Ch17 Oligopoly And Business Strategy Complete Test Bank - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 17 – Oligopoly and business strategy
TRUE/FALSE
1. Game theory is used to study oligopoly, but is not needed in the study of competitive and monopoly markets.
DIF: Easy TOP: Introduction
2. When oligopolists collude and act like a monopoly, they charge a price above marginal cost. When they act independently, they charge a price equal to marginal cost.
DIF: Easy TOP: Markets with only a few sellers
3. Larger cartels have a greater probability of reaching the monopoly outcome than do smaller cartels.
DIF: Easy TOP: Competition, monopolies and cartels
4. In a competitive market, strategic interactions among the firms are not important.
DIF: Easy TOP: Game theory and the economics of cooperation
5. The story of the prisoners’ dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members.
DIF: Easy TOP: The prisoners’ dilemma
6. In the prisoner’s dilemma game, the dominant strategy is for each player to not confess.
DIF: Moderate TOP: The prisoners’ dilemma
7. The game that oligopolists play in trying to reach the monopoly outcome is similar to the game that the two prisoners play in the prisoners’ dilemma.
DIF: Easy TOP: Oligopolies as a prisoners’ dilemma
8. In the case of oligopoly markets, self-interest prevents cooperation and leads to an inferior outcome for the parties involved.
DIF: Easy TOP: Oligopolies as a prisoners’ dilemma
9. When prisoners’ dilemma games are repeated over and over, sometimes the threat of penalty causes both parties to cooperate.
DIF: Moderate TOP: Case study: The prisoners’ dilemma tournament
10. Total profit for an oligopolist is more than that of a perfectly competitive firm.
DIF: Easy TOP: Between monopoly and perfect competition
11. A collusive agreement over the quantity of output is difficult for firms to maintain because each firm has a profit incentive to break the agreement and increase production.
DIF: Easy TOP: Competition, monopolies and cartels
12. If all the oligopolists in a market collude to form a cartel, total profit for the cartel is less than that of a monopolist.
DIF: Moderate TOP: Competition, monopolies and cartels
13. When an oligopolist decreases production, it is likely that the output effect is less than the price effect.
DIF: Easy TOP: The equilibrium for an oligopoly
14. The price-effect of an increase in production refers to the extra profit an oligopolist receives from outputting one extra unit.
DIF: Moderate TOP: How the size of an oligopoly affects the market outcome
15. Oligopolies can end up looking like competitive firms if the number of firms is large and they do not cooperate.
DIF: Moderate TOP: The equilibrium for an oligopoly
16. In an oligopoly, the actions of any one market participant can have an impact on the marginal revenue of other participants.
DIF: Difficult TOP: The equilibrium for an oligopoly
17. If the output effect is larger than the price effect, an oligopolist will decrease production.
DIF: Moderate TOP: How the size of an oligopoly affects the mrket outcome
18. If both countries agree on a certain level of arms in an arms race game, social welfare will decrease if both countries keep their end of the bargain.
DIF: Difficult TOP: Arms races
19. It is individually irrational for players to cooperate in the prisoner’s dilemma game because cooperation is not the dominant strategy.
DIF: Difficult TOP: The prisoners’ dilemma
20. Society will always be better off if the prisoners’ dilemma game is repeated numerous times in an oligopoly market.
DIF: Moderate TOP: The prisoners’ dilemma and the welfare of society
21. If the prisoners’ dilemma game is repeated, the co-operative outcome can be supported as an equilibrium.
DIF: Moderate TOP: The prisoners’ dilemma and the welfare of society
22. In the prisoners’ dilemma game, each player always has a dominate strategy.
DIF: Moderate TOP: The prisoners’ dilemma and the welfare of society
23. If duopolists individually pursue their own self-interest when deciding how much to produce, the price they are able to charge for their product will be less than the monopoly price.
DIF: Moderate TOP: Competition, monopolies and cartels
24. If duopolists individually pursue their own self-interest when deciding how much to produce, the price they are able to charge for their product will be equal to the monopoly price.
DIF: Moderate TOP: Competition, monopolies and cartels
25. In the long run, profits will be higher in a monopolistically competitive market than in an oligopoly.
DIF: Easy TOP: Between monopoly and perfect competition
26. The collective action problem (where everyone is better off if action is coordinated, but free riding on the actions of others is possible) is an example of a prisoners’ dilemma game.
DIF: Moderate TOP: The prisoners’ dilemma
27. One economic example of prisoner’s dilemma is overuse of a common resource like an oil-deposit.
DIF: Easy TOP: Common resources
28. When an oligopoly market is in Nash equilibrium a firm will choose its best pricing strategy, given the strategies that it observes other firms taking.
DIF: Moderate TOP: The equilibrium for an oligopoly
29. When an oligopoly market is in Nash equilibrium, firms will not act as profit maximisers.
DIF: Moderate TOP: The equilibrium for an oligopoly
30. Insight from the prisoners’ dilemma suggests we will exploit common resources, even when it is in the best interests of society to manage them.
