+ppose the town enacts new antitr+st laws that prohi2it #isa an, 'ark from operating as a monopoly. 7hat will 2e the price of water once #isa an, 'ark reach a Nash e6+ili2ri+m? a. A/" 2. A1" c. A3" ,. A5" DIF: / #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
ANS: K NAT: Analytic 'S%: Analytical
1/8
1 .
Re.er to Ta/le 17&10 S+ppose the town enacts new antitr+st laws that prohi2it #isa an, 'ark from operating as a monopoly. Dow many gallons of water will 2e pro,+ce, an, sol, once #isa an, 'ark reach a Nash e6+ili2ri+m? a. 5"" 2. "" c. 8"" ,. 9"" DIF: / #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
ANS: % NAT: Analytic 'S%: Analytical
Ta/le 17&10 The ta2le shows the town of &itts-ille4s ,eman, sche,+le for gasoline. For simplicity0 ass+me the town4s gasoline sellerFsG inc+r no costs in selling gasoline. B+antity Fin gallonsG " 1"" ("" /"" 1"" 3"" 5"" "" 8"" 9"" 10""" 18. &rice A1" 9 8 5 3 1 / ( 1 " Total Re-en+e Fan, total profitG A" 9"" 105"" (01"" (01"" (03"" (01"" (01"" 105"" 9"" "
Re.er to Ta/le 17&1. If the market for gasoline in &itts-ille is perfectly competiti-e0 then the e6+ili2ri+m price of gasoline is a. A8 an, the e6+ili2ri+m 6+antity is ("" gallons. 2. A3 an, the e6+ili2ri+m 6+antity is 3"" gallons. c. A( an, the e6+ili2ri+m 6+antity is 8"" gallons. ,. A" an, the e6+ili2ri+m 6+antity is 10""" gallons. DIF: ( REF: #$%: &erfect competition 1 !1 T$&: &erfect %ompetition
Re.er to Ta/le 17&10 If the market for gasoline in &itts-ille is a monopoly0 then the profit!ma;imi<ing monopolist will charge a price of a. A8 an, sell ("" gallons. 2. A3 an, sell 3"" gallons. c. A( an, sell 8"" gallons. ,. A" an, sell 10""" gallons. DIF: ( #$%: 'onopoly REF: T$&: 1 !1 'onopoly 'S%: Applicati-e
ANS: K NAT: Analytic (".
Re.er to Ta/le 17&10 If there are e;actly two sellers of gasoline in &itts-ille an, if they coll+,e0 then which of the following o+tcomes is most likely? a. Each seller will sell 3"" gallons an, charge a price of A3. 2. Each seller will sell 3"" gallons an, charge a price of A(.3". c. Each seller will sell /3" gallons an, charge a price of A/. ,. Each seller will sell (3" gallons an, charge a price of A3. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Applicati-e
ANS: D NAT: Analytic
(1.
1/9
Re.er to Ta/le 17&10 If there are e;actly three sellers of gasoline in &itts-ille an, if they coll+,e0 then which of the following o+tcomes is most likely? a. Each seller will sell 155.5 gallons an, charge a price of A1.//. 2. Each seller will sell 155.5 gallons an, charge a price of A3. c. Each seller will sell ("" gallons an, charge a price of A1. ,. Each seller will sell (//.// gallons an, charge a price of A3. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Applicati-e
ANS: K NAT: Analytic ((.
Re.er to Ta/le 17&10 S+ppose there are e;actly two sellers of gasoline in &itts-ille: E;;off an, KB. If E;;off sells /"" gallons an, KB sells 1"" gallons0 then a. E;;off4s profit is A9"" an, KB4s profit is A10("". 2. E;;off4s profit is A(01"" an, KB4s profit is A(01"". c. there is an e;cess ,eman, for gasoline in &itts-ille. ,. there is an e;cess s+pply of gasoline in &itts-ille. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Applicati-e
ANS: A NAT: Analytic (/.
Re.er to Ta/le 17&10 S+ppose there are e;actly two sellers of gasoline in &itts-ille: E;;off an, KB. %+rrently0 E;;off sells /"" gallons an, KB sells 1"" gallons. 7hich of the following statements is correct? FDint: &erform simple interpolation 2etween rows of the chart where necessary.G a. The c+rrent sit+ation is a Nash e6+ili2ri+m. 2. The c+rrent sit+ation is not a Nash e6+ili2ri+m0 as in,icate, 2y the fact that E;;off4s profit wo+l, increase if it increase, its o+tp+t to 1"" gallons an, KB kept its o+tp+t at 1"" gallons. c. The c+rrent sit+ation is not a Nash e6+ili2ri+m0 as in,icate, 2y the fact that KB4s profit wo+l, increase if it ,ecrease, its o+tp+t to /3" gallons an, E;;off kept its o+tp+t at /"" gallons. ,. The c+rrent sit+ation is not a Nash e6+ili2ri+m0 as in,icate, 2y the fact that 2oth sellers4 profits wo+l, increase if they coll+,e,0 ,eci,e, on a total le-el of o+tp+t0 an, agree, to each pro,+ce one! half of that amo+nt. DIF: / #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
ANS: % NAT: Analytic 'S%: Applicati-e (1.
7hich of the following statements is correct? a. 7hen ,+opoly firms reach a Nash e6+ili2ri+m0 their com2ine, le-el of o+tp+t is the monopoly le-el of o+tp+t. 2. 7hen oligopoly firms coll+,e0 they are 2eha-ing as a cartel. c. In an oligopoly0 self!interest ,ri-es the market to the competiti-e o+tcome. ,. An oligopoly is an e;ample of monopolistic competition. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . %artels
ANS: K NAT: Analytic 'S%: Interpreti-e (3.
As the n+m2er of firms in an oligopoly increases0 the magnit+,e of the a. o+tp+t effect increases. 2. o+tp+t effect ,ecreases. c. price effect increases. ,. price effect ,ecreases. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
ANS: D NAT: Analytic (5.
As the n+m2er of sellers in an oligopoly 2ecomes -ery large0 a. the 6+antity of o+tp+t approaches the socially efficient 6+antity. 2. the price approaches marginal cost. c. the price effect is ,iminishe,. ,. All of the a2o-e are correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
11"
( .
In markets characteri<e, 2y oligopoly0 a. the oligopolists earn the highest profit when they cooperate an, 2eha-e like a monopolist. 2. coll+si-e agreements will always pre-ail. c. collecti-e profits are always lower with cartel arrangements than they are witho+t cartel arrangements. ,. p+rs+it of self!interest 2y profit!ma;imi<ing firms always ma;imi<es collecti-e profits in the market. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
ANS: A NAT: Analytic (8.
As a gro+p0 oligopolists wo+l, always 2e 2etter off if they wo+l, act collecti-ely a. as if they were each seeking to ma;imi<e their own in,i-i,+al profits. 2. in a manner that wo+l, prohi2it coll+si-e agreements. c. as a single monopolist. ,. as a single perfectly competiti-e firm. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
ANS: % NAT: Analytic (9.
As a gro+p0 oligopolists wo+l, always earn the highest profit if they wo+l, a. pro,+ce the perfectly competiti-e 6+antity of o+tp+t. 2. pro,+ce more than the perfectly competiti-e 6+antity of o+tp+t. c. charge the same price that a monopolist wo+l, charge if the market were a monopoly. ,. operate accor,ing to their own in,i-i,+al self!interests. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
ANS: % NAT: Analytic /".
Keca+se each oligopolist cares a2o+t its own profit rather than the collecti-e profit of all the oligopolists together0 a. they are +na2le to maintain the same ,egree of monopoly power en*oye, 2y a monopolist. 2. each firm=s profit always en,s +p 2eing <ero. c. society is worse off as a res+lt. ,. Koth a an, c are correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
ANS: A NAT: Analytic
Table 17-3. The information in the ta2le 2elow shows the total ,eman, for premi+m!channel ,igital ca2le TH s+2scriptions in a small +r2an market. Ass+me that each ,igital ca2le TH operator pays a fi;e, cost of A(""0""" Fper yearG to pro-i,e premi+m ,igital channels in the market area an, that the marginal cost of pro-i,ing the premi+m channel ser-ice to a ho+sehol, is <ero. Quantity " /0""" 50""" 90""" 1(0""" 130""" 180""" /1. ri!e +per year, A18" A13" A1(" A 9" A 5" A /" A "
Re.er to Ta/le 17&2. If there is only one ,igital ca2le TH company in this market0 what price wo+l, it charge for a premi+m ,igital channel s+2scription to ma;imi<e its profit? a. A/" 2. A5" c. A9" ,. A13" DIF: ( #$%: 'onopoly REF: T$&: 1 !1 'onopoly 'S%: Applicati-e
/(.
111
Re.er to Ta/le 17&2. Ass+me there are two ,igital ca2le TH companies operating in this market. If they are a2le to coll+,e on the 6+antity of s+2scriptions that will 2e sol, an, on the price that will 2e charge, for s+2scriptions0 then their agreement will stip+late that a. each firm will charge a price of A9" an, each firm will sell 103"" s+2scriptions. 2. each firm will charge a price of A9" an, each firm will sell 90""" s+2scriptions. c. each firm will charge a price of A1(" an, each firm will sell /0""" s+2scriptions. ,. each firm will charge a price of A13" an, each firm will sell 103"" s+2scriptions. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly . %oll+sion
ANS: A NAT: Analytic 'S%: Applicati-e //.
Re.er to Ta/le 17&2. Ass+me there are two profit!ma;imi<ing ,igital ca2le TH companies operating in this market. F+rther ass+me that they are a2le to coll+,e on the 6+antity of s+2scriptions that will 2e sol, an, on the price that will 2e charge, for s+2scriptions. Dow m+ch profit will each company earn? a. A51"0""" 2. A33"0""" c. A11"0""" ,. A("30""" DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly . %oll+sion
ANS: D NAT: Analytic 'S%: Applicati-e /1.
Re.er to Ta/le 17&2. Ass+me there are two profit!ma;imi<ing ,igital ca2le TH companies operating in this market. F+rther ass+me that they are not a2le to coll+,e on the price an, 6+antity of premi+m ,igital channel s+2scriptions to sell. Dow many premi+m ,igital channel ca2le TH s+2scriptions will 2e sol, altogether when this market reaches a Nash e6+ili2ri+m? a. 50""" 2. 90""" c. 1(0""" ,. 130""" DIF: / #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
ANS: % NAT: Analytic 'S%: Applicati-e /3.
Re.er to Ta/le 17&2. Ass+me there are two profit!ma;imi<ing ,igital ca2le TH companies operating in this market. F+rther ass+me that they are not a2le to coll+,e on the price an, 6+antity of premi+m ,igital channel s+2scriptions to sell. 7hat price will premi+m ,igital channel ca2le TH s+2scriptions 2e sol, at when this market reaches a Nash e6+ili2ri+m? a. A/" 2. A5" c. A9" ,. A1(" DIF: / #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
ANS: K NAT: Analytic 'S%: Applicati-e /5.
Re.er to Ta/le 17&2. Ass+me that there are two profit!ma;imi<ing ,igital ca2le TH companies operating in this market. F+rther ass+me that they are not a2le to coll+,e on the price an, 6+antity of premi+m ,igital channel s+2scriptions to sell. Dow m+ch profit will each firm earn when this market reaches a Nash e6+ili2ri+m? a. A(30""" 2. A9"0""" c. A15"0""" ,. A(130""" DIF: / #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
11(
Table 17-4. The information in the ta2le 2elow shows the total ,eman, for high!spee, Internet s+2scriptions in a small +r2an market. Ass+me that each company that pro-i,es these s+2scriptions inc+rs an ann+al fi;e, cost of A(""0""" Fper yearG an, that the marginal cost of pro-i,ing an a,,itional s+2scription is always A8". Quantity " (0""" 10""" 50""" 80""" 1"0""" 1(0""" 110""" 150""" / . ri!e +per year, A/(" A(8" A(1" A("" A15" A1(" A 8" A 1" A"
Re.er to Ta/le 17&3. S+ppose there is only one high!spee, Internet ser-ice pro-i,er in this market an, it seeks to ma;imi<e its profit. The company will a. sell 50""" s+2scriptions an, charge a price of A("" for each s+2scription. 2. sell 80""" s+2scriptions an, charge a price of A15" for each s+2scription. c. sell 1"0""" s+2scriptions an, charge a price of A1(" for each s+2scription. ,. sell 1(0""" s+2scriptions an, charge a price of A8" for each s+2scription. DIF: / #$%: 'onopoly REF: T$&: 1 !1 'onopoly 'S%: Applicati-e
ANS: A NAT: Analytic /8.
Re.er to Ta/le 17&3. Ass+me there are two high!spee, Internet ser-ice pro-i,ers that operate in this market. If they are a2le to coll+,e on the 6+antity of s+2scriptions that will 2e sol, an, on the price that will 2e charge, for s+2scriptions0 then their agreement will stip+late that a. each firm will charge a price of A1(" an, each firm will sell 30""" s+2scriptions. 2. each firm will charge a price of A15" an, each firm will sell 10""" s+2scriptions. c. each firm will charge a price of A1"" an, each firm will sell /0""" s+2scriptions. ,. each firm will charge a price of A("" an, each firm will sell /0""" s+2scriptions. DIF: / #$%: $ligopoly REF: T$&: 1 !1 D+opoly . %oll+sion
ANS: D NAT: Analytic 'S%: Applicati-e /9.
Re.er to Ta/le 17&3. Ass+me there are two profit!ma;imi<ing high!spee, Internet ser-ice pro-i,ers operating in this market. F+rther ass+me that they are a2le to coll+,e on the 6+antity of s+2scriptions that will 2e sol, an, on the price that will 2e charge, for s+2scriptions. Dow m+ch profit will each company earn? a. A8"0""" 2. A1("0""" c. A15"0""" ,. A(1"0""" DIF: / #$%: $ligopoly REF: T$&: 1 !1 D+opoly . %oll+sion
ANS: % NAT: Analytic 'S%: Applicati-e 1".
Re.er to Ta/le 17&3. Ass+me there are two profit!ma;imi<ing high!spee, Internet ser-ice pro-i,ers operating in this market. F+rther ass+me that they are not a2le to coll+,e on the price an, 6+antity of s+2scriptions to sell. Dow many s+2scriptions will 2e sol, altogether when this market reaches a Nash e6+ili2ri+m? a. 50""" 2. 80""" c. 1"0""" ,. 1(0""" DIF: / #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
ANS: K NAT: Analytic 'S%: Applicati-e
11.
11/
Re.er to Ta/le 17&3. Ass+me there are two high!spee, Internet ser-ice pro-i,ers operating in this market. F+rther ass+me that they are not a2le to coll+,e on the price an, 6+antity of s+2scriptions to sell. 7hat price will they charge for a s+2scription when this market reaches a Nash e6+ili2ri+m? a. A1(" 2. A15" c. A("" ,. A(1" DIF: / #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
ANS: K NAT: Analytic 'S%: Applicati-e 1(.
Re.er to Ta/le 17&3. Ass+me that there are two profit!ma;imi<ing high!spee, Internet ser-ice pro-i,ers operating in this market. F+rther ass+me that they are not a2le to coll+,e on the price an, 6+antity of s+2scriptions to sell. Dow m+ch profit will each firm earn when this market reaches a Nash e6+ili2ri+m? a. A1("0""" 2. A13"0""" c. A(""0""" ,. A((30""" DIF: / #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
ANS: A NAT: Analytic 'S%: Applicati-e
Table 17-5. Imagine a small town in which only two resi,ents0 Kill an, Ken0 own wells that pro,+ce safe ,rinking water. Each week Kill an, Ken work together to ,eci,e how many gallons of water to p+mp0 to 2ring the water to town0 an, to sell it at whate-er price the market will 2ear. Ass+me Kill an, Ken can p+mp as m+ch water as they want witho+t cost so that the marginal cost of water e6+als <ero. The weekly town ,eman, sche,+le an, total re-en+e sche,+le for water are shown in the ta2le 2elow. Wee(ly Quantity +in gallon), " 1" (" /" 1" 3" 5" " 8" 9" 1"" 11" 1(" 1/. Wee(ly Total Re-enue +an$ Total ro.it, A" 11" ("" ( " /(" /3" /5" /3" /(" ( " ("" 11" "
ri!e A1( 11 1" 9 8 5 3 1 / ( 1 "
Re.er to Ta/le 17&4. Since Kill an, Ken operate as a profit!ma;imi<ing monopoly in the market for water0 what price will they charge for water? a. A( 2. A1 c. A5 ,. A DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Applicati-e
111
11.
Re.er to Ta/le 17&4. If the market for water were perfectly competiti-e instea, of monopolistic0 how many gallons of water wo+l, 2e pro,+ce, an, sol,? a. " 2. 9" c. 11" ,. 1(" DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %ompetiti-e markets
Re.er to Ta/le 17&4. As long as Kill an, Ken operate as a profit!ma;imi<ing monopoly0 what will their com2ine, weekly re-en+e amo+nt to? a. A("" 2. A( " c. A/3" ,. A/5" DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Applicati-e
Re.er to Ta/le 17&4. The socially efficient le-el of water s+pplie, to the market wo+l, 2e a. 5" gallons. 2. 8" gallons. c. 1"" gallons. ,. 1(" gallons. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %ompetiti-e markets
ANS: D NAT: Analytic 'S%: Applicati-e 1 .
Re.er to Ta/le 17&4. S+ppose the town enacts new antitr+st laws that prohi2it Kill an, Ken from operating as a monopolist. 7hat will the new price of water 2e once the Nash e6+ili2ri+m is reache,? a. A/ 2. A1 c. A3 ,. A5 DIF: / REF: 1 !1 #$%: The role of go-ernment T$&: Nash e6+ili2ri+m
Scenario 17-1. Ass+me that the co+ntries of Ir+n an, >r+n are the only two pro,+cers of cr+,e oil. F+rther ass+me that 2oth co+ntries ha-e entere, into an agreement to maintain certain pro,+ction le-els in or,er to ma;imi<e profits. In the worl, market for oil0 the ,eman, c+r-e is ,ownwar, sloping. 18. Re.er to S!enario 17&1. The fact that 2oth co+ntries ha-e coll+,e, to earn higher profit shows their ,esire to keep their com2ine, le-el of o+tp+t a. a2o-e the monopoly le-el. 2. 2elow the Nash e6+ili2ri+m le-el. c. e6+al to the Nash e6+ili2ri+m le-el. ,. a2o-e the Nash e6+ili2ri+m le-el. DIF: ( #$%: $ligopoly REF: T$&: 1 !( %artels 'S%: Analytical
Re.er to S!enario 17&1. As long as the com2ine, le-el of o+tp+t is less than the Nash e6+ili2ri+m le-el0 2oth Ir+n an, >r+n ha-e the in,i-i,+al incenti-e to a. hol, pro,+ction constant. 2. ,ecrease pro,+ction. c. increase pro,+ction. ,. increase price. DIF: ( #$%: $ligopoly REF: T$&: 1 !( %artels 'S%: Analytical
3". Re.er to S!enario 17&1. The agree,!+pon pro,+ction le-el 2etween the two co+ntries will in-aria2ly 2e a. lower than the Nash e6+ili2ri+m le-el. 2. e6+al to the Nash e6+ili2ri+m le-el. c. e6+al to the ,+opoly market e6+ili2ri+m le-el. ,. higher than the ,+opoly market e6+ili2ri+m le-el. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
113
ANS: A NAT: Analytic 'S%: Analytical 31.
Re.er to S!enario 17&1. If Ir+n fails to li-e +p to the pro,+ction agreement an, o-erpro,+ces0 which of the following statements will 2e tr+e of >r+n=s con,ition? a. >r+n will in-aria2ly 2e worse off than 2efore the agreement was 2roken. 2. >r+n will co+nter 2y ,ecreasing its pro,+ction in or,er to maintain price sta2ility. c. >r+n=s profit will 2e ma;imi<e, 2y hol,ing its pro,+ction constant. ,. >r+n4s profit will ,ecrease if it follows s+it an, increases pro,+ction. DIF: ( #$%: $ligopoly REF: T$&: 1 !( %artels 'S%: Analytical
ANS: A NAT: Analytic 3(.
Ass+ming that oligopolists ,o not ha-e the opport+nity to coll+,e0 once they ha-e reache, the Nash e6+ili2ri+m0 it a. is always in their 2est interest to s+pply more to the market. 2. is always in their 2est interest to s+pply less to the market. c. is always in their 2est interest to lea-e their 6+antities s+pplie, +nchange,. ,. may 2e in their 2est interest to ,o any of the a2o-e0 ,epen,ing on market con,itions. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
ANS: % NAT: Analytic 'S%: Interpreti-e 3/.
7hen an oligopoly market reaches a Nash e6+ili2ri+m0 a. the market price will 2e ,ifferent for each firm. 2. the firms will not ha-e 2eha-e, as profit ma;imi<ers. c. a firm will ha-e chosen its 2est strategy0 gi-en the strategies chosen 2y other firms in the market. ,. a firm will not take into acco+nt the strategies of competing firms. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
ANS: % NAT: Analytic 'S%: Interpreti-e 31.
In a ,+opoly sit+ation0 the logic of self!interest res+lts in a total o+tp+t le-el that a. e6+als the o+tp+t le-el that wo+l, pre-ail in a competiti-e market. 2. e6+als the o+tp+t le-el that wo+l, pre-ail in a monopoly. c. e;cee,s the monopoly le-el of o+tp+t0 2+t falls short of the competiti-e le-el of o+tp+t. ,. falls short of the monopoly le-el of o+tp+t. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Analytical
As a gro+p0 oligopolists earn the highest profit when they a. achie-e a Nash e6+ili2ri+m. 2. pro,+ce a total 6+antity of o+tp+t that falls short of the Nash!e6+ili2ri+m total 6+antity. c. pro,+ce a total 6+antity of o+tp+t that e;cee,s the Nash!e6+ili2ri+m total 6+antity. ,. charge a price that falls short of the Nash!e6+ili2ri+m price. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . Nash e6+ili2ri+m
ANS: K NAT: Analytic 'S%: Analytical
115
35.
In or,er to 2e s+ccessf+l0 a cartel m+st a. fin, a way to enco+rage mem2ers to pro,+ce more than they wo+l, otherwise pro,+ce. 2. agree on the total le-el of pro,+ction for the cartel0 2+t they nee, not agree on the amo+nt pro,+ce, 2y each mem2er. c. agree on the total le-el of pro,+ction an, on the amo+nt pro,+ce, 2y each mem2er. ,. agree on the prices charge, 2y each mem2er0 2+t they nee, not agree on amo+nts pro,+ce,. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
ANS: % NAT: Analytic 3 .
In a partic+lar town0 'etro-ision an, %a2le-iew are the only two pro-i,ers of ca2le TH ser-ice. 'etro-ision an, %a2le-iew constit+te a a. ,+opoly0 whether they coll+,e or not. 2. cartel0 whether they coll+,e or not. c. Nash in,+stry0 whether they coll+,e or not. ,. monopolistically competiti-e market if they charge the same price. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Interpreti-e
7hich of these sit+ations pro,+ces the largest profits for oligopolists? a. The firms reach a Nash e6+ili2ri+m. 2. The firms reach the monopoly o+tcome. c. The firms reach the competiti-e o+tcome. ,. The firms pro,+ce a 6+antity of o+tp+t that lies 2etween the competiti-e o+tcome an, the monopoly o+tcome. DIF: / #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
7hen firms ha-e agreements among themsel-es on the 6+antity to pro,+ce an, the price at which to sell o+tp+t0 we refer to their form of organi<ation as a a. Nash arrangement. 2. cartel. c. monopolistically competiti-e oligopoly. ,. perfectly competiti-e oligopoly. DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Definitional
ANS: K NAT: Analytic 5".
The e6+ili2ri+m 6+antity in markets characteri<e, 2y oligopoly is a. higher than in monopoly markets an, higher than in perfectly competiti-e markets. 2. higher than in monopoly markets an, lower than in perfectly competiti-e markets. c. lower than in monopoly markets an, higher than in perfectly competiti-e markets. ,. lower than in monopoly markets an, lower than in perfectly competiti-e markets. DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . E6+ili2ri+m 6+antity
ANS: K NAT: Analytic 'S%: Analytical 51.
The e6+ili2ri+m price in a market characteri<e, 2y oligopoly is a. higher than in monopoly markets an, higher than in perfectly competiti-e markets. 2. higher than in monopoly markets an, lower than in perfectly competiti-e markets. c. lower than in monopoly markets an, higher than in perfectly competiti-e markets. ,. lower than in monopoly markets an, lower than in perfectly competiti-e markets. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . E6+ili2ri+m price
ANS: % NAT: Analytic 'S%: Analytical
5(. 7hen oligopolistic firms interacting with one another each choose their 2est strategy gi-en the strategies chosen 2y other firms in the market0 we ha-e a. a cartel. 2. a gro+p of oligopolists 2eha-ing as a monopoly. c. a Nash e6+ili2ri+m. ,. the perfectly competiti-e o+tcome. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
11
ANS: % NAT: Analytic 'S%: Definitional 5/.
As the n+m2er of firms in an oligopoly market a. ,ecreases0 the price charge, 2y firms likely ,ecreases. 2. ,ecreases0 the market approaches the competiti-e market o+tcome. c. increases0 the market approaches the competiti-e market o+tcome. ,. increases0 the market approaches the monopoly o+tcome. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Analytical
Ass+me oligopoly firms are profit ma;imi<ers0 they ,o not form a cartel0 an, they take other firms= pro,+ction le-els as gi-en. Then in e6+ili2ri+m the o+tp+t effect a. m+st ,ominate the price effect. 2. m+st 2e smaller than the price effect. c. m+st 2alance with the price effect. ,. can 2e larger or smaller than the price effect. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . E6+ili2ri+m
ANS: % NAT: Analytic 'S%: Analytical 53.
For cartels0 as the n+m2er of firms Fmem2ers of the cartelG increases0 a. the monopoly o+tcome 2ecomes more likely. 2. the magnit+,e of the price effect ,ecreases. c. the more concerne, each seller is a2o+t its own impact on the market price. ,. the easier it 2ecomes to o2ser-e mem2ers -iolating their agreements. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
S+ppose a market is initially perfectly competiti-e with many firms selling an i,entical pro,+ct. $-er time0 howe-er0 s+ppose the merging of firms res+lts in the market 2eing ser-e, 2y only three or fo+r firms selling this same pro,+ct. As a res+lt0 we wo+l, e;pect a. an increase in market o+tp+t an, an increase in the price of the pro,+ct. 2. an increase in market o+tp+t an, an ,ecrease in the price of the pro,+ct. c. a ,ecrease in market o+tp+t an, an increase in the price of the pro,+ct. ,. a ,ecrease in market o+tp+t an, a ,ecrease in the price of the pro,+ct. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
%artels are ,iffic+lt to maintain 2eca+se a. antitr+st laws are ,iffic+lt to enforce. 2. cartel agreements are con,+ci-e to monopoly o+tcomes. c. there is always tension 2etween cooperation an, self!interest in a cartel. ,. firms pay little attention to the ,ecisions ma,e 2y other firms. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
118
58.
There are two types of markets in which firms face some competition yet are still a2le to ha-e some control o-er the prices of their pro,+cts. Those two types of market are a. monopolistic competition an, oligopoly. 2. ,+opoly an, triopoly. c. perfect competition an, monopolistic competition. ,. ,+opoly an, imperfect competition. DIF: 1 REF: 1 !1 #$%: $ligopoly . 'onopolistic competition 'S%: Interpreti-e
ANS: A NAT: Analytic T$&: 'arkets 59.
A gro+p of firms that act in +nison to ma;imi<e collecti-e profits is calle, a a. monopolistically competiti-e in,+stry. 2. monopoly. c. cartel. ,. Nash e6+ili2ri+m market. DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Definitional
ANS: % NAT: Analytic ".
An agreement among firms regar,ing price an,:or pro,+ction le-els is calle, a. an antitr+st market. 2. a free!tra,e arrangement. c. coll+sion. ,. a Nash agreement. DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 %oll+sion 'S%: Definitional
If ,+opolists in,i-i,+ally p+rs+e their own self!interest when ,eci,ing how m+ch to pro,+ce0 the amo+nt they will pro,+ce collecti-ely will a. 2e less than the monopoly 6+antity. 2. 2e e6+al to the monopoly 6+antity. c. 2e greater than the monopoly 6+antity. ,. Any of the a2o-e are possi2le. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Interpreti-e
If ,+opolists in,i-i,+ally p+rs+e their own self!interest when ,eci,ing how m+ch to pro,+ce0 the profit! ma;imi<ing price they will charge for their pro,+ct will 2e a. less than the monopoly price. 2. e6+al to the perfectly competiti-e market price. c. greater than the monopoly price. ,. possi2ly less than or greater than the monopoly price. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Interpreti-e
ANS: A NAT: Analytic /.
To increase their in,i-i,+al profits0 mem2ers of a cartel ha-e an incenti-e to a. charge a higher price than the other mem2ers of the cartel. 2. increase pro,+ction a2o-e the le-el agree, +pon. c. ignore the choices ma,e 2y the other firms an, act as a monopolist. ,. charge the same price a monopolist wo+l, charge. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
$nce a cartel is forme,0 the market is in effect ser-e, 2y a. a monopoly. 2. an oligopoly. c. imperfect competition. ,. monopolistic competition. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
3. A sit+ation in which firms choose their 2est strategy gi-en the strategies chosen 2y the other firms in the market is calle, a. a competiti-e e6+ili2ri+m. 2. an open!market sol+tion. c. a socially!optimal sol+tion. ,. a Nash e6+ili2ri+m. DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
119
ANS: D NAT: Analytic 'S%: Definitional 5.
If an oligopolist is part of a cartel that is collecti-ely pro,+cing the monopoly le-el of o+tp+t0 then that oligopolist has the incenti-e to lower pro,+ction with the aim of a. lowering prices. 2. increasing profits for the gro+p of firms as a whole. c. increasing profits for itself0 regar,less of the impact on profits for the gro+p of firms as a whole. ,. None of the a2o-e is correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Analytical
ANS: D NAT: Analytic .
7hen price is a2o-e marginal cost0 selling one more +nit at the c+rrent price will increase profit. This concept is known as the a. income effect. 2. price effect. c. o+tp+t effect. ,. cartel effect. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 &rofit ma;imi<ation
ANS: % NAT: Analytic 'S%: Definitional 8.
In imperfectly competiti-e markets0 increasing pro,+ction will ,ecrease the price of all +nits sol,. This concept is known as the a. income effect. 2. cost effect. c. o+tp+t effect. ,. price effect. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 &rofit ma;imi<ation
In a typical cartel agreement0 the cartel ma;imi<es profit when it a. 2eha-es as a monopolist. 2. 2eha-es as a ,+opolist. c. is fle;i2le in enforcing pro,+ction targets. ,. 2eha-es as a perfectly competiti-e firm. DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
ANS: A NAT: Analytic 8".
An oligopolist will increase pro,+ction if the o+tp+t effect is a. less than the price effect. 2. e6+al to the price effect. c. greater than the price effect. ,. The oligopolist ne-er has an incenti-e to increase pro,+ction. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . &rofit ma;imi<ation
ANS: % NAT: Analytic 'S%: Interpreti-e
13"
81.
As the n+m2er of firms in an oligopoly increases0 a. each seller 2ecomes more concerne, a2o+t its impact on the market price. 2. the o+tp+t effect ,ecreases. c. the total 6+antity of o+tp+t pro,+ce, 2y firms in the market gets closer to the socially efficient 6+antity. ,. the oligopoly has more market power an, firms earn a greater profit. DIF: / #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
ANS: % NAT: Analytic 8(.
7hen an oligopoly grows -ery large0 the a. o+tp+t effect ,isappears. 2. price effect ,isappears. c. o+tp+t effect e6+als the price effect. ,. price of the pro,+ct greatly e;cee,s marginal cost. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
ANS: K NAT: Analytic 8/.
As the n+m2er of firms in an oligopoly increases0 the price approaches a. <ero. 2. marginal cost. c. infinity. ,. the monopoly price. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
#ike monopolists0 oligopolists are aware that an increase in the 6+antity of o+tp+t always a. re,+ces the price of their pro,+ct. 2. re,+ces their profit. c. re,+ces their re-en+e. ,. re,+ces pro,+cti-ity. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
$ligopolies wo+l, like to act like a a. ,+opoly0 2+t self!interest often ,ri-es them closer to the perfectly competiti-e o+tcome. 2. competiti-e firm0 2+t self!interest often ,ri-es them closer to the ,+opoly o+tcome. c. monopoly0 2+t self!interest often ,ri-es them to charge a higher price than wo+l, 2e charge, 2y a monopoly. ,. monopoly0 2+t self!interest often ,ri-es them closer to the perfectly competiti-e o+tcome. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
$ligopolies can en, +p looking like competiti-e markets if the n+m2er of firms is a. large an, they all cooperate. 2. large an, they ,o not cooperate. c. small an, they all cooperate. ,. small an, they ,o not cooperate. DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
ANS: K NAT: Analytic 8 .
The theory of oligopoly pro-i,es another reason that free tra,e can 2enefit all co+ntries 2eca+se a. increase, competition lea,s to larger ,ea,weight losses. 2. as the n+m2er of firms within a gi-en market increases0 the price of the goo, ,ecreases. c. as the n+m2er of firms within a gi-en market increases0 the profit of each firm increases. ,. All of the a2o-e are correct. DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . International tra,e
ANS: K NAT: Analytic 'S%: Interpreti-e
88.
131
Firms ,o not nee, to 2e concerne, a2o+t striking a 2alance 2etween the price effect an, the o+tp+t effect when making pro,+ction ,ecisions in which of the following types of markets? a. oligopoly 2. ,+opoly c. monopoly ,. competiti-e markets ( REF: 1 !1 'S%: Interpreti-e
ANS: D DIF: T$&: &rofit ma;imi<ation 89.
If nations s+ch as )ermany0 Lapan0 an, the >nite, States prohi2ite, international tra,e in a+tomo2iles0 a likely effect wo+l, 2e that a. the price effect wo+l, 2ecome a more significant consi,eration for each firm that makes a+tomo2iles. 2. the e;cess of price o-er marginal cost wo+l, 2ecome less prono+nce, in the a+tomo2ile market. c. all co+ntries wo+l, 2ecome 2etter off. ,. a+tomo2ile pro,+cers in the >.S. wo+l, coll+,e to pro,+ce a large n+m2er of cars. DIF: / #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . International tra,e
ANS: A NAT: Analytic 'S%: Interpreti-e 9".
The theory of oligopoly pro-i,es a reason as to why a. perfect competition is not a +sef+l o2*ect of st+,y. 2. price is less than marginal cost for many firms. c. all co+ntries can 2enefit from free tra,e among nations. ,. firms ,o not want to capt+re larger shares of their markets. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly . International tra,e
D+ring the 199"s0 the mem2ers of $&E% operate, in,epen,ently from one another0 ca+sing the worl, market for cr+,e oil to 2ecome close to a. a monopoly market. 2. an oligopoly market. c. a ,+opoly market. ,. a competiti-e market. DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 $&E% 'S%: Interpreti-e
13(
9(.
%onsi,er the ,iagram 2elow0 which shows the market ,eman, c+r-e for a partic+lar pro,+ct. S+ppose this market is ser-e, 2y two ,+opolists who each face the marginal cost c+r-e shown in the ,iagram. The marginal re-en+e c+r-e that a monopolist wo+l, face in this market is also shown. 7hich of the following statements is tr+e?
a. 2. c. ,.
The total o+tp+t in this market will likely 2e ( +nits when the market is ser-e, 2y a ,+opoly. The price in this market will likely 2e A5 when the market is ser-e, 2y a ,+opoly. The total re-en+e to each firm will likely 2e more than A15 when the market is ser-e, 2y a ,+opoly. The total o+tp+t in this market will likely 2e less than 1 +nits when the market is ser-e, 2y a ,+opoly. DIF: / #$%: $ligopoly REF: T$&: 1 !1 D+opoly 'S%: Interpreti-e
ANS: D NAT: Analytic 9/.
The more firms an oligopoly has0 a. the more market power the oligopoly has. This res+lts in higher prices an, lower 6+antities of o+tp+t than an oligopoly with fewer firms wo+l, ha-e. 2. the more important the price effect is0 res+lting in the market price 2eing higher than when there are fewer firms in the oligopoly. c. the farther market price will 2e from marginal cost. ,. the more likely the firms will charge a price closer to the perfectly competiti-e price. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
In an oligopoly0 the total o+tp+t pro,+ce, in the market is a. higher than the total o+tp+t that wo+l, 2e pro,+ce, if the market were a monopoly an, higher than the total o+tp+t that wo+l, 2e pro,+ce, if the market were perfectly competiti-e. 2. higher than the total o+tp+t that wo+l, 2e pro,+ce, if the market were a monopoly 2+t lower than the total o+tp+t that wo+l, 2e pro,+ce, if the market were perfectly competiti-e. c. lower than the total o+tp+t that wo+l, 2e pro,+ce, if the market were a monopoly 2+t higher than the total o+tp+t that wo+l, 2e pro,+ce, if the market were perfectly competiti-e. ,. lower than the total o+tp+t that wo+l, 2e pro,+ce, if the market were a monopoly an, lower than the total o+tp+t that wo+l, 2e pro,+ce, if the market were perfectly competiti-e. DIF: ( #$%: $ligopoly REF: T$&: 1 !1 $ligopoly 'S%: Interpreti-e
ANS: K NAT: Analytic
Table 17-6. The table shows the demand schedule for a particular product. Quantity " 1 ( / 1 3 5 8 93. ri!e 15 11 1( 1" 8 5 1 ( "
13/
Re.er to Ta/le 17&50 S+ppose the market for this pro,+ct is ser-e, 2y two firms that ha-e forme, a cartel. 7hat price will the cartel charge in this market if the marginal cost of pro,+ction is A"? a. A5 2. A8 c. A1" ,. A1( DIF: T$&: ( %artels REF: 1 !1 'S%: Applicati-e
Re.er to Ta/le 17&50 S+ppose the market for this pro,+ct is ser-e, 2y two firms that ha-e forme, a cartel. 7hat price will the cartel charge in this market if the marginal cost of pro,+ction is A1? a. A5 2. A8 c. A1" ,. A1( DIF: T$&: ( %artels REF: 1 !1 'S%: Applicati-e
Table 17-7. The table shows the demand schedule for a particular product. Quantity " 3 1" 13 (" (3 /" /3 1" 13 3" 9 . ri!e 1" 9 8 5 3 1 / ( 1 "
Re.er to Ta/le 17&70 S+ppose the market for this pro,+ct is ser-e, 2y two ,+opolists who ha-e forme, a cartel an, are coll+,ing to set the price an, 6+antity in this market. If the marginal cost to pro,+ce this pro,+ct is constant at A( per +nit0 then what price will the cartel set in this market? a. A1 2. A3 c. A5 ,. A DIF: / #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Applicati-e
131
98.
Re.er to Ta/le 17&70 S+ppose the marginal cost to pro,+ce this pro,+ct is constant at A1 per +nit. If this market is ser-e, 2y two ,+opolists who choose their pro,+ction le-els in,epen,ently0 acting in their own self! interest0 what is the Nash e6+ili2ri+m pro,+ction le-el for each firm? a. 3 +nits 2. 1" +nits c. 13 +nits ,. (" +nits DIF: / #$%: $ligopoly REF: T$&: 1 !1 D+opoly . Nash e6+ili2ri+m
ANS: % NAT: Analytic 'S%: Applicati-e 99.
Re.er to Ta/le 17&70 S+ppose that the marginal cost to pro,+ce this pro,+ct is constant at A1 per +nit an, that the fi;e, cost of pro,+cing this pro,+ct is A1". If the market is ser-e, 2y two ,+opolists who each0 acting in their own self!interest0 choose the Nash e6+ili2ri+m le-el of pro,+ction0 how m+ch profit will each firm earn? a. A1" 2. A(" c. A/3 ,. A3" DIF: / #$%: $ligopoly REF: T$&: 1 !1 D+opoly . Nash e6+ili2ri+m
Table 17-8. For a certain small town0 the ta2le shows the ,eman, sche,+le for water. Ass+me the marginal cost of s+pplying water is constant at A1 per 2ottle. ri!e A9 A8 A A5 A3 A1 A/ A( Quantity +/ottle), 1"" ("" /"" 1"" 3"" 5"" "" 8""
1"". Re.er to Ta/le 17&6. If there were many s+ppliers of 2ottle, water0 what wo+l, 2e the price an, 6+antity? a. The price wo+l, 2e A5 per gallon an, the 6+antity wo+l, 2e 1"" gallons. 2. The price wo+l, 2e A3 per gallon an, the 6+antity wo+l, 2e 3"" gallons. c. The price wo+l, 2e A1 per gallon an, the 6+antity wo+l, 2e 5"" gallons. ,. The price wo+l, 2e A/ per gallon an, the 6+antity wo+l, 2e "" gallons. ANS: % NAT: Analytic 'S%: Applicati-e DIF: ( REF: #$%: &erfect competition 1 !1 T$&: %ompetiti-e markets
1"1. Re.er to Ta/le 17&6. If there were only one s+pplier of water0 what wo+l, 2e the price an, 6+antity? a. The price wo+l, 2e A per gallon an, the 6+antity wo+l, 2e /"" gallons. 2. The price wo+l, 2e A5 per gallon an, the 6+antity wo+l, 2e 1"" gallons. c. The price wo+l, 2e A3 per gallon an, the 6+antity wo+l, 2e 3"" gallons. ,. The price wo+l, 2e A1 per gallon an, the 6+antity wo+l, 2e 5"" gallons. ANS: A NAT: Analytic DIF: ( #$%: 'onopoly REF: T$&: 1 !1 'onopoly 'S%: Applicati-e
1"(. Re.er to Ta/le 17&6. If there are two s+ppliers of water0 'ort an, %allie0 an, if they ha-e s+ccessf+lly forme, a cartel0 then what wo+l, 2e the price an, the market 6+antity? a. The price wo+l, 2e A per 2ottle an, the market 6+antity wo+l, 2e /"" 2ottles. 2. The price wo+l, 2e A5 per 2ottle an, the market 6+antity wo+l, 2e 1"" 2ottles. c. The price wo+l, 2e A3 per 2ottle an, the market 6+antity wo+l, 2e 3"" 2ottles. ,. The price wo+l, 2e A1 per 2ottle an, the market 6+antity wo+l, 2e 5"" 2ottles.
ANS: A T$&: %artels DIF: ( 'S%: Applicati-e REF: 1 !1
133
1"/. Re.er to Ta/le 17&6. If there are two s+ppliers of water0 'ort an, %allie0 an, if they ha-e s+ccessf+lly forme, a cartel an, split the market e-enly0 then how many 2ottles will %allie s+pply? a. 3" 2. 1"" c. 13" ,. ("" ANS: % NAT: Analytic DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Applicati-e
1"1. Re.er to Ta/le 17&6. If there are two s+ppliers of water0 'ort an, %allie0 then what will 2e their com2ine, le-el of o+tp+t when a Nash e6+ili2ri+m is reache,? a. ("" 2. 1"" c. 5"" ,. 8"" ANS: K NAT: Analytic DIF: / #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Applicati-e
1"3. %artels in the >nite, States are a. legal if price is competiti-ely ,etermine,. 2. legal if all firms in the in,+stry agree to the terms of the cartel. c. legal if all con,itions of the cartel are ma,e p+2lic. ,. illegal. ANS: D NAT: Analytic DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
1"5. 7hich of the following wo+l, 2e most likely to contri2+te to the 2reak,own of a cartel in a nat+ral reso+rce Fe.g.0 2a+;iteG market? a. high prices 2. low price elasticity of ,eman, c. high compati2ility of mem2er interests ,. +ne6+al mem2er ownership of the nat+ral reso+rce ANS: D NAT: Analytic DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %artels 'S%: Interpreti-e
1" . An e6+ili2ri+m in which each firm in an oligopoly ma;imi<es profit0 gi-en the actions of its ri-als0 is calle, a. a general e6+ili2ri+m. 2. a ,ominant e6+ili2ri+m. c. a Nash e6+ili2ri+m. ,. an oligopoly e6+ili2ri+m. ANS: % NAT: Analytic 'S%: Definitional DIF: 1 #$%: $ligopoly REF: T$&: 1 !1 Nash e6+ili2ri+m
1"8. An oligopoly wo+l, ten, to restrict o+tp+t an, ,ri-e +p price if a. 2arriers to entering the in,+stry are negligi2le. 2. firms engage in informati-e a,-ertising. c. firms pro,+ce a stan,ar,i<e, pro,+ct. ,. firms coll+,e an, 2eha-e like a monopoly. ANS: D NAT: Analytic DIF: ( #$%: $ligopoly REF: T$&: 1 !1 %oll+sion 'S%: Interpreti-e
135
Se!%1 & Oligopoly & The E!ono7i!) o. Cooperation