DIF: Difficult TOP: Common resources and the prisoners’ dilemma
MULTIPLE CHOICE
1. Markets with only a few sellers, each offering a product similar or identical to the others, are typically referred to as:
A. | monopolistically competitive markets |
B. | oligopoly markets |
C. | monopoly markets |
D. | competitive markets |
DIF: Easy TOP: Between monopoly and perfect competition
2. The general term for market structures that fall somewhere in between monopoly and perfect competition is:
A. | oligopoly markets |
B. | monopolistically competitive markets |
C. | incomplete markets |
D. | imperfectly competitive markets |
DIF: Easy TOP: Between monopoly and perfect competition
3. Monopolistically competitive firms are typically characterised by:
A. | many firms selling identical products |
B. | a few firms selling similar or identical products |
C. | a few firms selling highly different products |
D. | many firms selling similar, but not identical products |
DIF: Easy TOP: Between monopoly and perfect competition
4. An imperfectly market that has only two firms is called:
A. | a duopoly |
B. | a split monopoly |
C. | a triopoly |
D. | a binary market |
DIF: Easy TOP: A duopoly example
5. Oligopoly markets are characterised by:
A. | the universal existence of collusive agreements |
B. | a fall in collective profits if a cartel is organised |
C. | the pursuit of self-interest by profit-maximising firms always maximising collective profits |
D. | a conflict between cooperation and self-interest |
DIF: Easy TOP: The equilibrium for an oligopoly
6. Firms in industries that have competitors but, at the same time, do not face so much competition that they are price takers, are operating in either a(n):
A. | oligopoly or perfectly competitive market |
B. | oligopoly or monopolistically competitive market |
C. | oligopoly or monopoly market |
D. | monopoly or monopolistically competitive market |
DIF: Moderate TOP: Between monopoly and perfect competition
7. An important characteristic of an oligopoly market structure is that:
A. | there are a large number of firms in the industry that produce identical products |
B. | products typically sell where price is equal to the marginal cost of production |
C. | the actions of one seller can have a large impact on the profitability of other sellers |
D. | the actions of one seller can have no impact on the profitability of other sellers because the market is so large |
DIF: Easy TOP: Between monopoly and perfect competition
8. One key difference between an oligopoly market and a competitive market is that oligopolistic firms:
A. | are interdependent while competitive firms are not |
B. | sell completely unrelated products while competitive firms do not |
C. | sell their product at a price equal to marginal cost while competitive firms do not |
D. | are price takers while competitive firms are not |
DIF: Moderate TOP: Between monopoly and perfect competition
9. Which of the following markets is most likely to be an oligopoly?
A. | the distribution of electricity across the power grid |
B. | air travel between two cities on Australia’s east coast |
C. | lunchtime take-away coffee service in Melbourne’s CBD |
D. | pizza restaurants in Sydney’s CBD, where each restaurant has its own signature pizza |
DIF: Easy TOP: Introduction
10. Suppose a firm makes a product whose price decreases as the output increases. The firm is in a market with many other firms. It is most likely that the firm:
A. | is a monopoly |
B. | makes a product that is identical to the other firms, hence is in a competitive market |
C. | makes a similar product to others, hence is in a monopolistically competitive market |
D. | makes zero economic profit in the long run |
DIF: Easy TOP: Between monopoly and perfect competition
11. If there are many firms participating in a market, the market is either:
A. | an oligopoly or perfectly competitive |
B. | an oligopoly or monopolistically competitive |
C. | perfectly competitive or monopolistically competitive |
D. | all of the above are possible |
DIF: Easy TOP: Between monopoly and perfect competition
12. As a group, oligopolists would always be better off if they would act collectively:
A. | as a single monopolist |
B. | as a single competitor |
C. | as if they were each seeking to maximise their own profit |
D. | in a manner that would prohibit collusive agreements |
DIF: Easy TOP: The equilibrium for an oligopoly
13. The best way for oligopolists to increase their profits is to:
A. | agree to limit production |
B. | increase production to increase the size of the market |
C. | decrease prices to gain larger market share |
D. | operate according to their own self-interest |
DIF: Easy TOP: The equilibrium for an oligopoly
14. Illegal cartel agreements are:
A. | difficult to maintain because each firm has a profit incentive to break the agreement |
B. | more likely to occur when there are many firms as the potential profits are higher |
C. | common in monopolistically competitive markets |
D. | not detrimental to total welfare as any loss of consumer surplus is offset by higher firm profits |
DIF: Moderate TOP: The equilibrium for an oligopoly
Table 16-1
The table below shows the total demand for viewing a rare penguin species at a local reserve. Ecotour companies have to build discreet viewing hides for tourists to view the penguins. Each ecotour company has to pay a fixed fee of $5000 for the right to build on the reserve. Assume that hides can be supplied to tourists at zero marginal cost. Tickets are sold to tourists to use the viewing hides.
Quantity (Visits) | Price ($ ticket) |
0 | 48 |
2000 | 36 |
4000 | 24 |
6000 | 12 |
8000 | 8 |
10 000 | 4 |
12 000 | 0 |
Quantity (Visits) | Price ($ ticket) | Revenue |
0 | 12 | 0 |
1000 | 10 | 10k |
2000 | 8 | 16k |
3000 | 6 | 18k |
4000 | 4 | 16k |
5000 | 2 | 10k |
6000 | 0 | 0 |
Any firm can change tickets by steps of 500 only. Any 500 step of quantity is assumed to be sold at the midpoint of the two prices (eg. 3500 tickets would be sold for $5)
15. Refer to Table 16-1. If there is only one ecotourist company in this market, what ticket price would it charge for its hides to maximise its profit?
A. | $2 |
B. | $4 |
C. | $6 |
D. | $8 |
DIF: Difficult TOP: Between monopoly and perfect competition
16. Refer to Table 16-1. Assume that there are two ecotourist companies operating in this market. If they are able to collude on the price of tickets to sell, what price will they charge, and how many tickets will they collectively sell?