#ULT' LE CHO'CE 1. 7hen firms are face, with making strategic choices in or,er to ma;imi<e profit0 economists typically +se a. the theory of monopoly to mo,el their 2eha-ior. 2. the theory of aggressi-e competition to mo,el their 2eha-ior. c. game theory to mo,el their 2eha-ior. ,. cartel theory to mo,el their 2eha-ior. DIF: 1 #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Interpreti-e
7hen strategic interactions are important to pricing an, pro,+ction ,ecisions0 a typical firm will a. set the price of its pro,+ct e6+al to marginal cost. 2. consi,er how competing firms might respon, to its actions. c. generally operate as if it is a monopolist. ,. consi,er e;iting the market. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Interpreti-e
ANS: K NAT: Analytic /.
)ame theory is important for the +n,erstan,ing of a. competiti-e markets. 2. monopolies. c. oligopolies. ,. all market str+ct+res. DIF: 1 #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Interpreti-e
)ame theory is necessary for +n,erstan,ing a. all market str+ct+res. 2. competition an, oligopoly0 2+t it is not necessary for +n,erstan,ing monopoly. c. monopoly an, oligopoly0 2+t it is not necessary for +n,erstan,ing competition. ,. oligopoly0 2+t it is not necessary for +n,erstan,ing monopoly or competition. DIF: 1 #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Interpreti-e
The prisoners= ,ilemma pro-i,es insights into the a. ,iffic+lty of maintaining cooperation. 2. 2enefits of a-oi,ing cooperation. c. 2enefits of go-ernment ownership of monopoly. ,. ease with which oligopoly firms maintain high prices. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: A NAT: Analytic 'S%: Interpreti-e 5.
In the prisoners= ,ilemma game0 self!interest lea,s a. each prisoner to confess. 2. to a 2reak,own of any agreement that the prisoners might ha-e ma,e 2efore 2eing 6+estione,. c. to an o+tcome that is not partic+larly goo, for either prisoner. ,. All of the a2o-e are correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: D NAT: Analytic 'S%: Interpreti-e .
The likely o+tcome of the stan,ar, prisoners= ,ilemma game is that a. neither prisoner confesses. 2. e;actly one prisoner confesses. c. 2oth prisoners confess. ,. Not eno+gh information is gi-en to answer this 6+estion.
ANS: % NAT: Analytic 'S%: Interpreti-e 8. DIF: 1 #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
13
The prisoners= ,ilemma is an important game to st+,y 2eca+se a. most games present <ero!s+m alternati-es. 2. it i,entifies the f+n,amental ,iffic+lty in maintaining cooperati-e agreements. c. strategic ,ecisions face, 2y prisoners are i,entical to those face, 2y firms engage, in competiti-e agreements. ,. all interactions among firms are represente, 2y this game. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: K NAT: Analytic 'S%: Interpreti-e 9.
The prisoners4 ,ilemma game a. pro-i,es insight into why cooperation is in,i-i,+ally rational. 2. pro-i,es insight into why cooperation is ,iffic+lt. c. is a game in which neither player has a ,ominant strategy. ,. is a game in which e;actly one of the two players has a ,ominant strategy. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: K NAT: Analytic 'S%: Interpreti-e 1".
In the prisoners4 ,ilemma game with Konnie an, %ly,e as the players0 the likely o+tcome is one a. in which neither Konnie nor %ly,e confesses. 2. in which 2oth Konnie an, %ly,e confess. c. that in-ol-es neither Konnie nor %ly,e p+rs+ing a ,ominant strategy. ,. that is i,eal in terms of Konnie4s self!interest an, in terms of %ly,e4s self!interest. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
In the prisoners4 ,ilemma game with Konnie an, %ly,e as the players0 the likely o+tcome is a. a -ery goo, o+tcome for 2oth players. 2. a -ery goo, o+tcome for Konnie0 2+t a 2a, o+tcome for %ly,e. c. a -ery goo, o+tcome for %ly,e0 2+t a 2a, o+tcome for Konnie. ,. a 2a, o+tcome for 2oth players. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: D NAT: Analytic 'S%: Interpreti-e 1(.
In a game0 a ,ominant strategy is a. the 2est strategy for a player to follow only if other players are cooperati-e. 2. the 2est strategy for a player to follow0 regar,less of the strategies followe, 2y other players. c. a strategy that m+st appear in e-ery game. ,. a strategy that lea,s to one player=s interests ,ominating the interests of the other players. DIF: 1 #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
ANS: K NAT: Analytic 'S%: Definitional 1/.
A ,ominant strategy is one that a. makes e-ery player 2etter off. 2. makes at least one player 2etter off witho+t h+rting the competiti-eness of any other player. c. increases the total payoff for the player. ,. is 2est for the player0 regar,less of what strategies other players follow. DIF: 1 #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
ANS: D NAT: Analytic 'S%: Definitional
138
Table 17-9 Two cigarette man+fact+rers FFirm A an, Firm KG are face, with laws+its from states to reco-er the healthcare relate, e;penses associate, with cigarette smoking. Koth cigarette firms ha-e e-i,ence that in,icates that cigarette smoke ca+ses l+ng cancer Fan, other relate, illnessesG. State prosec+tors ,o not ha-e access to the same ,ata +se, 2y cigarette man+fact+rers an, th+s will ha-e ,iffic+lty reco-ering f+ll costs witho+t the help of at least one cigarette firm st+,y. Each firm has 2een presente, with an opport+nity to lower its lia2ility in the s+it if it cooperates with attorneys representing the states. Concede that cigarette smoke causes lung cancer Concede that cigarette smoke causes lung cancer Argue that there is no e idence that smoke causes cancer Firm A profit C AM(" Firm K profit C AM13 Firm A profit C AM3 Firm K profit C AM3" Fir7 8 Argue that there is no e idence that smoke causes cancer Firm A profit C AM3" Firm K profit C AM3 Firm A profit C AM1" Firm K profit C AM1"
Fir7 A
11.
Re.er to Ta/le 17&9. &+rs+ing its own 2est interests0 Firm A will conce,e that cigarette smoke ca+ses l+ng cancer a. only if Firm K conce,es that cigarette smoke ca+ses l+ng cancer. 2. only if Firm K ,oes not conce,e that cigarette smoke ca+ses l+ng cancer. c. regar,less of whether Firm K conce,es that cigarette smoke ca+ses l+ng cancer. ,. None of the a2o-e. In p+rs+ing its own 2est interests0 Firm A will in no case conce,e that cigarette smoke ca+ses l+ng cancer. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Ta/le 17&9. &+rs+ing its own 2est interests0 Firm K will conce,e that cigarette smoke ca+ses l+ng cancer a. only if Firm A conce,es that cigarette smoke ca+ses l+ng cancer. 2. only if Firm A ,oes not conce,e that cigarette smoke ca+ses l+ng cancer. c. regar,less of whether Firm A conce,es that cigarette smoke ca+ses l+ng cancer. ,. None of the a2o-e@ in p+rs+ing its own 2est interests0 Firm K will in no case conce,e that cigarette smoke ca+ses l+ng cancer. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Ta/le 17&9. If 2oth firms follow a ,ominant strategy0 Firm A=s profits FlossesG will 2e a. A!3" 2. A!(" c. A!1" ,. A!3 DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Ta/le 17&9. If 2oth firms follow a ,ominant strategy0 Firm K=s profits FlossesG will 2e a. A!3" 2. A!13 c. A!1" ,. A!3 DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
18. Re.er to Ta/le 17&9. 7hen this game reaches a Nash e6+ili2ri+m0 profits for Firm A an, Firm K will 2e a. A!3 an, A!3"0 respecti-ely. 2. A!1" an, A!1"0 respecti-ely. c. A!(" an, A!130 respecti-ely. ,. A!3" an, A!30 respecti-ely. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
139
ANS: K NAT: Analytic 'S%: Applicati-e Table 17-1
Each year the >nite, States consi,ers renewal of 'ost Fa-ore, Nation F'FNG tra,ing stat+s with Farlan, Fa mythical nationG. Distorically0 legislators ha-e ma,e threats of not renewing 'FN stat+s 2eca+se of h+man rights a2+ses in Farlan,. The non!renewal of 'FN tra,ing stat+s is likely to in-ol-e some retaliatory meas+res 2y Farlan,. The payoff ta2le 2elow shows the potential economic gains associate, with a game in which Farlan, may impose tra,e sanctions against >.S. firms an, the >nite, States may not renew 'FN stat+s with Farlan,. The ta2le contains the ,ollar -al+e of all tra,e!flow 2enefits to the >nite, States an, Farlan,. Farlan$ !mpose trade sanctions Do not impose trade sanctions against ".#. firms against ".#. firms >.S. tra,e -al+e C A53 2 >.S. tra,e -al+e C A11" 2 Farlan, tra,e -al+e C A 3 2 Farlan, tra,e -al+e C A3 2 >.S. tra,e -al+e C A/3 2 >.S. tra,e -al+e C A1/" 2 Farlan, tra,e -al+e C A(83 2 Farlan, tra,e -al+e C A( 3 2
Unite$ State) 19.
Don$t renew %&' status with &arland (enew %&' status with &arland
Re.er to Ta/le 17&1%. &+rs+ing its own 2est interests0 Farlan, will impose tra,e sanctions against >.S. firms a. only if the >.S. ,oes not renew 'FN stat+s with Farlan,. 2. only if the >.S. renews 'FN stat+s with Farlan,. c. regar,less of whether the >.S. renews 'FN stat+s with Farlan,. ,. None of the a2o-e is correct. In p+rs+ing its own 2est interests0 Farlan, will in no case impose tra,e sanctions against >.S. firms. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
ANS: % NAT: Analytic (".
Re.er to Ta/le 17&1%. &+rs+ing its own 2est interests0 the >.S. will renew 'FN stat+s with Farlan, a. only if Farlan, ,oes not impose tra,e sanctions against >.S. firms. 2. only if Farlan, imposes tra,e sanctions against >.S. firms. c. regar,less of whether Farlan, imposes tra,e sanctions against >.S. firms. ,. None of the a2o-e is correct. In p+rs+ing its own 2est interests0 the >nite, States will in no case renew 'FN stat+s with Farlan,. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Ta/le 17&1%. This partic+lar game a. feat+res a ,ominant strategy for the >.S. 2. feat+res a ,ominant strategy for Farlan,. c. is a -ersion of the prisoners= ,ilemma game. ,. All of the a2o-e are correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma . Dominant strategy
ANS: D NAT: Analytic 'S%: Applicati-e ((.
Re.er to Ta/le 17&1%. If 2oth co+ntries follow a ,ominant strategy0 the -al+e of tra,e flow 2enefits for Farlan, will 2e a. A3 2. 2. A 3 2. c. A( 3 2. ,. A(83 2.
15"
DIF: 1 #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: K NAT: Analytic 'S%: Applicati-e (/.
Re.er to Ta/le 17&1%. If 2oth co+ntries follow a ,ominant strategy0 the -al+e of tra,e flow 2enefits for the >nite, States will 2e a. A/3 2. 2. A53 2. c. A1/" 2. ,. A11" 2. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: K NAT: Analytic 'S%: Applicati-e (1.
Re.er to Ta/le 17&1%. 7hen this game reaches a Nash e6+ili2ri+m0 the -al+e of tra,e flow 2enefits will 2e a. >nite, States A/3 2 an, Farlan, A(83 2. 2. >nite, States A53 2 an, Farlan, A 3 2. c. >nite, States A11" 2 an, Farlan, A3 2. ,. >nite, States A1/" 2 an, Farlan, A( 3 2. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
Re.er to Ta/le 17&1%. If tra,e negotiators are a2le to comm+nicate effecti-ely a2o+t the conse6+ences of -ario+s tra,e policies Fi.e.0 enter into an agreement a2o+t the policy they sho+l, a,optG0 then we wo+l, e;pect the co+ntries to agree to which o+tcome? a. >nite, States A/3 2 an, Farlan, A(83 2 2. >nite, States A53 2 an, Farlan, A 3 2 c. >nite, States A11" 2 an, Farlan, A3 2 ,. >nite, States A1/" 2 an, Farlan, A( 3 2 DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: D NAT: Analytic 'S%: Applicati-e (5.
Re.er to Ta/le 17&1%. Ass+me that tra,e negotiators meet to ,isc+ss tra,e policy 2etween the >nite, States an, Farlan,. If neither party to the negotiation is a2le to tr+st the other party0 then a. each sho+l, ass+me that the other will choose a strategy that optimi<es total -al+e of the tra,e relationship. 2. the Nash e6+ili2ri+m will pro-i,e the largest possi2le gains to each party. c. %hinese negotiators sho+l, ass+me that >nite, States negotiators will implement a policy that is in the m+t+al 2est interest of 2oth co+ntries. ,. each sho+l, follow its ,ominant strategy. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: D NAT: Analytic 'S%: Applicati-e
151
Table 17-11 Two home!impro-ement stores FKig Ko; Del+;e an, Domes R >sG in a growing +r2an area are intereste, in e;pan,ing their market share. Koth are intereste, in e;pan,ing the si<e of their store an, parking lot to accommo,ate potential growth in their c+stomer 2ase. The following game ,epicts the strategic o+tcomes that res+lt from the game. Increases in ann+al profits of the two home!impro-ement stores are shown in the ta2le 2elow. 8ig 8o: ;elu:e !ncrease the si)e of store Do not increase the si)e of and parking lot store and parking lot Kig Ko; Del+;e C A".3" Kig Ko; Del+;e C A".(" million million Domes R >s C A". 3 million Domes R >s C A1. " million Kig Ko; Del+;e C A1.5" Kig Ko; Del+;e C A1."" million million Domes R >s C A"./" million Domes R >s C A1.(3 million
Ho7e) R U)
!ncrease the si)e of store and parking lot Do not increase the si)e of store and parking lot
( .
Re.er to Ta/le 17&11. Increasing the si<e of its store an, parking lot is a ,ominant strategy for a. Kig Ko; Del+;e0 2+t not for Domes R >s. 2. Domes R >s0 2+t not for Kig Ko; Del+;e. c. 2oth stores. ,. neither store. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
ANS: % NAT: Analytic 'S%: Applicati-e (8.
Re.er to Ta/le 17&11. If 2oth stores follow a ,ominant strategy0 Domes R >s=s ann+al profit will grow 2y a. A"./" million. 2. A". 3 million. c. A1.(3 million. ,. A1. " million. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Dominant strategy
Re.er to Ta/le 17&11. If 2oth stores follow a ,ominant strategy0 Kig Ko; Del+;e=s ann+al profit will grow 2y a. A".(" million. 2. A".3" million. c. A1."" million. ,. A1.5" million. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Dominant strategy
ANS: K NAT: Analytic 'S%: Applicati-e /".
Re.er to Ta/le 17&11. 7hen this game reaches a Nash e6+ili2ri+m0 ann+al profit will grow 2y a. A". 3 million for Domes R >s an, 2y A".3" million for Kig Ko; Del+;e. 2. A1. " million for Domes R >s an, 2y A".(" million for Kig Ko; Del+;e. c. A"./" million for Domes R >s an, 2y A1.5" million for Kig Ko; Del+;e. ,. A1.(3 million for Domes R >s an, 2y A1."" million for Kig Ko; Del+;e. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
ANS: A NAT: Analytic 'S%: Applicati-e /1.
Re.er to Ta/le 17&11. S+ppose the owners of Kig Ko; Del+;e an, Domes R >s meet for a frien,ly game of golf one afternoon an, happen to ,isc+ss a strategy to optimi<e growth relate, profit. They sho+l, 2oth agree to a. increase their store an, parking lot si<es. 2. refrain from increasing their store an, parking lot si<es. c. 2e more competiti-e in capt+ring market share. ,. share the conte;t of their con-ersation with the Fe,eral Tra,e %ommission.
15(
DIF: ( #$%: $ligopoly REF: T$&: 1 !( %artels 'S%: Applicati-e
Figure 17&1. Two companies0 AK% an, NOP0 each ,eci,e whether to pro,+ce a high le-el of o+tp+t or a low le-el of o+tp+t. In the fig+re0 the ,ollar amo+nts are payoffs an, they represent ann+al profits for the two companies.
A8C<) ;e!i)ion High output AK%=s profit C A/ million High output =>?<) ;e!i)ion Lo* output NOP=s profit C A(.3 million NOP=s profit C A/.3 million NOP=s profit C A/ million AK%=s profit C A1 million NOP=s profit C A1 million AK%=s profit C A/.3 million Lo* output AK%=s profit C A(.3 million
/(.
Re.er to Figure 17&1. The ,ominant strategy for AK% is to a. pro,+ce high o+tp+t0 an, the ,ominant strategy for NOP is to pro,+ce high o+tp+t. 2. pro,+ce high o+tp+t0 an, the ,ominant strategy for NOP is to pro,+ce low o+tp+t. c. pro,+ce low o+tp+t0 an, the ,ominant strategy for NOP is to pro,+ce high o+tp+t. ,. pro,+ce low o+tp+t0 an, the ,ominant strategy for NOP is to pro,+ce low o+tp+t. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Dominant strategy
ANS: A NAT: Analytic 'S%: Applicati-e //.
Re.er to Figure 17&1. 7hich of the following statements is correct? a. AK% can potentially earn its highest possi2le profit if it pro,+ces a high le-el of o+tp+t0 an, for that reason it is a ,ominant strategy for AK% to pro,+ce a high le-el of o+tp+t. 2. The highest possi2le com2ine, profit for the two firms occ+rs when 2oth pro,+ce a low le-el of o+tp+t0 an, for that reason pro,+cing a low le-el of o+tp+t is a ,ominant strategy for 2oth firms. c. Regar,less of the strategy p+rs+e, 2y AK%0 NOP4s 2est strategy is to pro,+ce a high le-el of o+tp+t0 an, for that reason pro,+cing a high le-el of o+tp+t is a ,ominant strategy for NOP. ,. $+r knowle,ge of game theory s+ggests that the most likely o+tcome of the game0 if it is playe, only once0 is for one firm to pro,+ce a low le-el of o+tp+t an, for the other firm to pro,+ce a high le-el of o+tp+t. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Dominant strategy
ANS: % NAT: Analytic 'S%: Applicati-e /1.
Re.er to Figure 17&1. If this game is playe, only once0 then the most likely o+tcome is that a. 2oth firms pro,+ce a low le-el of o+tp+t. 2. AK% pro,+ces a low le-el of o+tp+t an, NOP pro,+ces a high le-el of o+tp+t. c. AK% pro,+ces a high le-el of o+tp+t an, NOP pro,+ces a low le-el of o+tp+t. ,. 2oth firms pro,+ce a high le-el of o+tp+t. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
/3.
15/
'+ch of the research on game theory in recent ,eca,es was ,ri-en 2y attempts to analy<e actions of players ,+ring a. the )reat Depression of the 19/"s. 2. 7orl, 7ar II. c. the %ol, 7ar 2etween the >nite, States an, the So-iet >nion. ,. the ascen,ancy of the conser-ati-e mo-ement in the >nite, States in the 19 "s an, 198"s. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Interpreti-e
ANS: % NAT: Analytic /5.
%onsi,er a game of the ILack an, LillJ type in which a market is a ,+opoly an, each firm ,eci,es to pro,+ce either a IhighJ 6+antity of o+tp+t or a IlowJ 6+antity of o+tp+t. If the two firms s+ccessf+lly reach an, maintain the cooperati-e o+tcome of the game0 then a. 2oth the com2ine, profit of the firms an, total s+rpl+s are ma;imi<e,. 2. the com2ine, profit of the firms is ma;imi<e, 2+t total s+rpl+s is not ma;imi<e,. c. the com2ine, profit of the firms is not ma;imi<e, 2+t total s+rpl+s is ma;imi<e,. ,. neither the com2ine, profit of the firms nor total s+rpl+s is ma;imi<e,. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: K NAT: Analytic 'S%: Interpreti-e / .
)ames that are playe, more than once generally a. lea, to o+tcomes ,ominate, p+rely 2y self!interest. 2. lea, to o+tcomes that ,o not reflect *oint rationality. c. enco+rage cheating on cartel pro,+ction 6+otas. ,. make coll+si-e arrangements easier to enforce. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Interpreti-e
ANS: D NAT: Analytic /8.
Hery often0 the reason that players can sol-e the prisoners= ,ilemma an, reach the most profita2le o+tcome is that a. each player tries to capt+re a large portion of the market share. 2. the players play the game not once 2+t many times. c. the game 2ecomes more competiti-e. ,. self interest res+lts in the Nash e6+ili2ri+m which is the 2est o+tcome for the players. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: K NAT: Analytic 'S%: Interpreti-e /9.
In a two!person repeate, game0 a tit!for!tat strategy starts with a. cooperation an, then each player mimics the other player=s last mo-e. 2. cooperation an, then each player is +nresponsi-e to the strategic mo-es of the other player. c. noncooperation an, then each player p+rs+es his or her own self!interest. ,. noncooperation an, then each player cooperates when the other player ,emonstrates a ,esire for the cooperati-e sol+tion. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: A NAT: Analytic 'S%: Interpreti-e 1".
A tit!for!tat strategy starts o+t a. conciliatory an, then enco+rages an optimal social o+tcome among the other players. 2. +nfrien,ly an, then enco+rages frien,ly strategies among players. c. frien,ly0 then penali<es +nfrien,ly players0 an, forgi-es them if warrante,. ,. aggressi-e0 then compensates losing players0 an, e-ent+ally forgi-es +nfrien,ly players. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
151
11. In,i-i,+al profit earne, 2y Da-e0 the oligopolist0 ,epen,s on which of the following? FiG The 6+antity of o+tp+t that Da-e pro,+ces FiiG The 6+antities of o+tp+t that the other firms in the market pro,+ce FiiiG The e;tent of coll+sion 2etween Da-e an, the other firms in the market a. 2. c. ,. FiG an, FiiG FiiG an, FiiiG FiiiG only FiG0 FiiG0 an, FiiiG DIF: ( #$%: $ligopoly REF: T$&: 1 !( $ligopoly 'S%: Interpreti-e
1(. 7hich of the following statements is FareG tr+e of the prisoners= ,ilemma? FiG Rational self!interest lea,s neither party to confess. FiiG %ooperation 2etween the prisoners is ,iffic+lt to maintain. FiiiG %ooperation 2etween the prisoners is in,i-i,+ally rational. a. 2. c. ,. FiiG only FiiG an, FiiiG FiG an, FiiiG FiG0 FiiG0 an, FiiiG DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: A NAT: Analytic 'S%: Interpreti-e 1/.
7hen the prisoners4 ,ilemma game is generali<e, to ,escri2e sit+ations other than those that literally in-ol-e two prisoners0 we see that cooperation 2etween the players of the game a. can 2e ,iffic+lt to maintain0 2+t only when cooperation wo+l, make at least one of the players of the game worse off. 2. can 2e ,iffic+lt to maintain0 e-en when cooperation wo+l, make 2oth players of the game 2etter off. c. always works to the 2enefit of society as a whole. ,. always works to the ,etriment of society as a whole. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
Scenario 17-!. Imagine that two oil companies0 #e;;on an, &K0 own a,*acent oil fiel,s. >n,er the fiel,s is a common pool of oil worth A18 million. Drilling a well to reco-er oil costs A1 million per well. If each company ,rills one well0 each will get half of the oil an, earn a A(" million profit FA(1 million in re-en+e ! A1 million in costsG. Ass+me that ha-ing N percent of the total wells means that a company will collect N percent of the total re-en+e. 11. Re.er to S!enario 17&1. If #e;;on were to ,rill a secon, well0 what wo+l, its profit 2e if &K ,i, not ,rill a secon, well? a. A(( million 2. A(1 million c. A(5 million ,. A(8 million DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma . %ommon reso+rces
ANS: K NAT: Analytic 'S%: Applicati-e 13.
Re.er to S!enario 17&1. If #e;;on were to ,rill a secon, well an, &K also ,rille, a secon, well0 what wo+l, #e;;on=s profit 2e? a. A11 million 2. A15 million c. A18 million ,. A(( million
ANS: K NAT: Analytic 'S%: Applicati-e 15. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma . %ommon reso+rces
153
Re.er to S!enario 17&1. &K=s ,ominant strategy wo+l, lea, to what sort of well!,rilling 2eha-ior? a. &K will ne-er ,rill a secon, well. 2. &K will always ,rill a secon, well. c. &K will ,rill a secon, well only if #e;;on ,rills a well. ,. &K will ,rill a secon, well only if #e;;on ,oes not ,rill a well. DIF: / #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma . %ommon reso+rces
ANS: K NAT: Analytic 'S%: Applicati-e 1 .
S+ppose two companies own a,*acent oil fiel,s. >n,er the two fiel,s is a common pool of oil worth A/" million. For each well that is ,rille,0 the company that ,rills the well inc+rs a cost of A/ million. Each company can ,rill +p to two wells. 7hat is the likely o+tcome of this game if each company p+rs+es its own self!interest? a. Each company ,rills one well an, e;periences a profit of A1( million. 2. Each company ,rills one well an, e;periences a profit of A1" million. c. Each company ,rills two wells an, e;periences a profit of A9 million. ,. $ne company ,rills two wells an, e;periences a profit of A11 million@ the other company ,rills one well an, e;periences a profit of A million. DIF: ( #$%: $ligopoly REF: T$&: 1 !( %ommon reso+rces . &risoners= ,ilemma
7e know that people ten, to o-er+se common reso+rces. This pro2lem can 2e -iewe, as an e;ample of a. a game in which the players s+ccee, in reaching the cooperati-e o+tcome. 2. the prisoners4 ,ilemma. c. a sit+ation to which game theory ,oes not apply 2eca+se of a lack of strategic thinking. ,. a sit+ation to which game theory ,oes not apply 2eca+se of too many ,ecision!makers. DIF: ( #$%: $ligopoly REF: T$&: 1 !( %ommon reso+rces . &risoners= ,ilemma
The para,o;ical nat+re of oligopoly can 2e ,emonstrate, 2y the fact that0 e-en tho+gh the monopoly o+tcome is 2est for the oligopolists0 a. they coll+,e to set the o+tp+t le-el e6+al to the Nash e6+ili2ri+m le-el of o+tp+t. 2. they ha-e incenti-es to increase pro,+ction a2o-e the monopoly o+tcome. c. they ,o not 2eha-e as profit ma;imi<ers. ,. self!interest *+;taposes the profits earne, at the Nash e6+ili2ri+m. DIF: ( #$%: $ligopoly REF: T$&: 1 !( $ligopoly 'S%: Interpreti-e
Dot!,og -en,ors on the 2each fail to cooperate with one another on the 6+antity of hot!,ogs they sho+l, sell to earn monopoly profits. A conse6+ence of their fail+re is that0 relati-e to the o+tcome the -en,ors wo+l, like0 FiG the 6+antity of hot ,ogs s+pplie, is closer to the socially optimal le-el. FiiG the price of hot ,ogs is closer to marginal cost. FiiiG the hot!,og market at the 2each is less competiti-e. a. 2. c. ,. FiG an, FiiG FiiG an, FiiiG FiG an, FiiiG FiiiG only DIF: ( #$%: $ligopoly REF: T$&: 1 !( %oll+sion 'S%: Analytical
155
31.
7hy wo+l, lack of cooperation 2etween criminal s+spects 2e ,esira2le for society as a whole? a. The s+spects are a2le to choose optimal o+tcomes for themsel-es 2y acting in their own self interest. 2. The prisoners= ,ilemma safeg+ar,s the criminals= constit+tional rights. c. 'ore criminals will 2e con-icte,. ,. None of the a2o-e is correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
3(. 7hat happens when the prisoners= ,ilemma game is repeate, n+mero+s times in an oligopoly market? FiG The firms may well reach the monopoly o+tcome. FiiG The firms may well reach the competiti-e o+tcome. FiiiG K+yers of the oligopolists= pro,+ct will likely 2e worse off as a res+lt. a. 2. c. ,. FiG an, FiiG FiiG an, FiiiG FiG an, FiiiG FiG0 FiiG0 an, FiiiG DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: % NAT: Analytic 'S%: Interpreti-e 3/.
In game theory0 a Nash e6+ili2ri+m is a. an o+tcome in which each player is ,oing his 2est gi-en the strategies chosen 2y the other players. 2. an o+tcome in which no player wishes to change their chosen strategy gi-en the strategies chosen 2y the other players. c. the o+tcome that occ+rs when all players ha-e a ,ominant strategy. ,. All of the a2o-e are correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
ANS: D NAT: Analytic 'S%: Interpreti-e
Scenario 17-3. %onsi,er two co+ntries0 '+ria an, Penya0 that are engage, in an arms race. Each co+ntry m+st ,eci,e whether to 2+il, new weapons or to ,isarm e;isting weapons. Each co+ntry prefers to ha-e more arms than the other 2eca+se a large arsenal gi-es it more infl+ence in worl, affairs. K+t each co+ntry also prefers to li-e in a worl, safe from the other co+ntry=s weapons. The following ta2le shows the possi2le o+tcomes for each ,ecision com2ination. The n+m2ers in each cell represent the co+ntry4s ranking of the o+tcome F1 C 2est o+tcome0 1 C worst o+tcomeG. ?enya *uild new weapons '+ria: ( Penya: ( '+ria: 1 Penya: 1 Disarm existing weapons '+ria: 1 Penya: 1 '+ria: / Penya: /
#uria
*uild new weapons Disarm existing weapons
31.
Re.er to S!enario 17&2. If Penya chooses to 2+il, new weapons0 then '+ria will a. ,isarm in or,er to pre-ent the loss of infl+ence in worl, affairs. 2. ,isarm in or,er to promote worl, peace. c. 2+il, new weapons in or,er to pre-ent the loss of infl+ence in worl, affairs. ,. None of the a2o-e are correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
33. Re.er to S!enario 17&2. If Penya chooses to ,isarm its e;isting weapons0 then '+ria will a. ,isarm in or,er to increase its infl+ence in worl, affairs. 2. ,isarm in or,er to promote worl, peace. c. 2+il, new weapons in or,er to promote worl, peace. ,. 2+il, new weapons in or,er to increase its infl+ence in worl, affairs. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
15
35. Re.er to S!enario 17&2. 7hich of these statements is correct? FiG '+ria is 2etter off 2+il,ing new weapons if Penya 2+il,s new weapons. FiiG '+ria is 2etter off 2+il,ing new weapons if Penya ,isarms e;isting weapons. FiiiG K+il,ing new weapons is '+ria=s ,ominant strategy. a. 2. c. ,. FiG an, FiiG FiiG an, FiiiG FiG an, FiiiG FiG0 FiiG0 an, FiiiG DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
ANS: D NAT: Analytic 3 .
Re.er to S!enario 17&2. K+il,ing new weapons is a ,ominant strategy for a. '+ria0 2+t not for Penya. 2. Penya0 2+t not for '+ria. c. 2oth '+ria an, Penya. ,. neither '+ria nor Penya. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
Re.er to S!enario 17&2. S+ppose the two co+ntries agree, to ,isarm e;isting weapons. In reality these two co+ntries may ha-e a har, time keeping this agreement ,+e to which of the following reasons? FiG E-en tho+gh '+ria has no incenti-e to cheat on the agreement0 Penya has an incenti-e to cheat on the agreement. FiiG '+ch like the prisoners4 ,ilemma0 2oth co+ntries are 2etter off reneging on the agreement an, 2+il,ing new weapons. FiiiG Koth co+ntries want to increase their worl, power 2y 2+il,ing new weapons. a. 2. c. ,. FiG an, FiiG FiiG an, FiiiG FiG an, FiiiG FiG0 FiiG0 an, FiiiG DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
Scenario 17-4. %onsi,er two cigarette companies0 &' Inc. an, Krown Inc. If neither company a,-ertises0 the two companies split the market an, earn A3" million each. If they 2oth a,-ertise0 they again split the market0 2+t profits are lower 2y A1" million since each company m+st 2ear the cost of a,-ertising. Oet if one company a,-ertises while the other ,oes not0 the one that a,-ertises attracts c+stomers from the other. In this case0 the company that a,-ertises earns A5" million while the company that ,oes not a,-ertise earns only A/" million. 39. Re.er to S!enario 17&3. 7hat will these two companies ,o if they 2eha-e as in,i-i,+al profit ma;imi<ers? a. Neither company will a,-ertise. 2. Koth companies will a,-ertise. c. $ne company will a,-ertise0 the other will not. ,. There is no way of knowing witho+t knowing how many c+stomers are stolen thro+gh a,-ertising. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
158
5".
Re.er to S!enario 17&3. &' Inc.=s ,ominant strategy is to a. refrain from a,-ertising regar,less of whether Krown Inc. a,-ertises. 2. a,-ertise only if Krown Inc. a,-ertises. c. a,-ertise only if Krown Inc. ,oes not a,-ertise. ,. a,-ertise regar,less of whether Krown Inc. a,-ertises. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
Re.er to S!enario 17&3. In 19 10 %ongress passe, a law that 2anne, cigarette a,-ertising on tele-ision. If cigarette companies are profit ma;imi<ers0 it is likely that a. neither company oppose, the 2an on a,-ertising. 2. Krown Inc. s+e, the fe,eral go-ernment on gro+n,s that the 2an constit+tes a ci-il rights -iolation. c. 2oth companies s+e, the fe,eral go-ernment on gro+n,s that the 2an constit+tes a ci-il rights -iolation. ,. 2oth companies retaliate, with 2lack!market operations. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: A NAT: Analytic 'S%: Applicati-e 5(.
Two s+specte, ,r+g ,ealers are stoppe, 2y the highway patrol for spee,ing. The officer searches the car an, fin,s a small 2ag of mari*+ana an, arrests the two. D+ring the interrogation0 each is separately offere, the following: QIf yo+ confess to ,ealing ,r+gs an, testify against yo+r partner0 yo+ will 2e gi-en imm+nity an, release, while yo+r partner will get 1" years in prison. If yo+ 2oth confess0 yo+ will each get 3 years.Q If neither confesses0 there is no e-i,ence of ,r+g ,ealing0 an, the most they co+l, get is one year each for possession of mari*+ana. If each s+specte, ,r+g ,ealer follows a ,ominant strategy0 what sho+l, he:she ,o? a. %onfess regar,less of the partner=s ,ecision 2. %onfess only if the partner confesses c. Don4t confess regar,less of the partner=s ,ecision ,. Don4t confess only if the partner ,oesn4t confess DIF: ( #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
ANS: A NAT: Analytic 'S%: Applicati-e 5/.
A lack of cooperation 2y oligopolists trying to maintain monopoly profits a. is ,esira2le for society as a whole. 2. is not ,esira2le for society as a whole. c. may or may not 2e ,esira2le for society as a whole. ,. is not a concern ,+e to antitr+st laws. DIF: ( #$%: $ligopoly REF: T$&: 1 !( %oll+sion 'S%: Interpreti-e
$ligopolists may well 2e a2le to reach their preferre,0 cooperati-e o+tcome if a. the n+m2er of oligopolists is large. 2. they learn that a Nash e6+ili2ri+m is in their 2est long!term interests. c. a s+fficient n+m2er of firms can 2e pers+a,e, to lower their prices. ,. the game they play is repeate, a s+fficient n+m2er of times. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