A. | $2 and 5000 tickets |
B. | $4 and 4000 tickets |
C. | $6 and 3000 tickets |
D. | $8 and 2000 tickets |
DIF: Difficult TOP: A duopoly example
17. Refer to Table 16-1. Assume that there are two profit-maximising ecotourist companies operating in this market. Further assume that they are able to collude on the price of the tickets they sell. As part of their collusive agreement, they decide to take an equal share of the market. How much profit will each company make?
A. | $18 000 |
B. | $16 000 |
C. | $9000 |
D. | $4500 |
DIF: Difficult TOP: Competition, monopolies and cartels
18. Refer to Table 16-1. Assume that there are two profit-maximising ecotourist companies operating in this market. Further assume that they are not able to collude on price and quantity of the tickets they sell. How many tickets will be sold by each firm when this market reaches a Nash equilibrium?
A. | 1000 |
B. | 2000 |
C. | 3000 |
D. | 4000 |
DIF: Difficult TOP: Competition, monopolies and cartels
*Each firm reasons that the monopoly price ($6) earns them $9000 each (1500 tickets each). If one of them increases output by 500, the price drops to $5 (midpoint). At 3500 tickets, the firm that drops its price earns 2000 x $5 = $10 000. The other firm earns $7500.
At an output of 4000 each firm is earning $8000. If it increases by a further 500, price drops to $3, output for this firm is 2500, and revenue is $7500. There is no incentive to increase revenue further, so the NE is for both firms to increase output to 2000.
19. Refer to Table 16-1. Assume that there are two profit-maximising ecotourist companies operating in this market. Further assume that they are not able to collude on the price and quantity of tickets they sell. How much profit will each firm earn when this market reaches a Nash equilibrium?
A. | $0 |
B. | $8000 |
C. | $3000 |
D. | each firm will incur economic losses in a Nash equilibrium |
DIF: Difficult TOP: Competition, monopolies and cartels
20. Refer to Table 16-1. Assume that there are two profit-maximising ecotourist companies operating in this market. Further assume that they are not able to collude on the price and quantity of tickets they sell. What price will the tickets be sold at when this market reaches a Nash equilibrium?
A. | $0 |
B. | $4 |
C. | $6 |
D. | from the information given in the table, we can’t determine price in a Nash equilibrium |
DIF: Difficult TOP: Competition, monopolies and cartels
21. Refer to Table 16-1. Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash equilibrium, it:
A. | is always in their best interest to supply more to the market |
B. | is always in their best interest to leave supply unchanged |
C. | is always in their best interest to supply less to the market |
D. | may be in their best interest to do any of the above, depending on market conditions |
DIF: Moderate TOP: The equilibrium for an oligopoly
Table 16-2
In the following duopoly game, the two firms can either set the price of their product high or low. The game is represented in the table below.
Firm B | |||
High Price | Low Price | ||
Firm A | High Price | Firm A gets $1000 Firm B gets $1000 | Firm A get $1250 Firm B gets $1100 |
Low Price | Firm A gets $800 Firm B gets $800 | Firm A gets $900 Firm B gets $900 | |
22. Refer to Table 16-2. The Nash equilibrium for this game is for:
A. | both firms to sell the product at a low price |
B. | both firms to sell the product at a high price |
C. | firm A to sell at a low price and for firm B to sell at a high price |
D. | firm A to sell at a high price and for firm B to sell at a low price |
DIF: Moderate TOP: The prisoners’ dilemma
23. Refer to Table 16-2. If the two firms wanted to achieve the optimal level of profit they would:
A. | both sell at a low price |
B. | both sell at a high price |
C. | collude to let firm A sell at a low price and firm B to sell at a high price |
D. | collude to let firm A sell at a high price and firm B to sell at a low price |
DIF: Moderate TOP: The prisoners’ dilemma
24. Refer to Table 16-2. What is the profit firm A will earn if it plays its dominant strategy:
A. | $1000 if firm B has a high price and $1250 if firm B has a low price |
B. | $1000 if firm B has a high price and $1100 if firm B has a low price |
C. | $800 if firm B has a high price and $900 if firm B has a low price |
D. | $1250 if firm B has a high price and $1100 if firm B has a low price |
DIF: Moderate TOP: The prisoners’ dilemma
25. Refer to Table 16-2. What is the profit firm B will earn if it plays its dominant strategy:
A. | $1000 if firm A has a high price and $800 if firm A has a low price |
B. | $1100 if firm A has a high price and $900 if firm A has a low price |
C. | $800 if firm A has a high price and $900 if firm A has a low price |
D. | $1250 if firm A has a high price and $1100 if firm A has a low price |
DIF: Moderate TOP: The prisoners’ dilemma
Table 16-3
Imagine a small town in which only two residents, Robert and John, own wells that produce water for safe drinking. Each Saturday, Robert and John work together to decide how many litres of water to pump, bring the water to town, and sell it at whatever price the market will bear. To keep things simple, suppose that Robert and John can pump as much water as they want without cost; therefore, the marginal cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water are shown in the table.
Weekly quantity (in litres) | Price ($) per litre | Weekly total revenue (and total profit) ($) |
0 | 12 | $0 |
5 | 11 | 55 |
10 | 10 | 100 |
15 | 9 | 135 |
20 | 8 | 160 |
25 | 7 | 175 |
30 | 6 | 180 |
35 | 5 | 175 |
40 | 4 | 160 |
45 | 3 | 135 |
50 | 2 | 100 |
55 | 1 | 55 |
60 | 0 | 0 |
26. Refer to Table 16-3. Since Robert and John operate as a profit-maximising monopoly in the market for water, what price will they charge to sell 45 litres of water?