ANS: D NAT: Analytic 'S%: Interpreti-e 53.
'artha an, $leg are competitors in a local market an, each is trying to ,eci,e if it is worthwhile to a,-ertise. If 2oth of them a,-ertise0 each will earn a profit of A30""". If neither of them a,-ertise0 each will earn a profit of A1"0""". If one a,-ertises an, the other ,oesn=t0 then the one who a,-ertises will earn a profit of A130""" an, the other will earn A 0""". To earn the highest profit0 'artha a. sho+l, a,-ertise0 an, she will earn A30""". 2. sho+l, a,-ertise0 an, she will earn A130""". c. sho+l, not a,-ertise0 an, she will earn A1"0""". ,. has no ,ominant strategy.
ANS: D NAT: Analytic 'S%: Applicati-e 55. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
159
Kar2 an, S+e are competitors in a local market. Each is trying to ,eci,e if it is 2etter to a,-ertise on TH0 on ra,io0 or not at all. If they 2oth a,-ertise on TH0 each will earn a profit of A30""". If they 2oth a,-ertise on ra,io0 each will earn a profit of A 0""". If neither a,-ertises at all0 each will earn a profit of A1"0""". If one a,-ertises on TH an, other a,-ertises on ra,io0 then the one a,-ertising on TH will earn A80""" an, the other will earn A/0""". If one a,-ertises on TH an, the other ,oes not a,-ertise0 then the one a,-ertising on TH will earn A130""" an, the other will earn A(0""". If one a,-ertises on ra,io an, the other ,oes not a,-ertise0 then the one a,-ertising on ra,io will earn A1(0""" an, the other will earn A10""". If 2oth follow their ,ominant strategy0 then Kar2 will a. a,-ertise on TH an, earn A30""". 2. a,-ertise on ra,io an, earn A 0""". c. not a,-ertise at all an, earn A1"0""". ,. None of the a2o-e is correct. Kar2 an, S+e ,o not ha-e ,ominant strategies. DIF: / #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
ANS: A NAT: Analytic 'S%: Applicati-e 5 .
Da-e an, An,y are competitors in a local market. Each is trying to ,eci,e if it is 2etter to a,-ertise on TH0 on ra,io0 or not at all. If they 2oth a,-ertise on TH0 each will earn a profit of A10""". If they 2oth a,-ertise on ra,io0 each will earn a profit of A 0""". If neither a,-ertises at all0 each will earn a profit of A1"0""". If one a,-ertises on TH an, other a,-ertises on ra,io0 then the one a,-ertising on TH will earn A50""" an, the other will earn A30""". If one a,-ertises on TH an, the other ,oes not a,-ertise0 then the one a,-ertising on TH will earn A110""" an, the other will earn A(0""". If one a,-ertises on ra,io an, the other ,oes not a,-ertise0 then the one a,-ertising on ra,io will earn A1(0""" an, the other will earn A10""". If 2oth follow their ,ominant strategy0 then Da-e will a. a,-ertise on TH an, earn A10""". 2. a,-ertise on ra,io an, earn A 0""". c. a,-ertise on TH an, earn A110""". ,. not a,-ertise an, earn A1"0""". DIF: / #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
)eorge an, Lerry are competitors in a local market. Each is trying to ,eci,e if it is 2etter to a,-ertise on TH0 on ra,io0 or not at all. If they 2oth a,-ertise on TH0 each will earn a profit of A/0""". If they 2oth a,-ertise on ra,io0 each will earn a profit of A30""". If neither a,-ertises at all0 each will earn a profit of A1"0""". If one a,-ertises on TH an, the other a,-ertises on ra,io0 then the one a,-ertising on TH will earn A10""" an, the other will earn A(0""". If one a,-ertises on TH an, the other ,oes not a,-ertise0 then the one a,-ertising on TH will earn A80""" an, the other will earn A30""". If one a,-ertises on ra,io an, the other ,oes not a,-ertise0 then the one a,-ertising on ra,io will earn A90""" an, the other will earn A50""". If 2oth follow their ,ominant strategy0 then )eorge will a. a,-ertise on TH an, earn A/0""". 2. a,-ertise on ra,io an, earn A30""". c. a,-ertise on TH an, earn A80""". ,. not a,-ertise an, earn A1"0""". DIF: / #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
1 "
59.
#a+rel an, Lanet are competitors in a local market an, each is trying to ,eci,e if it is worthwhile to a,-ertise. If 2oth of them a,-ertise0 each will earn a profit of A30""". If neither of them a,-ertise0 each will earn a profit of A1"0""". If one a,-ertises an, the other ,oesn=t0 then the one who a,-ertises will earn a profit of A1(0""" an, the other will earn A(0""". In this -ersion of the prisoners= ,ilemma0 if the game is playe, only once0 #a+rel sho+l, a. a,-ertise0 2+t if the game is to 2e repeate, many times she sho+l, pro2a2ly not a,-ertise. 2. a,-ertise0 an, if the game is to 2e repeate, many times she sho+l, still pro2a2ly a,-ertise. c. not a,-ertise0 2+t if the game is to 2e repeate, many times she sho+l, pro2a2ly a,-ertise. ,. not a,-ertise0 an, if the game is to 2e repeate, many times she sho+l, still not a,-ertise. DIF: / #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
Table 17-1!. This ta2le shows a game playe, 2etween two players0 A an, K. The payoffs in the ta2le are shown as F&ayoff to A0 &ayoff to KG. 8 A ". "p Down (ight F(0 (G F10 /G +eft F/0 1G F"0 "G
Re.er to Ta/le 17&110 7hich of the following statements a2o+t this game is tr+e? a. >p is a ,ominant strategy for A an, Right is a ,ominant strategy for K. 2. >p is a ,ominant strategy for A an, #eft is a ,ominant strategy for K. c. Down is a ,ominant strategy for A an, Right is a ,ominant strategy for K. ,. Down is a ,ominant strategy for A an, #eft is a ,ominant strategy for K. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Ta/le 17&110 7hich o+tcome is the Nash e6+ili2ri+m in this game? a. >p!Right 2. >p!#eft c. Down!Right ,. Down!#eft DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Table 17-13. This ta2le shows a game playe, 2etween two players0 A an, K. The payoffs in the ta2le are shown as F&ayoff to A0 &ayoff to KG. 8 +eft Center (ight "p F10 1G F50 (G F/0 1G A %iddle F(0 (G F10 5G F30 G Down F/0 (G F30 3G F10 /G (. Re.er to Ta/le 17&120 7hich of the following statements regar,ing this game is tr+e? a. Koth players ha-e a ,ominant strategy. 2. &layer A has a ,ominant strategy0 2+t player K ,oes not ha-e a ,ominant strategy. c. &layer A ,oes not ha-e a ,ominant strategy0 2+t player K ,oes ha-e a ,ominant strategy. ,. Neither player has a ,ominant strategy. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
ANS: D NAT: Analytic /.
Re.er to Ta/le 17&120 7hich of the following o+tcomes represents a Nash e6+ili2ri+m in the game? a. >p!%enter 2. 'i,,le!Right c. Down!#eft ,. Down!%enter
ANS: K NAT: Analytic DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
1 1
Table 17-14. This ta2le shows a game playe, 2etween two players0 A an, K. The payoffs are gi-en in the ta2le as F&ayoff to A0 &ayoff to KG. 8 Center F(0 3G F30 /G F10 1G
A 1.
"p %iddle Down
+eft F10 (G F/0 1G F10 /G
(ight F/0 /G F30 (G F50 1G
Re.er to Ta/le 17&130 7hich of the following statements is tr+e regar,ing this game? a. Koth players ha-e a ,ominant strategy. 2. Neither player has a ,ominant strategy. c. A has a ,ominant strategy0 2+t K ,oes not ha-e a ,ominant strategy. ,. K has a ,ominant strategy0 2+t A ,oes not ha-e a ,ominant strategy. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Ta/le 17&130 This ta2le shows a game playe, 2etween two players0 A an, K. The payoffs in the ta2le are shown as F&ayoff to A0 &ayoff to KG. 7hich of the following o+tcomes represents a Nash e6+ili2ri+m in the game? a. 'i,,le!%enter 2. Down!%enter c. >p!#eft ,. 'ore than one of the a2o-e is a Nash e6+ili2ri+m in this game. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Table 17-15. This ta2le shows a game playe, 2etween two firms0 Firm A an, Firm K. In this game each firm m+st ,eci,e how m+ch o+tp+t F,G to pro,+ce: ( +nits or / +nits. The profit for each firm is gi-en in the ta2le as F&rofit for Firm A0 &rofit for Firm KG. Fir7 8 Fir7 A 5. ,-. ,-/ ,-. F1"0 1"G F1(0 8G ,-/ F80 1(G F50 5G
Re.er to Ta/le 17&140 In this game0 a. neither player has a ,ominant strategy. 2. 2oth players ha-e a ,ominant strategy. c. Firm A has a ,ominant strategy0 2+t Firm K ,oes not ha-e a ,ominant strategy. ,. Firm K has a ,ominant strategy0 2+t Firm A ,oes not ha-e a ,ominant strategy. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Dominant strategy
ANS: A NAT: Analytic 'S%: Applicati-e .
Re.er to Ta/le 17&140 7hich of the following o+tcomes represent the Nash e6+ili2ri+m in this game? a. ,C( for Firm A an, ,C/ for Firm K. 2. ,C/ for Firm A an, ,C( for Firm K. c. There is no Nash e6+ili2ri+m in this game since neither player has a ,ominant strategy. ,. Koth a an, 2 are correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Nash e6+ili2ri+m
1 (
Table 17-16. This ta2le shows a game playe, 2etween two firms0 Firm A an, Firm K. In this game each firm m+st ,eci,e how m+ch o+tp+t F,G to pro,+ce: 3 +nits or 5 +nits. The profit for each firm is gi-en in the ta2le as F&rofit for Firm A0 &rofit for Firm KG. Fir7 8 Fir7 A 8. ,-0 ,-1 ,-0 F(10 (1G F/"0 1"G ,-1 F1"0 /"G F190 19G
Re.er to Ta/le 17&150 The ,ominant strategy For Firm A is to pro,+ce a. 3 +nits an, the ,ominant strategy for Firm K is to pro,+ce 3 +nits. 2. 3 +nits an, the ,ominant strategy for Firm K is to pro,+ce 5 +nits. c. 5 +nits an, the ,ominant strategy for Firm K is to pro,+ce 3 +nits. ,. 5 +nits an, the ,ominant strategy for Firm K is to pro,+ce 5 +nits. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma . Dominant strategy
Re.er to Ta/le 17&150 The Nash e6+ili2ri+m for this game is a. 3 +nits of o+tp+t for Firm A an, 3 +nits of o+tp+t for Firm K. 2. 3 +nits of o+tp+t for Firm A an, 5 +nits of o+tp+t for Firm K. c. 5 +nits of o+tp+t for Firm A an, 3 +nits of o+tp+t for Firm K. ,. 5 +nits of o+tp+t for Firm A an, 5 +nits of o+tp+t for Firm K. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma . Nash e6+ili2ri+m
ANS: D NAT: Analytic 'S%: Applicati-e 8".
The prisoners= ,ilemma game a. is a sit+ation in which two players 2oth ha-e ,ominant strategies which lea, to the highest total payoff for the two players. 2. has no Nash e6+ili2ri+m since players0 after agreeing to play their ,ominant strategy0 will ha-e an incenti-e to switch to another strategy. c. has a Nash e6+ili2ri+m0 2+t the Nash e6+ili2ri+m o+tcome is not the o+tcome the players wo+l, agree to if they co+l, cooperate with each other. ,. Koth a an, c are correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
In a prisoners= ,ilemma game0 a. the sol+tion when playing the game once will 2e the same as the sol+tion when the players play the game repeate,ly0 since agreements cannot 2e maintaine, in a prisoners= ,ilemma. 2. if the players play the game repeate,ly0 the players can achie-e a higher payoff0 on a-erage0 than when they play the game only once. c. repeate, play will always res+lt in a 2etter o+tcome for 2oth players than when the game is playe, only once. ,. the tit!for!tat strategy in repeate, play re6+ires players to always select the opposite strategy as their opponent. DIF: ( #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
1 /
Table 17-17. %onsi,er a small town that has two grocery stores from which resi,ents can choose to 2+y a gallon of milk. The store owners each m+st make a ,ecision to set a high milk price or a low milk price. The payoff ta2le0 showing profit per week0 is pro-i,e, 2elow. The profit in each cell is shown as FStore 10 Store (G. Store 1 Store 1 8(. +ow 2rice 3igh 2rice +ow 2rice F3""0 3""G F1""0 8""G 3igh 2rice F8""0 1""G F53"0 53"G
Re.er to Ta/le 17&170 If grocery store ( sets a low price0 what price sho+l, grocery store 1 set? An, what will grocery store 1=s payoff e6+al? a. #ow price0 A3"" 2. Digh price0 A8"" c. #ow price0 A1"" ,. Digh price0 A1"" DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
ANS: A NAT: Analytic 8/.
Re.er to Ta/le 17&170 If grocery store ( sets a high price0 what price sho+l, grocery store 1 set? An, what will grocery store 1=s payoff e6+al? a. #ow price0 A8"" 2. Digh price0 A53" c. #ow price0 A1"" ,. Digh price0 A8"" DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Ta/le 17&170 If grocery store 1 sets a low price0 what price sho+l, grocery store ( set? An, what will grocery store (=s payoff e6+al? a. #ow price0 A3"" 2. Digh price0 A8"" c. #ow price0 A1"" ,. Digh price0 A53" DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Ta/le 17&170 If grocery store 1 sets a high price0 what price sho+l, grocery store ( set? An, what will grocery store (=s payoff e6+al? a. #ow price0 A8"" 2. Digh price0 A1"" c. #ow price0 A3"" ,. Digh price0 A53" DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Ta/le 17&170 7hat is grocery store 1=s ,ominant strategy? a. )rocery store 1 ,oes not ha-e a ,ominant strategy. 2. )rocery store 1 sho+l, always set a low price. c. )rocery store 1 sho+l, always set a high price. ,. )rocery store 1 sho+l, set a low price when grocery store ( sets a low price0 an, grocery store 1 sho+l, set a high price when grocery store ( sets a high price. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
1 1
8 .
Re.er to Ta/le 17&170 7hat is grocery store (=s ,ominant strategy? a. )rocery store ( ,oes not ha-e a ,ominant strategy. 2. )rocery store ( sho+l, always set a low price. c. )rocery store ( sho+l, always set a high price. ,. )rocery store ( sho+l, set a low price when grocery store 1 sets a low price0 an, grocery store ( sho+l, set a high price when grocery store 1 sets a high price. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
Re.er to Ta/le 17&170 7hat is the Nash E6+ili2ri+m of this price!setting game? a. )rocery store 1: #ow price )rocery store (: #ow price 2. )rocery store 1: #ow price )rocery store (: Digh price c. )rocery store 1: Digh price )rocery store (: Dow price ,. )rocery store 1: Digh price )rocery store (: Digh price DIF: ( #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
Table 17-18. Amy an, Deather are two college roommates who 2oth prefer a clean common space in their ,orm room0 2+t neither en*oys cleaning. The roommates m+st each make a ,ecision to either clean or not clean the ,orm room=s common space. The payoff ta2le for this sit+ation is pro-i,e, 2elow0 where the higher a player4s payoff n+m2er0 the 2etter off that player is. The payoffs in each cell are shown as Fpayoff for Amy0 payoff for DeatherG. Heather A7y 89. Clean Dont Clean Clean F 30 3G F1""0 13G Dont Clean F130 1""G F("0 ("G
Re.er to Ta/le 17&160 If Deather chooses to clean0 then Amy will a. clean an, Deather4s payoff will 2e 3. 2. not clean an, Deather4s payoff will 2e 1"". c. clean an, Deather4s payoff will 2e 13. ,. not clean an, Deather4s payoff will 2e (". DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Ta/le 17&160 If Deather chooses not to clean0 then Amy will a. clean0 an, Amy4s payoff will 2e 1"". 2. not clean0 an, Amy4s payoff will 2e (". c. clean0 an, Amy4s payoff will 2e 13. ,. not clean0 an, Amy4s payoff will 2e 3. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Ta/le 17&160 If Amy chooses to clean0 then Deather will a. clean0 an, Deather4s payoff will 2e 3. 2. not clean0 an, Deather4s payoff will 2e 1"". c. clean0 an, Deather4s payoff will 2e 13. ,. not clean0 an, Deather4s payoff will 2e (". DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
9(. Re.er to Ta/le 17&160 If Amy chooses to not clean0 then Deather will a. clean0 an, Deather4s payoff will 2e (". 2. not clean0 an, Deather4s payoff will 2e 1"". c. clean0 an, Deather4s payoff will 2e 3. ,. not clean0 an, Deather4s payoff will 2e (". DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
1 3
ANS: D NAT: Analytic 9/.
Re.er to Ta/le 17&160 7hat is Amy=s ,ominant strategy? a. Amy has no ,ominant strategy. 2. Amy sho+l, always choose %lean. c. Amy sho+l, always choose Don4t %lean. ,. Amy has two ,ominant strategies0 %lean an, Don4t %lean0 ,epen,ing on the choice Deather makes. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
Re.er to Ta/le 17&160 7hat is Deather=s ,ominant strategy? a. Deather has no ,ominant strategy. 2. Deather sho+l, always choose %lean. c. Deather sho+l, always choose Don4t %lean. ,. Deather has two ,ominant strategies0 %lean an, Don4t %lean0 ,epen,ing on the choice Amy makes. DIF: ( #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
Re.er to Ta/le 17&160 7hat is the Nash E6+ili2ri+m in this ,orm room cleaning game? a. Amy: %lean Deather: %lean 2. Amy: Don=t %lean Deather: %lean c. Amy: %lean Deather: Don=t %lean ,. Amy: Don=t %lean Deather: Don=t %lean DIF: ( #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
1 5
Figure 17&1. Lohn an, 'ichael are roommates. $n a partic+lar ,ay0 their apartment nee,s to 2e cleane,. Each person has to ,eci,e whether to take part in cleaning. At the en, of the ,ay0 either the apartment will 2e completely clean Fif one or 2oth roommates take part in cleaningG0 or it will remain ,irty Fif neither roommate cleansG. 7ith happiness meas+re, on a scale of 1 F-ery +nhappyG to 1" F-ery happyG0 the possi2le o+tcomes are as follows:
@ohn<) ;e!i)ion Clean Lohn=s happiness C Clean #i!hael<) ;e!i)ion ;on<t !lean ' ichael=s happiness C 1" ' ichael=s happiness C 1 ' ichael=s happiness C 8 Lohn=s happiness C / ' ichael=s happiness C / Lohn=s happiness C 5 ;on<t !lean Lohn=s happiness C 1"
95.
Re.er to Figure 17&1. The ,ominant strategy for Lohn is to a. clean0 an, the ,ominant strategy for 'ichael is to clean. 2. clean0 an, the ,ominant strategy for 'ichael is to refrain from cleaning. c. refrain from cleaning0 an, the ,ominant strategy for 'ichael is to clean. ,. refrain from cleaning0 an, the ,ominant strategy for 'ichael is to refrain from cleaning. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Dominant strategy
ANS: D NAT: Analytic 'S%: Applicati-e 9 .
Re.er to Figure 17&1. In p+rs+ing his own self!interest0 'ichael will a. refrain from cleaning whether or not Lohn cleans. 2. clean only if Lohn cleans. c. clean only if Lohn refrains from cleaning. ,. clean whether or not Lohn cleans. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Dominant strategy
ANS: A NAT: Analytic 'S%: Applicati-e 98.
Re.er to Figure 17&1. If this game is playe, only once0 then the most likely o+tcome is that a. Lohn an, 'ichael 2oth clean. 2. Lohn cleans an, 'ichael ,oes not clean. c. 'ichael cleans an, Lohn ,oes not clean. ,. neither Lohn nor 'ichael cleans. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Re.er to Figure 17&1. In p+rs+ing his own self!interest0 Lohn will a. refrain from cleaning whether or not 'ichael cleans. 2. clean only if 'ichael cleans. c. clean only if 'ichael refrains from cleaning. ,. clean whether or not 'ichael cleans. DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Dominant strategy
1"". Re.er to Figure 17&1. The possi2le o+tcome in which 2oth Lohn an, 'ichael clean is analogo+s to which of the following o+tcomes of the ,+opoly game? a. The ,+opolists coll+,e to achie-e the monopoly o+tcome. 2. The ,+opolists coll+,e to achie-e the monopolistically!competiti-e o+tcome. c. The o+tcome is the one that is most prefera2le for cons+mers of the ,+opolists4 pro,+ct. ,. The o+tcome is the one that is least prefera2le for 2oth the ,+opolists an, for the cons+mers of their pro,+ct. ANS: A NAT: Analytic DIF: / #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
Figure 17&2. Ratie an, Taylor are roommates. $n a partic+lar ,ay0 their lawn nee,s to 2e mowe,. Each person has to ,eci,e whether to take part in mowing the lawn. At the en, of the ,ay0 either the lawn will 2e mowe, Fif one or 2oth roommates take part in mowingG0 or it will remain +nmowe, Fif neither roommate mowsG. 7ith happiness meas+re, on a scale of 1 F-ery +nhappyG to 1" F-ery happyG0 the possi2le o+tcomes are as follows:
Aatie<) ;e!i)ion #o* Ratie=s happiness C #o* Taylor<) ;e!i)ion ;on<t 7o* Taylor=s happiness C 8 Taylor=s happiness C 1 Taylor=s happiness C Ratie=s happiness C 3 Taylor=s happiness C ( Ratie=s happiness C 1 ;on<t 7o* Ratie=s happiness C 1"
1"1. Re.er to Figure 17&2. The ,ominant strategy for Taylor is to a. mow0 an, the ,ominant strategy for Ratie is to mow. 2. mow0 an, the ,ominant strategy for Ratie is to refrain from mowing. c. refrain from mowing0 an, the ,ominant strategy for Ratie is to mow. ,. refrain from mowing0 an, there is no ,ominant strategy for Ratie. ANS: D NAT: Analytic 'S%: Applicati-e DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Dominant strategy
1"(. Re.er to Figure 17&2. If this game is playe, only once0 then which of the following o+tcomes is the most likely one? a. Ratie an, Taylor 2oth mow. 2. Ratie mows an, Taylor ,oes not mow. c. Taylor mows an, Ratie ,oes not mow. ,. All of the a2o-e o+tcomes are e6+ally likely. ANS: K NAT: Analytic DIF: / #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
1"/. Re.er to Figure 17&2. In p+rs+ing her own self!interest0 Taylor will a. refrain from mowing whether or not Ratie mows. 2. mow only if Ratie mows. c. mow only if Ratie refrains from mowing. ,. mow whether or not Ratie mows.
1 8
DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Dominant strategy
1"1. Re.er to Figure 17&2. In p+rs+ing her own self!interest0 Ratie will a. refrain from mowing whether or not Taylor mows. 2. mow only if Taylor mows. c. mow only if Taylor refrains from mowing. ,. mow whether or not Taylor mows. ANS: % NAT: Analytic 'S%: Applicati-e DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Dominant strategy
Table 17-19. The %hicken )ame is name, for a contest in which ,ri-ers test their co+rage 2y ,ri-ing straight at each other. Lohn an, &a+l ha-e a common interest to a-oi, crashing into each other0 2+t they also ha-e a personal0 competing interest to not t+rn first to ,emonstrate their co+rage to those o2ser-ing the contest. The payoff ta2le for this sit+ation is pro-i,e, 2elow. The payoffs are shown as FLohn0 &a+lG. aul @ohn Turn Dri e #traight Turn F1"0 1"G F("0 3G Dri e #traight F30 ("G F"0 "G
1"3. Re.er to Ta/le 17&19. If &a+l chooses T+rn0 what will Lohn choose to ,o an, what will Lohn4s payoff e6+al? a. T+rn0 1" 2. Dri-e Straight0 (" c. T+rn0 3 ,. Dri-e Straight0 " ANS: K NAT: Analytic DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
1"5. Re.er to Ta/le 17&19. If &a+l chooses Dri-e Straight0 what will Lohn choose to ,o an, what will Lohn4s payoff e6+al? a. T+rn0 3 2. Dri-e Straight0 " c. T+rn0 (" ,. Dri-e Straight0 3 ANS: A NAT: Analytic DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
1" . Re.er to Ta/le 17&19. If Lohn chooses T+rn0 what will &a+l choose to ,o an, what will &a+l=s payoff e6+al? a. T+rn0 1" 2. Dri-e Straight0 (" c. T+rn0 3 ,. Dri-e Straight0 " ANS: K NAT: Analytic DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
1"8. Re.er to Ta/le 17&19. If Lohn chooses Dri-e Straight0 what will &a+l choose to ,o an, what will &a+l=s payoff e6+al? a. T+rn0 3 2. Dri-e Straight0 " c. T+rn0 1" ,. Dri-e Straight0 ("" ANS: A NAT: Analytic DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
1"9. Re.er to Ta/le 17&19. 7hat is &a+l=s ,ominant strategy? a. &a+l has no ,ominant strategy. 2. &a+l sho+l, always choose T+rn. c. &a+l sho+l, always choose Dri-e Straight. ,. &a+l has more than one ,ominant strategy. ANS: A NAT: Analytic 'S%: Applicati-e DIF: ( #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
1 9
11". Re.er to Ta/le 17&19. 7hat is Lohn=s ,ominant strategy? a. Lohn has no ,ominant strategy. 2. Lohn sho+l, always choose T+rn. c. Lohn sho+l, always choose Dri-e Straight. ,. Lohn has two ,ominant strategies. ANS: A NAT: Analytic 'S%: Applicati-e DIF: ( #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
111. Re.er to Ta/le 17&19. Dow many Nash e6+ili2ria are there in this %hicken game? a. " 2. 1 c. ( ,. / ANS: % NAT: Analytic 'S%: Applicati-e DIF: / #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
11(. Re.er to Ta/le 17&19. 7hat is FareG the Nash e6+ili2ri+m Fe6+ili2riaG in this %hicken game? a. Lohn: T+rn &a+l: T+rn 2. Lohn: T+rn &a+l: Dri-e Straight c. Lohn: Dri-e Straight &a+l: T+rn ,. Koth 2 an, c are Nash e6+ili2ria ANS: D NAT: Analytic 'S%: Applicati-e DIF: / #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
11/. In the prisoners4 ,ilemma0 a. the prisoners easily coll+,e in or,er to achie-e the 2est possi2le payoff for 2oth. 2. only one player has a ,ominant strategy. c. when each player chooses his ,ominant strategy the players achie-e the 2est *oint o+tcome. ,. when each player chooses his ,ominant strategy the players reach a Nash e6+ili2ri+m. ANS: D NAT: Analytic 'S%: Analytical DIF: ( #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
111. In the game in which two oil companies own a,*acent oil fiel,s0 the companies will not +se the oil efficiently 2eca+se a. neither company has a ,ominant strategy in the game. 2. the companies coll+,e an, pro,+ce a 6+antity of oil that is less than the socially!efficient 6+antity. c. the pool from which they reco-er the oil is a common reso+rce. ,. the pool from which they reco-er the oil is not large eno+gh to allow 2oth companies to earn a positi-e profit. ANS: % NAT: Analytic 'S%: Interpreti-e DIF: ( #$%: $ligopoly REF: T$&: 1 !( %ommon reso+rces . &risoners= ,ilemma
18"
113. An e6+ili2ri+m occ+rs in a game when a. price e6+als marginal cost. 2. 6+antity s+pplie, e6+als 6+antity ,eman,e,. c. all in,epen,ent strategies co+nter2alance all ,ominant strategies. ,. all players follow a strategy that they ha-e no incenti-e to change. ANS: D NAT: Analytic 'S%: Interpreti-e DIF: ( #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
115. The players in a two!person game are choosing 2etween Strategy N an, Strategy O. If the secon, player chooses Strategy N0 the first player=s 2est o+tcome is to select N. If the secon, player chooses Strategy O0 the first player=s 2est o+tcome is to select N. For the first player0 Strategy N is calle, a a. ,ominant strategy. 2. coll+si-e strategy. c. repeate,!trial strategy. ,. cartel strategy. ANS: A NAT: Analytic 'S%: Applicati-e DIF: 1 #$%: $ligopoly REF: T$&: 1 !( Dominant strategy
11 . S+ppose that two poker players 2elie-e that they are s+perior players to the rest of the people at their ta2le. F+rther s+ppose that the two players make an agreement to conce,e han,s to each other in or,er to ,ri-e the other players from the game first. Economists wo+l, mo,el s+ch 2eha-ior as a. monopolistic competition. 2. game theory. c. pre,atory pricing. ,. a ,ominant strategy. ANS: K NAT: Analytic DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
118. After initial s+ccess0 the $&E% cartel saw the price of oil an, the re-en+es of its mem2ers ,ecline ,+e0 in part0 to a. the low elasticity of ,eman, for oil in the short r+n. 2. the large n+m2er of 2+yers from each mem2er nation. c. s+rging ,eman, for oil in the early 198"s. ,. $&E% mem2ers failing to pro,+ce their agree,!+pon pro,+ction le-els. ANS: D NAT: Analytic DIF: 1 #$%: $ligopoly REF: T$&: 1 !( %artels 'S%: Interpreti-e
Table 17-! . Krian an, 'att own the only two 2icycle repair shops in town. Each m+st choose 2etween a low price for repair work an, a high price. The ann+al economic profit from each strategy is in,icate, in the ta2le. The profits are shown as F'att0 KrianG in each cell. 8rian +ow 2rice 3igh 2rice +ow 2rice F13""0 13""G F3"""0 (""G #att 3igh 2rice F(""0 /"""G F1"""0 1"""G 119. Re.er to Ta/le 17&1%. 7hich of the following statements is correct? a. 'att=s ,ominant strategy is to charge a low price. 2. Krian=s ,ominant strategy is to charge a high price. c. The ,ominant strategy for 2oth Krian an, 'att is to charge a low price. ,. 'att=s ,ominant strategy is to charge a high price. ANS: A NAT: Analytic DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory 'S%: Applicati-e
181
1(". Re.er to Ta/le 17&1%. 7hich of the following statements is correct if Krian an, 'att will play this game only once? a. The Nash e6+ili2ri+m is the high price. 2. A Nash e6+ili2ri+m cannot 2e esta2lishe, +nless Krian an, 'att coll+,e. c. A Nash e6+ili2ri+m cannot 2e esta2lishe, witho+t the players repeating the game. ,. The Nash e6+ili2ri+m price is the low price. ANS: D NAT: Analytic 'S%: Applicati-e DIF: / #$%: $ligopoly REF: T$&: 1 !( Nash e6+ili2ri+m
Table 17-!1. Two 2ottle, 2e-erage man+fact+rers FFirm A an, Firm KG ,etermine that they co+l, lower their costs0 an, th+s increase their profits0 if they re,+ce, their a,-ertising 2+,gets. K+t in or,er for the plan to work0 each firm m+st agree to refrain from a,-ertising. Each firm 2elie-es that a,-ertising works 2y increasing the ,eman, for the firm4s pro,+ct0 2+t each firm also 2elie-es that if neither firm a,-ertises0 the costs sa-ings will o+tweigh the lost sales. #iste, in the ta2le 2elow are the in,i-i,+al profits for each firm. *reaks the agreement and ad ertises Firm A profit C A90""" Firm K profit C A10""" Firm A profit C A110""" Firm K profit C A/03"" Fir7 A %aintains the agreement and does not ad ertise Firm A profit C A80""" Firm K profit C A50""" Firm A profit C A1"0""" Firm K profit C A30"""
Fir7 8
*reaks the agreement and ad ertises %aintains the agreement and does not ad ertise
1(1. Re.er to Ta/le 17&110 S+ppose that the two firms0 A an, K0 make an agreement to withhol, any a,-ertising for one month in or,er to lower each firm4s costs an, raise each firm4s profits. If the firms reach the Nash e6+ili2ri+m0 a. 2oth firms will choose not to a,-ertise. 2. firm A will choose not to a,-ertise0 2+t firm K will 2reak the agreement an, choose to a,-ertise. c. firm K will choose not to a,-ertise0 2+t firm A will 2reak the agreement an, choose to a,-ertise. ,. 2oth firms will 2reak the agreement an, choose to a,-ertise. ANS: D NAT: Analytic 'S%: Analytical DIF: / #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
1((. Re.er to Ta/le 17&110 At the Nash e6+ili2ri+m0 how m+ch profit will Firm A earn? a. A80""" 2eca+se firm A will maintain the agreement not to a,-ertise0 2+t firm K will 2reak the agreement an, choose to a,-ertise. 2. A90""" 2eca+se each firm will 2reak the agreement an, choose to a,-ertise. c. A1"0""" 2eca+se each firm will maintain the agreement an, choose not to a,-ertise. ,. A110""" 2eca+se firm K will maintain the agreement not to a,-ertise0 2+t firm A will 2reak the agreement an, choose to a,-ertise. ANS: K NAT: Analytic 'S%: Analytical DIF: / #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
1(/. Re.er to Ta/le 17&110 At the Nash e6+ili2ri+m0 how m+ch profit will Firm K earn? a. A/03"" 2eca+se firm K will maintain the agreement not to a,-ertise0 2+t firm A will 2reak the agreement an, choose to a,-ertise. 2. A10""" 2eca+se each firm will 2reak the agreement an, choose to a,-ertise. c. A30""" 2eca+se each firm will maintain the agreement an, choose not to a,-ertise. ,. A50""" 2eca+se firm A will maintain the agreement not to a,-ertise0 2+t firm K will 2reak the agreement an, choose to a,-ertise. ANS: K NAT: Analytic 'S%: Analytical DIF: / #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
18(
1(1. In which of the following games is it clearly the case that the cooperati-e o+tcome of the game is goo, for the two players and goo, for society? a. Two g+ilty criminals ha-e 2een capt+re, 2y the police0 an, each prisoner ,eci,es whether to confess or to remain silent. 2. Two airlines ,ominate air tra-el 2etween %ity A an, %ity K0 an, each airline ,eci,es whether to charge a IhighJ airfare or a IlowJ airfare. c. Two ,+opoly firms acco+nt for all of the pro,+ction in a market0 an, each firm ,eci,es whether to pro,+ce a IhighJ amo+nt of o+tp+t or a IlowJ amo+nt of o+tp+t. ,. Two oil companies own a,*acent oil fiel,s o-er a common pool of oil0 an, each company ,eci,es whether to ,rill one well or two wells. ANS: D NAT: Analytic 'S%: Interpreti-e DIF: / #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
1(3. In which of the following games is it clearly the case that the cooperati-e o+tcome of the game is good for the two players an, bad for society? a. Two oil companies own a,*acent oil fiel,s o-er a common pool of oil0 an, each company ,eci,es whether to ,rill one well or two wells. 2. Two airlines ,ominate air tra-el 2etween %ity A an, %ity K0 an, each airline ,eci,es whether to charge a IhighJ airfare or a IlowJ airfare on flights 2etween those two cities. c. Two s+perpowers ,eci,e whether to 2+il, new weapons or to ,isarm. ,. In all of the a2o-e cases0 the cooperati-e o+tcome of the game is goo, for the two players an, 2a, for society ANS: K NAT: Analytic 'S%: Interpreti-e DIF: / #$%: $ligopoly REF: T$&: 1 !( &risoners= ,ilemma
1(5. No2el pri<e!winner Thomas Schelling a. oppose, the +se of game theory as a means of analy<ing strategic sit+ations. 2. +se, mathematics to gi-e precise form+lations to game theory. c. ,escri2e, ,r+g a,,iction as a Igame against oneself.J ,. ha, his life portraye, in the mo-ie A *eautiful %ind. ANS: % NAT: Analytic 'S%: Interpreti-e DIF: ( #$%: $ligopoly REF: T$&: 1 !( )ame theory . Economists
Se!%2 & Oligopoly & u/li! oli!y to*ar$ Oligopolie)