A. | $12 |
B. | $6 |
C. | $3 |
D. | none of the above; the price is arbitrary when dealing with a monopoly market |
DIF: Moderate TOP: Competition, monopolies and cartels
27. Refer to Table 16-3. If the market for water was perfectly competitive instead of monopolistic, how many litres of water would be produced and sold?
A. | 30 |
B. | 35 |
C. | 50 |
D. | 60 |
DIF: Difficult TOP: Competition, monopolies and cartels
28. Refer to Table 16-3. As long as Robert and John operate as a profit-maximising monopoly, what will their weekly revenue be?
A. | $100 |
B. | $135 |
C. | $175 |
D. | $180 |
DIF: Difficult TOP: Competition, monopolies and cartels
29. Refer to Table 16-3. The socially efficient level of water supplied to the market would be:
A. | 15 litres |
B. | 30 litres |
C. | 45 litres |
D. | 60 litres |
DIF: Difficult TOP: Competition, monopolies and cartels
30. Refer to Table 16-3. Suppose the town enacts new anti-trust laws that prohibit Robert and John from operating as a monopolist. What will the new price of water end up being once the Nash equilibrium is reached?
A. | $7 |
B. | $6 |
C. | $5 |
D. | $4 |
DIF: Difficult TOP: Competition, monopolies and cartels NAR: Table 16-3
Table 16-4
In the following duopoly game, the two firms can either set the price of their product high or low. In this market, customers are very price sensitive: when one firm sets a low price it steals the majority of customers from its competitor. The game is represented in the table below.
Firm B | |||
High Price | Low Price | ||
Firm A | High Price | Firm A gets $500 Firm B gets $500 | Firm A get $300 Firm B gets $600 |
Low Price | Firm A gets $600 Firm B gets $300 | Firm A gets $400 Firm B gets $400 | |
31. Refer to Table 16-4. The Nash-equilibrium in this market is:
A. | firm A gets $500, firm B gets $500 |
B. | firm A gets $300, firm B gets $600 |
C. | firm A gets $600, firm B gets $300 |
D. | firm A gets $400, firm B gets $400 |
DIF: Easy TOP: The prisoners’ dilemma
32. Refer to Table 16-4. The dominant strategy for the firms are:
A. | firm A sets low price, firm B sets low price |
B. | firm A sets low price, firm B sets high price |
C. | firm A sets high price, firm B sets low price |
D. | firm A sets high price, firm B sets high price |
DIF: Easy TOP: The prisoners’ dilemma
33. Refer to Table 16-4. Profit for each firm would be maximised if:
A. | each firm plays their dominant strategy |
B. | firm A sets a high price and firm B sets a low price |
C. | firm A sets a low price and firm B sets a high price |
D. | the two firms could successfully collude |
DIF: Easy TOP: The prisoners’ dilemma
34. There are two types of markets in which firms face some competition, yet are still able to have some control over the prices of their products. The names given to these market structures are:
A. | oligopoly and duopoly |
B. | imperfect competition and monopolistic competition |
C. | duopoly and imperfect competition |
D. | monopolistic competition and oligopoly |
DIF: Easy TOP: Between monopoly and perfect competition
35. In what type of market do the actions of any one seller have a significant impact on the profits of all other sellers?
A. | a monopoly |
B. | an oligopoly |
C. | perfect competition |
D. | monopolistic competition |
DIF: Easy TOP: Between monopoly and perfect competition
36. OPEC is an example of a:
A. | cartel |
B. | collective |
C. | international free trade agreement |
D. | coalition |
DIF: Easy TOP: Case study: OPEC and the world oil market
37. An agreement among firms over production and price is called:
A. | collusion |
B. | conspiracy |
C. | multinational corporation |
D. | trade arrangement |
DIF: Easy TOP: Competition, monopolies and cartels
38. If duopolists can enforce an agreement, to produce collectively the monopoly output and split the market between the two firms, then the sum of their output will be:
A. | be less than the monopoly quantity |
B. | be greater than the monopoly quantity |
C. | be equal to the monopoly quantity |
D. | any of the above are possible |
DIF: Moderate TOP: Competition, monopolies and cartels
39. If duopolists individually pursue their own self-interest when deciding how much to produce, the price they are able to charge for their product will be:
A. | less than the monopoly price |
B. | greater than the monopoly price |
C. | possibly less than or greater than the monopoly price |
D. | equal to the perfectly competitive market price |
DIF: Moderate TOP: Competition, monopolies and cartels
40. To increase their profits further, members of a cartel have an incentive to:
A. | collude |
B. | lower production |
C. | cheat |
D. | limit membership |
DIF: Easy TOP: The prisoners’ dilemma and the welfare of society
41. Once a cartel is formed, the market is in effect served by:
A. | imperfect competition |
B. | a monopoly |
C. | monopolistic competition |
D. | an oligopoly |
DIF: Easy TOP: Competition, monopolies and cartels
42. A situation in which economic actors interacting with one another each choose their best strategy, given the strategies the others have chosen is called a(n):
A. | socially optimal solution |
B. | Nash equilibrium |
C. | competitive equilibrium |
D. | open market solution |
DIF: Moderate TOP: The equilibrium for an oligopoly
43. If an oligopolist is part of a cartel that is collectively producing at the monopoly level of output, then the oligopolist, being self-interested, will:
A. | lower production and drive up prices |
B. | increase production and push prices down |
C. | do nothing, thus allowing the cartel to realise monopoly profits |