#ULT' LE CHO'CE 1. From society4s stan,point0 cooperation among oligopolists is a. ,esira2le0 2eca+se it lea,s to less conflict among firms an, a wi,er -ariety of pro,+cts for cons+mers. 2. ,esira2le0 2eca+se it lea,s to an o+tcome closer to the competiti-e o+tcome than what wo+l, 2e o2ser-e, in the a2sence of cooperation. c. +n,esira2le0 2eca+se it lea,s to o+tp+t le-els that are too low an, prices that are too high. ,. +n,esira2le0 2eca+se it lea,s to o+tp+t le-els that are too high an, prices that are too high. DIF: ( #$%: $ligopoly REF: T$&: 1 !/ %ooperation . $ligopoly
ANS: % NAT: Analytic 'S%: Interpreti-e (.
The Sherman Antitr+st Act a. was passe, to enco+rage *+,icial leniency in the re-iew of cooperati-e agreements. 2. was concerne, with self!interest ,ominate, Nash e6+ili2ri+ms in prisoners= ,ilemma games. c. enhance, the a2ility to enforce cartel agreements. ,. restricte, the a2ility of competitors to engage in cooperati-e agreements. DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
/. The Sherman Act ma,e cooperati-e agreements a. +nenforcea2le o+tsi,e of esta2lishe, *+,icial re-iew processes. 2. enforcea2le with proper *+,icial re-iew. c. a criminal conspiracy. ,. a crime0 2+t ,i, not gi-e ,irection on possi2le penalties. DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
18/
The Sherman Antitr+st Act was passe, in a. 18/5. 2. 189". c. 1911. ,. 1915. DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: K NAT: Analytic 'S%: Definitional 3.
The Sherman Antitr+st Act prohi2its price!fi;ing in the sense that a. competing e;ec+ti-es cannot e-en talk a2o+t fi;ing prices. 2. competing e;ec+ti-es can talk a2o+t fi;ing prices0 2+t they cannot take action to fi; prices. c. a price!fi;ing agreement can lea, to prosec+tion pro-i,e, the go-ernment can show that the p+2lic was not well!ser-e, 2y the agreement. ,. None of the a2o-e is correct. The Sherman Act ,i, not a,,ress the matter of price!fi;ing. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
The Sherman Antitr+st Act prohi2its e;ec+ti-es of competing companies from a. fi;ing prices0 2+t it ,oes not prohi2it them from talking a2o+t fi;ing prices. 2. e-en talking a2o+t fi;ing prices. c. sharing with one another their knowle,ge of game theory. ,. failing to stan, 2y agreements that they ha, ma,e with one another. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: K NAT: Analytic 'S%: Interpreti-e .
The Sherman Antitr+st Act a. o-ert+rne, cent+ries!ol, -iews of English an, American *+,ges on agreements among competitors. 2. ha, the effect of ,isco+raging pri-ate laws+its against conspiring oligopolists. c. strengthene, the %layton Act. ,. ele-ate, agreements among conspiring oligopolists from an +nenforcea2le contract to a criminal conspiracy. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
The %layton Act a. prece,e, the Sherman Act. 2. replace, the Sherman Act. c. strengthene, the Sherman Act. ,. was specifically ,esigne, to re,+ce the a2ility of cartels to organi<e. DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
181
9.
Accor,ing to the %layton Act0 a. lawyers are gi-en an incenti-e to re,+ce the n+m2er of cases in-ol-ing cooperati-e arrangements. 2. in,i-i,+als can s+e to reco-er ,amages from illegal cooperati-e agreements. c. the go-ernment was a2le to incarcerate the %E$ of a firm for illegal pricing arrangements. ,. pri-ate laws+its are ,isco+rage,. DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: K NAT: Analytic 'S%: Interpreti-e 1".
If a person can pro-e that she was ,amage, 2y an illegal arrangement to restrain tra,e0 that person can s+e an, reco-er a. the ,amages she s+staine,0 as pro-i,e, for in the Sherman Act. 2. the ,amages she s+staine,0 as pro-i,e, for in the %layton Act. c. three times the ,amages she s+staine,0 as pro-i,e, for in the Sherman Act. ,. three times the ,amages she s+staine,0 as pro-i,e, for in the %layton Act. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
Antitr+st laws in general are +se, to a. pre-ent oligopolists from acting in ways that make markets less competiti-e. 2. enco+rage oligopolists to p+rs+e cooperati-e!interest at the e;pense of self!interest. c. enco+rage fri-olo+s laws+its among competiti-e firms. ,. enco+rage all firms to c+t pro,+ction le-els an, c+t prices. DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: A NAT: Analytic 'S%: Interpreti-e 1(.
Economists claim that a resale price maintenance agreement is not anti!competiti-e 2eca+se a. s+ppliers are ne-er a2le to e;ercise noncompetiti-e market power. 2. if a s+pplier has market power0 it will 2e likely to e;ert that power thro+gh wholesale price rather than retail price. c. retail markets are inherently noncompetiti-e. ,. retail cartel agreements cannot increase retail profits. DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Resale price maintenance
ANS: K NAT: Analytic 'S%: Interpreti-e 1/.
Ass+me that &each %omp+ters has entere, into a resale price maintenance agreement with %omp+ter S+per Stores Inc. F%SS Inc.G 2+t not with %omp+'art. In this case0 a. the wholesale price of &each comp+ters will 2e ,ifferent for %SS Inc. than it is for %omp+'art. 2. &each comp+ters will ne-er increase profits 2y ha-ing a resale price maintenance agreement with all retail o+tlets that sell its pro,+cts. c. %omp+'art will 2enefit from c+stomers who go to %SS Inc. for information a2o+t ,ifferent comp+ters. ,. %SS Inc. will sell &each comp+ters at a lower price than %omp+'art. DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Resale price maintenance
Ass+me that Apple %omp+ter has entere, into an enforcea2le resale price maintenance agreement with %omp+ter S+per Stores Inc. F%SS Inc.G an, 7al!'art. 7hich of the following will always 2e tr+e? a. The wholesale price of Apple comp+ters will 2e ,ifferent for %SS Inc. than it is for 7al!'art. 2. 7al!'art will 2enefit from c+stomers who go to %SS Inc. for information a2o+t ,ifferent comp+ters. c. %SS Inc. will sell Apple comp+ters at a lower price than 7al!'art. ,. 7al!'art an, %SS Inc. will always sell Apple %omp+ters for e;actly the same price.
ANS: D NAT: Analytic 'S%: Interpreti-e 13. DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Resale price maintenance
183
The practice of tying is illegal on the gro+n,s that a. it allows firms to e;pan, their market power. 2. it allows firms to form coll+si-e arrangements. c. it pre-ents firms from forming coll+si-e agreements. ,. the Sherman Act e;plicitly prohi2ite, s+ch agreements. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: Tying
The practice of tying is +se, to a. enhance the enforcement of antitr+st laws. 2. enco+rage the enforcement of coll+si-e agreements. c. control the retail price of a collection of relate, pro,+cts. ,. package pro,+cts to sell at a com2ine, price closer to a 2+yer=s total willingness to pay. DIF: 1 #$%: $ligopoly REF: T$&: 1 !/ Tying 'S%: Definitional
ANS: D NAT: Analytic Scenario 17-5
Ass+me that a local 2ank sells two ser-ices0 checking acco+nts an, AT' car, ser-ices. The 2ank4s only two c+stomers are 'r. Donethat an, 's. Keenthere. 'r. Donethat is willing to pay A8 a month for the 2ank to ser-ice his checking acco+nt an, A( a month for +nlimite, +se of his AT' car,. 's. Keenthere is willing to pay only A3 for a checking acco+nt0 2+t is willing to pay A9 for +nlimite, +se of her AT' car,. Ass+me that the 2ank can pro-i,e each of these ser-ices at <ero marginal cost. 1 . Re.er to S!enario 17&4. If the 2ank is +na2le to +se tying0 what is the profit!ma;imi<ing price to charge for a checking acco+nt? a. A1/ 2. A9 c. A8 ,. A3 DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Tying 'S%: Applicati-e
Re.er to S!enario 17&4. If the 2ank is +na2le to +se tying0 what is the profit!ma;imi<ing price to charge for +nlimite, +se of an AT' car,? a. A11 2. A11 c. A9 ,. A( DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Tying 'S%: Applicati-e
Re.er to S!enario 17&4. If the 2ank is a2le to +se tying to price checking acco+nt an, AT' ser-ices0 what is the profit!ma;imi<ing price to charge for the Qtie,Q goo,? a. A11 2. A1" c. A9 ,. A8 DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Tying 'S%: Applicati-e
185
(".
Re.er to S!enario 17&4. Dow m+ch a,,itional profit can the 2ank earn 2y switching to the +se of a tying strategy to price checking acco+nts an, AT' ser-ice rather than pricing these ser-ices separately? a. A11 2. A11 c. A ,. A1 DIF: / #$%: $ligopoly REF: T$&: 1 !/ Tying 'S%: Applicati-e
7hen in,i-i,+als are ,amage, 2y an illegal arrangement to restrain tra,e0 which law allows them to p+rs+e ci-il action an, reco-er +p to three times the ,amages s+staine,? a. Tra,e Damage Act 2. %layton Act c. Sherman Act ,. No law allows in,i-i,+als to p+rs+e ci-il action an, reco-er +p to three times the ,amages s+staine,. DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: K NAT: Analytic 'S%: Interpreti-e ((.
7hich of the following gro+ps or entities has the a+thority to initiate legal s+its to enforce antitr+st laws? a. the >.S. L+stice Department 2. pri-ate citi<ens c. corporations ,. All of the a2o-e are correct. DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: D NAT: Analytic 'S%: Interpreti-e (/.
7ho wrote0 Q&eople of the same tra,e sel,om meet together0 2+t the con-ersation en,s in a conspiracy against the p+2lic0 or in some ,i-ersion to raise prices.Q? a. Thomas Lefferson 2. A,am Smith c. Kill )ates ,. Ro2ert A;elro, DIF: 1 #$%: $ligopoly REF: T$&: 1 !/ $ligopoly 'S%: Interpreti-e
ANS: K NAT: Analytic (1.
The practice of selling a pro,+ct to retailers an, re6+iring the retailers to charge a specific price for the pro,+ct is calle, a. fi;e, retail pricing. 2. resale price maintenance. c. cost pl+s pricing. ,. +nfair tra,e. DIF: 1 #$%: $ligopoly REF: T$&: 1 !/ Resale price maintenance
ANS: K NAT: Analytic 'S%: Definitional (3.
The practice of re6+iring someone to 2+y two or more items together0 rather than separately0 is calle, a. resale maintenance. 2. pro,+ct fi;ing. c. tying. ,. free!ri,ing. DIF: 1 #$%: $ligopoly REF: T$&: 1 !/ Tying 'S%: Definitional
(5.
18
If #e-i Stra+ss S %o. were to re6+ire e-ery retailer that carrie, its clothing to charge c+stomers A1( for each pair of *eans0 #e-i Stra+ss S %o. wo+l, 2e practicing a. resale price maintenance. 2. fi;e, retail pricing. c. tying. ,. cost pl+s pricing. DIF: 1 #$%: $ligopoly REF: T$&: 1 !/ Resale price maintenance
ANS: A NAT: Analytic 'S%: Interpreti-e ( .
7hich of the following prohi2its e;ec+ti-es of competing firms from e-en talking a2o+t fi;ing prices? a. Sherman Act 2. %layton Act c. Fe,eral Tra,e %ommission ,. >.S. L+stice Department DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: A NAT: Analytic 'S%: Interpreti-e (8.
7hich go-ernment entity is charge, with in-estigating an, enforcing antitr+st laws? a. the >.S. L+stice Department 2. the >.S. %ommerce Department c. the >.S. Treas+ry Department ,. the K+rea+ of Alcohol0 To2acco0 an, Firearms DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: A NAT: Analytic 'S%: Interpreti-e (9.
The arg+ment that cons+mers will not 2e willing to pay any more for two items sol, as one than they wo+l, for the two items sol, separately is +se, to *+stify the legality of which of the following? a. resale price maintenance 2. tying c. pre,atory pricing ,. free!ri,ing DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Tying 'S%: Interpreti-e
ANS: K NAT: Analytic /".
$&E% is a2le to raise the price of its pro,+ct 2y a. tying. 2. setting pro,+ction le-els for each of its mem2ers. c. increasing the s+pply of oil a2o-e the competiti-e le-el. ,. imposing resale price maintenance agreements on mem2ers. DIF: ( #$%: $ligopoly REF: T$&: 1 !/ %artels 'S%: Interpreti-e
ANS: K NAT: Analytic /1.
All cartels are inherently reliant on a. a hori<ontal ,eman, c+r-e. 2. an inelastic ,eman, for their pro,+ct. c. the cooperation of their mem2ers. ,. enforcement of antitr+st laws. DIF: 1 #$%: $ligopoly REF: T$&: 1 !/ %artels 'S%: Interpreti-e
ANS: % NAT: Analytic /(.
In 19 10 %ongress passe, a law that 2anne, cigarette a,-ertising on tele-ision. After the 2an it is most likely that the FiG profits of cigarette companies increase,. FiiG prices of cigarettes increase,. FiiiG total costs inc+rre, 2y cigarette companies increase,.
188
a. 2. c. ,.
FiG only FiG an, FiiG FiiG an, FiiiG FiG0 FiiG0 an, FiiiG DIF: ( #$%: $ligopoly REF: T$&: 1 !/ $ligopoly 'S%: Applicati-e
ANS: A NAT: Analytic //.
To mo-e the allocation of reso+rces closer to the social optim+m0 policymakers sho+l, typically try to in,+ce firms in an oligopoly to a. coll+,e with each other. 2. form -ario+s ,egrees of cartels. c. compete rather than cooperate with each other. ,. cooperate rather than compete with each other. DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Economic welfare
ANS: % NAT: Analytic 'S%: Interpreti-e /1.
7hich of the following is necessarily a pro2lem with antitr+st laws? a. They may target a 2+siness whose practices appear to 2e anti!competiti-e 2+t in fact ha-e legitimate p+rposes. 2. They promote competition. c. They limit monopoly power. ,. They prohi2it firms from entering or e;iting a market. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: A NAT: Analytic 'S%: Interpreti-e /3.
Altho+gh the practice of pre,atory pricing is a common claim in antitr+st s+its0 some economists are skeptical of this arg+ment 2eca+se they 2elie-e a. the e-i,ence of its practice is nearly impossi2le to collect. 2. pre,atory pricing is not a profita2le 2+siness strategy. c. e-en tho+gh pre,atory pricing is a profita2le 2+siness strategy0 it is on 2alance 2eneficial to society. ,. pre,atory pricing act+ally attracts new firms to the in,+stry. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: &re,atory pricing
7hich of the following statements is tr+e? a. The proper scope of antitr+st laws is well ,efine, an, ,efinite. 2. Antitr+st laws foc+s on granting certain firms the option to form a cartel. c. &olicymakers ha-e the ,iffic+lt task of ,etermining whether some firms= ,ecisions ha-e legitimate p+rposes e-en tho+gh they appear anti!competiti-e. ,. There is always a nee, for policymakers to try to limit a firm=s pricing power0 regar,less of whether the firm=s market is competiti-e0 a monopoly0 or an oligopoly. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: % NAT: Analytic 'S%: Interpreti-e / .
A central iss+e in the 'icrosoft antitr+st laws+it in-ol-e, 'icrosoft=s integration of its Internet 2rowser into its 7in,ows operating system0 to 2e sol, as one +nit. This practice is known as a. tying. 2. pre,ation. c. wholesale maintenance. ,. retail maintenance. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: Tying
ANS: A NAT: Analytic 'S%: Interpreti-e
/8.
189
A key iss+e in the 'icrosoft case in-ol-e, whether or not the 2+n,ling of the 7in,ows operating system with an Internet 2rowser was an e;ample of a. pre,atory pricing. 2. tying. c. resale price maintenance. ,. price ,iscrimination. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: Tying
7hich of the following statements is false? a. The %layton Act allows triple ,amages in ci-il laws+its in or,er to enco+rage laws+its against conspiring oligopolists. 2. 'any economists ,efen, the practice of resale price maintenance on the gro+n,s that it may help sol-e a free!ri,er pro2lem. c. 'ost economists agree that pre,atory pricing is a profita2le 2+siness strategy that +s+ally preser-es market power. ,. The >.S. S+preme %o+rt=s -iew that the practice of tying +s+ally allows a firm to e;ten, its market power is not generally s+pporte, 2y economic theory. DIF: ( #$%: $ligopoly REF: T$&: 1 !/ &re,atory pricing
ANS: % NAT: Analytic 'S%: Interpreti-e 1".
%onsi,er a market ser-e, 2y a monopolist0 Firm A. A new firm0 Firm K0 enters the market an,0 as a res+lt0 Firm A lowers its price to try to ,ri-e Firm K o+t of the market. This practice is known as a. resale price maintenance. 2. pre,atory tying. c. tying. ,. pre,atory pricing. DIF: 1 #$%: $ligopoly REF: T$&: 1 !/ &re,atory pricing
Two %E$s from ,ifferent firms in the same market coll+,e to fi; the price in the market. This action -iolates the a. %layton Act of 1911. 2. Sherman Antitr+st Act of 189". c. %ran,all!&+tnam r+ling of 198/. ,. Lackson!'icrosoft r+ling of (""". DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: K NAT: Analytic 'S%: Interpreti-e 1(.
The %layton Act of 1911 allows those harme, 2y illegal arrangements to restrain tra,e to a. s+e for +p to two times the ,amages they inc+rre,. 2. s+e for +p to three times the ,amages they inc+rre,. c. s+e for +p to fo+r times the ,amages they inc+rre,. ,. s+e for ,amages0 2+t only for the act+al amo+nt of ,amages they inc+rre,. DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: K NAT: Analytic 'S%: Definitional 1/.
The man+fact+rer of Ko<< Ra,ios sells ra,ios to retail stores for A3"" each0 an, it re6+ires the retail stores to charge c+stomers A33" per ra,io. Any retailer that charges less than A33" wo+l, -iolate its contract with Ko<< Ra,ios. 7hat ,o economists call this 2+siness practice? a. pre,atory pricing 2. resale price maintenance c. tying ,. le-erage
19"
DIF: 1 #$%: $ligopoly REF: T$&: 1 !/ Resale price maintenance
S+ppose that 'akemoney 'o-ies pro,+ces two new films T The 3ulk an, The 2iano. 'akemoney offers theaters the two films together at a single price 2+t will not s+pply the mo-ies separately. 7hat ,o economists call this 2+siness practice? a. pre,atory pricing 2. resale price maintenance c. tying ,. le-erage DIF: 1 #$%: $ligopoly REF: T$&: 1 !/ Tying 'S%: Interpreti-e
The primary p+rpose of antitr+st legislation is to a. protect small 2+sinesses. 2. protect the competiti-eness of >.S. markets. c. protect the prices of American!ma,e pro,+cts. ,. ens+re firms earn only a fair profit. DIF: ( REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
A law that enco+rages market competition 2y prohi2iting firms from gaining or e;ercising e;cessi-e market power is a. a patent. 2. impossi2le to enforce. c. an antitr+st law. ,. an e;ternality law. DIF: 1 REF: 1 !/ #$%: The role of go-ernment T$&: Antitr+st
ANS: % NAT: Analytic 'S%: Definitional 1 .
Resale price maintenance in-ol-es a firm a. coll+,ing with another firm to restrict o+tp+t an, raise prices. 2. selling two in,i-i,+al pro,+cts together for a single price rather than selling each pro,+ct in,i-i,+ally at separate prices. c. temporarily c+tting the price of its pro,+ct to ,ri-e a competitor o+t of the market. ,. re6+iring that the firm reselling its pro,+ct ,o so at a specifie, price. DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Resale price maintenance
Acme %omp+ter %o. sells comp+ters to retail stores for A1"". If Acme re6+ires the retailers to charge c+stomers A3"" for the comp+ters0 then it is engaging in a. resale price maintenance. 2. pre,atory pricing. c. tying. ,. monopolistic competition. DIF: 1 #$%: $ligopoly REF: T$&: 1 !/ Resale price maintenance
ANS: A NAT: Analytic 'S%: Definitional 19.
&re,atory pricing in-ol-es a firm a. coll+,ing with another firm to restrict o+tp+t an, raise prices. 2. selling two in,i-i,+al pro,+cts together for a single price rather than selling each pro,+ct in,i-i,+ally at separate prices. c. temporarily c+tting the price of its pro,+ct to ,ri-e a competitor o+t of the market. ,. re6+iring that the firm reselling its pro,+ct ,o so at a specifie, price.
ANS: % NAT: Analytic 'S%: Definitional 3". DIF: ( #$%: $ligopoly REF: T$&: 1 !/ &re,atory pricing
191
&re,atory pricing occ+rs when a firm a. e;ercises its oligopoly power 2y raising its price thro+gh the formation of a cartel. 2. e;ercises its monopoly power 2y raising its price. c. c+ts its prices in or,er make itself more competiti-e. ,. c+ts its prices temporarily in or,er to ,ri-e o+t any competition. DIF: 1 #$%: $ligopoly REF: T$&: 1 !/ &re,atory pricing
Tying in-ol-es a firm a. coll+,ing with another firm to restrict o+tp+t an, raise prices. 2. selling two in,i-i,+al pro,+cts together for a single price rather than selling each pro,+ct in,i-i,+ally at separate prices. c. temporarily c+tting the price of its pro,+ct to ,ri-e a competitor o+t of the market. ,. re6+iring that the firm reselling its pro,+ct ,o so at a specifie, price. DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Tying 'S%: Definitional
ANS: K NAT: Analytic 3(.
A partic+lar ca2le TH company re6+ires a ho+sehol, to s+2scri2e to its high!spee, Internet ser-ice if it s+2scri2es to ca2le TH0 an, -ice -ersa. This practice a. is referre, to as tying. 2. is regar,e, 2y some economists as a form of price ,iscrimination. c. is contro-ersial among economists 2eca+se they ,isagree on whether it has a,-erse effects for society as a whole. ,. All of the a2o-e are correct. DIF: ( #$%: $ligopoly REF: T$&: 1 !/ Tying 'S%: Interpreti-e
Se!%3 & Oligopoly & Con!lu)ion