D. | do none of the above |
DIF: Moderate TOP: The equilibrium for an oligopoly
44. For the non-colluding oligopolist, there are two factors that affect the decision to raise production. These factors are the:
A. | output effect and the cost effect |
B. | cost effect and the price effect |
C. | production effect and the output effect |
D. | output effect and the price effect |
DIF: Moderate TOP: The equilibrium for an oligopoly
45. Suppose an opal-mining firm notices that the price of opals is above marginal cost. Selling one more unit of opals at the going price also increases profit. This concept is known as the:
A. | income effect |
B. | price effect |
C. | opal effect |
D. | output effect |
DIF: Easy TOP: The equilibrium for an oligopoly
46. Raising production will increase total units sold, which will decrease the per unit price of all units sold. This concept is known as the:
A. | cost effect |
B. | output effect |
C. | price effect |
D. | income effect |
DIF: Easy TOP: The equilibrium for an oligopoly
47. An oligopolist will increase production if the output effect is:
A. | less than the price effect |
B. | greater than the price effect |
C. | equal to the price effect |
D. | greater than or equal to the price effect |
DIF: Easy TOP: The equilibrium for an oligopoly
48. Suppose an opal-mining firm is part of an oligopoly. It will have no profit incentive to increase the output of opals when the output effect is:
A. | is equal to the dominant strategy |
B. | equal to the price effect |
C. | less than the price effect |
D. | greater than the price effect |
DIF: Moderate TOP: The equilibrium for an oligopoly
49. When an oligopoly grows very large, the:
A. | output effect disappears |
B. | income effect disappears |
C. | price effect disappears |
D. | homogeneous product effect disappears |
DIF: Moderate TOP: How the size of an oligopoly affects the market outcome
50. If the number of firms in an oligopoly grows smaller, an oligopolistic market looks less and less like:
A. | a monopoly |
B. | a duopoly |
C. | a competitive market |
D. | none of the above |
DIF: Easy TOP: How the size of an oligopoly affects the market outcome
51. As the number of firms in an oligopolistic market grows larger, the price approaches:
A. | the monopoly price |
B. | average cost |
C. | marginal revenue |
D. | marginal cost |
DIF: Moderate TOP: How the size of an oligopoly affects the market outcome
52. As the number of firms in an oligopoly grows larger, what happens to the quantity produced?
(i) it approaches the socially optimal level
(ii) it increases
(iii) it decreases
A. | (i) and (ii) |
B. | (ii) and (iii) |
C. | (i) and (iii) |
D. | (ii) only |
DIF: Moderate TOP: How the size of an oligopoly affects the market outcome
53. The only market where firms need not to be concerned about balancing the price effect and the output effect when making production decisions is a:
A. | monopoly market |
B. | competitive markets |
C. | oligopoly market |
D. | duopoly market |
DIF: Moderate TOP: Competition, monopolies and cartels
54. When firms are faced with making strategic choices in order to maximise profit, economists typically use:
A. | the theory of monopoly to model their behaviour |
B. | game theory to model their behaviour |
C. | cartel theory to model their behaviour |
D. | the theory of aggressive competition to model their behaviour |
DIF: Easy TOP: Game theory and the economics of cooperation
55. When strategic interactions are important to pricing and production decisions, a firm will:
A. | assume that competing firms are already maximising profit |
B. | consider exiting the market |
C. | consider how competing firms might respond to its actions |
D. | generally operate as if it is a monopolist |
DIF: Moderate TOP: Game theory and the economics of cooperation
56. The prisoners’ dilemma is an important game to study because:
A. | it identifies the fundamental difficulty in maintaining cooperative agreements |
B. | most games present zero-sum alternatives |
C. | strategic decisions faced by prisoners are identical to those faced by firms engaged in competitive agreements |
D. | all of the above are true |
DIF: Moderate TOP: The prisoners’ dilemma
57. A prisoners’ dilemma game demonstrates how cooperative action is often not rational even though:
A. | cooperation would make everyone worse off |
B. | cooperation would make everyone better off |
C. | prisoners are not capable of individual choice |
D. | all of the above can be demonstrated with a prisoners’ dilemma game |
DIF: Moderate TOP: The prisoners’ dilemma
58. An important characteristic of a dominant strategy is that:
A. | it is the best strategy only in prisoner’s dilemma |
B. | it always leads to a Nash equilibrium that makes all players equally well off |
C. | it can prevent the game reaching a Nash equilibrium |
D. | it is the best strategy for a player, regardless of whatever strategy the opponent chooses |
DIF: Moderate TOP: The prisoners’ dilemma
59. Dominant strategies in a two-person game often lead to:
A. | the best possible outcome for both players |
B. | one person gaining advantage at the expense of the other person |
C. | profit minimisation |
D. | a less preferred outcome for both players |
DIF: Moderate TOP: The prisoners’ dilemma
60. Self-interest usually dictates what kind of outcome for the players in a prisoners’ dilemma game?
A. | sub-optimal |
B. | optimal |
C. | indeterminate |
D. | symmetrical |
DIF: Moderate TOP: The prisoners’ dilemma
Table 16-5
Consider the following Duopoly game.
Firm B | |||
U | D | ||
Firm A | U | Firm A gets $140 Firm B gets $80 | Firm A gets $220 Firm B gets -$160 |
D | Firm A gets -$160 Firm B gets $220 | Firm A gets -$80 Firm B gets -$100 | |
61. Refer to Table 16-5. If both firms follow a dominant strategy, firm A’s profits (losses) will be:
A. | $140 |
B. | $220 |
C. | -$160 |
D. | -$80 |
DIF: Moderate TOP: The prisoners’ dilemma
62. Refer to Table 16-5. If both firms follow a dominant strategy, firm B’s profits (losses) will be:
A. | –$100 |
B. | –$160 |
C. | $80 |
D. | $220 |
DIF: Moderate TOP: The prisoners’ dilemma
63. Refer to Table 16-5. When this game reaches a Nash equilibrium, profits for firm A and firm B will be:
A. | $140 and $80, respectively |
B. | $220 and –$160, respectively |
C. | –$160 and $220, respectively |
D. | –$80 and –$100, respectively |
DIF: Moderate TOP: The prisoners’ dilemma
Table 16-6
Two pita-bread stores (Pita Pan and Pita Wrapbit) have both recently opened up in a new suburb and are interested in expanding their market share. Both are considering advertising in the surrounding area to entice more customers to come to their stores. The following table depicts the strategic outcome that results from the game. The profits of the two pita-bread stores under two advertising scenarios are shown.
Pita Wrapbit | |||
Advertise | Do Not Advertise | ||
Pita Pan | Advertise | Pita Pan = $750 Pita Wrapbit = $400 | Pita Pan = $2950 Pita Wrapbit = $350 |
Do Not Advertise | Pita Pan = $250 Pita Wrapbit = $2600 | Pita Pan = $1450 Pita Wrapbit = $950 | |
64. Refer to Table 16-6. If both stores follow a dominant strategy, Pita Pan’s profits will be:
A. | $2950 |
B. | $1450 |
C. | $750 |
D. | $250 |
DIF: Moderate TOP: Oligopolies as a prisoners’ dilemma
65. Refer to Table 16-6. If both stores follow a dominant strategy, Pita Wrapbit’s growth related profits will be:
A. | $2600 |
B. | $950 |
C. | $400 |
D. | $350 |
DIF: Moderate TOP: Oligopolies as a prisoners’ dilemma
66. Refer to Table 16-6. The dominate strategies of Pita Pan and Pita Wrapbit are:
A. | Advertise and Do Not Advertise, respectively |
B. | both Advertise |
C. | Do Not Advertise and Advertise, respectively |
D. | both Do Not Advertise |
DIF: Moderate TOP: Oligopolies as a prisoners’ dilemma
67. Refer to Table 16-6. If the owners of Pita Pan and Pita Wrapbit meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimise their profits, they should both agree to:
A. | share the context of their conversation with the Australian Competition and Consumer Commission |
B. | be more competitive in capturing market share |
C. | agree to both not advertise |
D. | both advertise |
DIF: Moderate TOP: Oligopolies as a prisoners’ dilemma
68. Refer to Table 16-6. Non-cooperative outcomes typically imply an outcome:
A. | that is worse for both parties to the ‘game’ |
B. | that is better for both parties to the ‘game’ |
C. | in which society is always worse off |
D. | in which society is always better off |
DIF: Difficult TOP: Oligopolies as a prisoners’ dilemma
69. The Nash equilibrium for a game can be a sub-optimal outcome for players when:
A. | defection is likely to be individually rational |
B. | self-interest is likely to be individually irrational |
C. | defection is likely to be collectively rational |
D. | self-interest is likely to be collectively irrational |
DIF: Difficult TOP: The prisoners’ dilemma
Table 16.7
The USA and China are locked in negotiations to cut emissions. The following table represents the pay-offs from cutting emissions and continuing to pollute:
China | |||
Pollute | Cut Emissions | ||
USA | Pollute | USA = $1mil China = $1.5mil | USA = $2.5mil China = $1mil |
Cut Emissions | USA = $0.8mil China = $2.4mil | USA = $2mil China = $1.8mil | |
70. Refer to Table 16-7. If the USA plays its dominant strategy, its payoff at the Nash Equilibrium will be:
A. | $1mil |
B. | $2.5mil |
C. | $0.8mil |
D. | $2mil |
DIF: Moderate TOP: The prisoners’ dilemma
71. Refer to Table 16-7. If China plays its dominant strategy, its payoff at the Nash Equilibrium will be:
A. | $1.5mil |
B. | $1mil |
C. | $2.4mil |
D. | $1.8mil |
DIF: Moderate TOP: The prisoners’ dilemma
72. Refer to Table 16-7. When this game reaches a Nash equilibrium, payoffs for the USA and China will be:
A. | $2.5mil and $1mil, respectively |
B. | $1mil and $1.5mil, respectively |
C. | $0.8mil and $2.4mil, respectively |
D. | $2mil and $1.8mil, respectively |
DIF: Moderate TOP: The prisoners’ dilemma
73. Refer to Table 16-7. The Nash equilibrium for this game is for:
A. | both countries cut emissions |
B. | USA pollutes and China cut’s emissions |
C. | China pollutes and USA cut’s emissions |
D. | both countries pollute |
DIF: Moderate TOP: The prisoners’ dilemma
74. Very often, the reason that players can solve the prisoners’ dilemma game and reach the most profitable outcome is that:
A. | they play the game not once but many times |
B. | the game becomes more competitive |
C. | each player tries to capture a large portion of the market share |
D. | all of the above can result in a solution to the prisoners’ dilemma game |
DIF: Moderate TOP: The prisoners’ dilemma tournament
75. The tit-for-tat strategy in repeated prisoners’ dilemma games:
A. | is often dominated by more complex gaming strategies |
B. | is never dominated by more complex gaming strategies |
C. | often dominates more complex gaming strategies |
D. | was not socially optimal according to Robert Axelrod |
DIF: Moderate TOP: The prisoners’ dilemma tournament
76. In a two-person repeated game, a tit-for-tat strategy starts with:
A. | non-cooperation and then each player pursues his or her own self-interest |
B. | cooperation and then each player is unresponsive to the strategic moves of the other player |
C. | non-cooperation and then each player cooperates when the other player demonstrates a desire for the cooperative solution |
D. | cooperation and then each player mimics the other player’s last move |
DIF: Moderate TOP: The prisoners’ dilemma tournament
77. A tit-for-tat strategy starts out:
A. | conciliatory and then encourages an optimal social outcome among the other players |
B. | unfriendly and then encourages friendly strategy among players |
C. | friendly and then penalises unfriendly players |
D. | aggressive and then compensates losing players |
DIF: Moderate TOP: The prisoners’ dilemma tournament
78. Game theory is not necessary for understanding competitive markets but is quite useful in understanding the behaviour of:
A. | oligopolies |
B. | monopolies |
C. | oligarchies |
D. | competitive markets |
DIF: Easy TOP: Oligopolies as a prisoners’ dilemma
79. Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and finds a small bag of marijuana, and arrests the two. During the interrogation, each is separately made the following offer: ‘If you confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will get 10 years in prison. If you both confess, you will each get five years’. If neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of marijuana. If each suspected drug dealer follows a dominant strategy, what should they do?