#ULT' LE CHO'CE 1. The story of the prisoners4 ,ilemma shows why a. pre,atory pricing is clearly not in society4s 2est interest. 2. economists are +nanimo+s in con,emning resale price maintenance0 since it ine-ita2ly re,+ces competition. c. oligopolies can fail to act in,epen,ently0 e-en when in,epen,ent ,ecision!making is in their 2est interest. ,. oligopolies can fail to cooperate0 e-en when cooperation is in their 2est interest. DIF: 1 #$%: $ligopoly REF: T$&: 15!1 %ooperation . $ligopoly

Chapter 17

Transféré par

Informations du document

Description originale:

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Chapter 17

Transféré par

Droits d'auteur :

Formats disponibles

Chapter 17 Oligopoly

DIF: / #$%: $ligopoly 1.

NAT: Analytic 'S%: Applicati-e

1 !( NAT: Analytic &risoners= ,ilemma

Se!%% & Oligopoly

ANS: % NAT: Analytic (.

ANS: A NAT: Analytic /.

ANS: D NAT: Analytic 1.

ANS: % NAT: Analytic

Se!%1 & Oligopoly & #ar(et) *ith Only a Fe* Seller)

ANS: % NAT: Analytic 'S%: Interpreti-e /.

ANS: K NAT: Analytic 1.

ANS: D NAT: Analytic 3.

ANS: % NAT: Analytic 5.

ANS: D NAT: Analytic .

ANS: K NAT: Analytic 8.

ANS: A NAT: Analytic 9.

ANS: % NAT: Analytic

ANS: % NAT: Analytic 'S%: Applicati-e

ANS: % NAT: Analytic 'S%: Applicati-e 1(.

ANS: K NAT: Analytic 'S%: Applicati-e 1/.

ANS: D NAT: Analytic 'S%: Applicati-e 11.

ANS: D NAT: Analytic 'S%: Applicati-e 13.

ANS: A NAT: Analytic 'S%: Applicati-e 15.

ANS: K NAT: Analytic 'S%: Analytical

ANS: % NAT: Analytic 'S%: Analytical

ANS: D NAT: Analytic 'S%: Applicati-e 19.

ANS: K NAT: Analytic (".

ANS: D NAT: Analytic

ANS: K NAT: Analytic ((.

ANS: A NAT: Analytic (/.

ANS: % NAT: Analytic 'S%: Applicati-e (1.

ANS: K NAT: Analytic 'S%: Interpreti-e (3.

ANS: D NAT: Analytic (5.

ANS: D NAT: Analytic

ANS: A NAT: Analytic (8.

ANS: % NAT: Analytic (9.

ANS: % NAT: Analytic /".

ANS: A NAT: Analytic

ANS: % NAT: Analytic

ANS: A NAT: Analytic 'S%: Applicati-e //.

ANS: D NAT: Analytic 'S%: Applicati-e /1.

ANS: % NAT: Analytic 'S%: Applicati-e /3.

ANS: K NAT: Analytic 'S%: Applicati-e /5.

ANS: % NAT: Analytic 'S%: Applicati-e

ANS: A NAT: Analytic /8.

ANS: D NAT: Analytic 'S%: Applicati-e /9.

ANS: % NAT: Analytic 'S%: Applicati-e 1".

ANS: K NAT: Analytic 'S%: Applicati-e

ANS: K NAT: Analytic 'S%: Applicati-e 1(.

ANS: A NAT: Analytic 'S%: Applicati-e

ri!e A1( 11 1" 9 8 5 3 1 / ( 1 "

ANS: % NAT: Analytic

ANS: D NAT: Analytic 'S%: Applicati-e 13.

ANS: D NAT: Analytic 15.

ANS: D NAT: Analytic 'S%: Applicati-e 1 .

ANS: K NAT: Analytic 'S%: Applicati-e

ANS: K NAT: Analytic 19.

ANS: % NAT: Analytic

ANS: A NAT: Analytic 'S%: Analytical 31.

ANS: A NAT: Analytic 3(.

ANS: % NAT: Analytic 'S%: Interpreti-e 3/.

ANS: % NAT: Analytic 'S%: Interpreti-e 31.

Se!%1 & Oligopoly & #ar(et) ith Only a Fe Seller)