A. | not confess, regardless of the partner’s decision |
B. | not confess and hope that the partner does confess |
C. | confess, regardless of the partner’s decision |
D. | confess in the hope that the partner does not confess |
DIF: Difficult TOP: The prisoners’ dilemma
80. While on holiday in Berserkistan, you are arrested and accused of spying for Australia. You are, of course, innocent. Your captors inform you that if you confess, you will receive a sentence of two years while your co-conspirator (whom you have never heard of) will receive a sentence of 20 years. If you both confess, you will each receive a sentence of three years. You are also told that your co-conspirator is being offered the same option.
You suspect that there is not enough evidence to convict you unless your alleged co-conspirator confesses. If you are risk-averse, what should you choose to do?
A. | not confess because you are innocent, even though you may spend 20 years in a Berserkistan prison |
B. | confess, even though you are innocent, to avoid a 20-year sentence |
C. | confess because it is always the best solution to this type of ‘game’ |
D. | not confess in the hope that your alleged co-conspirator also remains silent |
DIF: Difficult TOP: The prisoners’ dilemma
81. Suppose a cartel collapses. The firms resume individual rather than collusive production. This outcome:
A. | may or may not be desirable for society as a whole |
B. | is not a concern because collusion is not a dominant strategy |
C. | is worse for society because profits for the firms will be lower |
D. | is desirable for society as a whole |
DIF: Easy TOP: Competition, monopolies and cartels
82. Identify the market in the following list where economic profit is driven to zero in the long run:
A. | oligopoly |
B. | monopoly |
C. | common resource |
D. | perfect competition |
DIF: Easy TOP: Between monopoly and perfect competition
83. The typical firm in the economy:
A. | is an oligopoly |
B. | is perfectly competitive |
C. | is a monopoly |
D. | has some degree of market power |
DIF: Easy TOP: Between monopoly and perfect competition
84. The only case where profit-maximising production decisions by firms will drive price to equal marginal cost are when:
A. | there are only two sellers |
B. | many sellers sell products that are slightly differentiated |
C. | there is only one seller |
D. | many sellers sell products that are identical |
DIF: Moderate TOP: Between monopoly and perfect competition
85. The standard price for monopoly firms is a price that:
A. | exceeds marginal cost |
B. | exceeds demand |
C. | exceeds fixed costs |
D. | equals marginal revenue |
DIF: Easy TOP: Competition, monopolies and cartels
86. Binding agreements concerning production levels between oligopolists can lead the involved firms to:
A. | bankruptcy |
B. | higher prices and less profit |
C. | monopoly profit |
D. | lower prices and more profit |
DIF: Moderate TOP: Competition, monopolies and cartels
87. Suppose a group of four opal-mining firms operate as an oligopoly. If there is an increase in output from one of the firms, then:
A. | its price will increase and the other firms’ prices will decrease |
B. | its price will decrease and the other firm’s prices will be unchanged |
C. | its price will decrease and the other firm’s prices will decrease |
D. | its price will increase and the other firms’ prices will be unchanged |
DIF: Easy TOP: Competition, monopolies and cartels
88. As the number of firms in an oligopoly market grows larger, the price will approach:
A. | marginal revenue |
B. | marginal cost |
C. | zero |
D. | the monopoly price |
DIF: Moderate TOP: How the size of an oligopoly affects the market outcome
89. OPEC is able to raise the price of its product by:
A. | tying |
B. | bundling |
C. | setting production levels for each of its members |
D. | doing all of the above |
DIF: Moderate TOP: Case study: OPEC and the world oil market
90. During the 1990s, the members of OPEC operated independently from one another, causing the world market for crude oil to become close to a(n):
A. | monopoly market |
B. | oligopoly market |
C. | competitive market |
D. | duopoly market |
DIF: Moderate TOP: Case study: OPEC and the world oil market
91. The only way a cartel is able to maintain its market power is if:
A. | all the members of cartel continue to cooperate |
B. | the product has horizontal demand curve |
C. | the product has an inelastic demand for their product |
D. | the government uses competition law to break-up the cartel |
DIF: Moderate TOP: Competition, monopolies and cartels
92. The paradoxical nature of the oligopoly game can be described by the fact that even though the monopoly outcome is best for all the oligopolists:
A. | they cheat themselves out of monopoly profits by increasing production |
B. | they collude to set output level equivalent to the Nash equilibrium |
C. | they do not behave as profit maximisers |
D. | self-interest juxtaposes the profits earned at the Nash equilibrium |
DIF: Difficult TOP: Oligopolies as a prisoners’ dilemma
93. The arms race is similar to which of the following economic scenarios?
A. | the competitive game |
B. | the prisoners’ dilemma |
C. | the welfare choice |
D. | cost allocation theory |
DIF: Moderate TOP: Arms races
94. In the case of oligopolists trying to maintain monopoly profits, the profit-maximising level of production is:
A. | good for consumers and bad for the oligopolists |
B. | good for consumers and good for the oligopolists |
C. | bad for consumers and good for the oligopolists |
D. | bad for the consumers and bad for the oligopolists |
DIF: Moderate TOP: How the size of an oligopoly affects the market outcome
95. Why is a lack of cooperation between criminal suspects desirable for society as a whole?
A. | the police are able to convict more criminals |
B. | the suspects are able to choose optimal outcomes for themselves by acting on self-interest |
C. | the prisoners’ dilemma safeguards the criminals’ constitutional rights |
D. | all of the above are true |
DIF: Moderate TOP: The prisoners’ dilemma
96. Oligopolies would like to act like a:
A. | monopoly but self-interest often drives them closer to duopoly |
B. | monopoly but self-interest often drives them closer to competition |
C. | duopoly but self-interest often drives them closer to competition |
D. | competitor but self-interest often drives them closer to duopoly |
DIF: Easy TOP: How the size of an oligopoly affects the market outcome
97. Oligopolies can end up looking like competitive firms if the number of firms is:
A. | large and they all cooperate |
B. | small and they all cooperate |
C. | large and they do not cooperate |
D. | small and they do not cooperate |
DIF: Easy TOP: How the size of an oligopoly affects the market outcome
SHORT ANSWER
1. Even when allowed to collude, firms in an oligopoly will choose to cheat on their agreements with the rest of the cartel. Why?
DIF: Moderate TOP: Competition, monopolies and cartels
2. Suppose three firms are in an oligopoly and each firm has a dominant production strategy. Would it be possible to determine the Nash Equilibrium solely from knowledge about the firms’ dominant strategies? Suppose one of the three firms is irrational and plays a strategy other than its dominant strategy. Is it possible to determine the best course of action of the other two firms?
DIF: Moderate TOP: Oligopolies as a prisoners’ dilemma
3. Table 16-8
The demand for a product that is produced at zero marginal cost is reflected in the table.
Quantity Price ($)
0 24
20 22
40 20
60 18
80 16
100 14
120 12
140 10
160 8
180 6
200 4
220 2
240 0
(a) What is the profit-maximising level of production for a group of oligopolistic firms that operate as a cartel?
(b) Assume that this market is characterised by a duopoly in which collusive agreements are illegal. What market price and quantity will be associated with a profit-maximising Nash equilibrium?
(c) Assume that this market is served by three identical firms that operate as independent oligopolists (no collusive agreements). Without calculating the profit-maximising equilibrium, do you think the quantity produced will be higher, lower, or equal to your answer in part b?
DIF: Difficult TOP: Competition, monopolies and cartels
4. Describe the output and price effects that influence the profit-maximising decision faced by a firm in an oligopoly market. How does this differ from output and price effects in a monopoly market?
DIF: Moderate TOP: How the size of an oligopoly affects the market outcome
5. What is the output effect and the price effect? How do these effects influence the output decision of an oligopolist?
DIF: Moderate TOP: The equilibrium for an oligopoly
6. What is OPEC and how effective was it at colluding to maintain high prices for its product?
DIF: Difficult TOP: Case study: OPEC and the world oil market
7. Table 16-9
Two discount superstores (Ultimate Saver and SuperDuper Saver) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their stores and parking lots to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Growth-related profits of the two discount superstores under two scenarios are shown in the table:
a. What are growth related profits for Ultimate Saver if both stores follow a dominant strategy?
b. What are growth related profits for SuperDuper Saver if both stores follow a dominant strategy?
c. If the owners of Ultimate Saver and SuperDuper Saver meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimise their growth-related profits, what strategy should they agree to? How would they enforce this agreement? If the collusive agreement was enforceable, how would the wellbeing of society be impacted by the agreement?
DIF: Difficult TOP: Oligopolies as a prisoners’ dilemma
8. Two fishing firms share a common fishery. One strategy available to the firms is to fish sustainably. This maintains a healthy breeding population of fish, and keeps the price of fish relatively high. The other strategy is to overfish. This reduces the breeding population and fish prices tend to fall. The game is represented in the following table:
Explain what the Nash equilibrium for this game is and identify the profit each player gets at this solution. Is the Nash equilibrium the best social outcome for this problem?
DIF: Difficult TOP: Common resources
9. In Berserkistan, two political parties vie for control of the country. Each political party, when it is not in power, has a tendency to call general strikes to influence the policy of the ruling party. Evaluate this strategy in the context of a multiple-period game. Is it possible, in this situation, that a multiple-period game reduces, rather than enhances, social wellbeing? What would have to happen in this game in order to improve social welfare if a tit-for-tat strategy is used?
DIF: Difficult TOP: Game theory and the economics of cooperation