Chapter 18 Oligopoly – Test Bank | 9th Edition - Foundations of Microeconomics 9e | Test Bank with Answer Key by Robin Bade by Robin Bade. DOCX document preview.
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Foundations of Microeconomics, 9e (Bade)
Chapter 18 Oligopoly
18.1 What Is Oligopoly?
1) A firm faces a small number of competitors. This firm is competing in
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) a perfect multi-firm monopoly.
Topic: Oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
2) Sammy's Inc. competes with a few other firms because there are natural barriers to entry. Sammy's operates in
A) a perfectly competitive market.
B) an oligopoly.
C) a monopolistically competitive market.
D) a monopoly.
E) a natural monopolistically competitive market.
Topic: Oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
3) Herb's Inc. has a large share of its market and is tempted to collude with the few firms that are in its market. Herb's operates in
A) an oligopoly.
B) a monopolistically competitive market.
C) a monopoly market.
D) a perfectly competitive market.
E) a collusively protected market.
Topic: Oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
4) Which of the following is found ONLY in oligopoly?
A) producers who sell identical products
B) one firm's actions affect another firm's profit
C) entry into the industry is blocked
D) sellers face a downward sloping demand curve for their product
E) the firm's demand curve is horizontal
Topic: Oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
5) Firms in an oligopoly
i. are independent of each other's actions.
ii. can each influence the market price.
iii. charge a price equal to marginal revenue.
A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii, and iii
Topic: Oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
6) In an oligopoly, there are
A) many firms and barriers to entry.
B) many firms and no barriers to entry.
C) barriers to entry and only a few firms.
D) few firms and no barriers to entry.
E) barriers to entry and only one firm.
Topic: Oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Revised
AACSB: Reflective thinking
7) A cartel is
A) a market structure with a small number of large firms.
B) a market structure with a large number of small firms.
C) a group of firms acting together to raise price, decrease output, and increase economic profit.
D) a market with only two firms.
E) another name for an oligopoly.
Topic: Cartel
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
8) A group of firms acting together to limit output, raise price, and increase economic profit is a called a
A) duopoly.
B) monopolistic oligopoly.
C) competitive oligopoly.
D) cartel.
E) multi-firm competitive monopoly.
Topic: Cartel
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
9) A cartel is a collusive agreement among a number of firms that is designed to
A) expand output and lower prices but not to a predatory level.
B) decrease output and lower prices to a predatory level.
C) decrease output and raise prices.
D) expand output and raise prices.
E) expand output and lower prices to a predatory level.
Topic: Cartel regulation
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Revised
AACSB: Reflective thinking
10) A cartel is
A) a group of firms selling identical products but at slightly different prices.
B) an agreement among firms to limit output, raise prices, and increase economic profit.
C) the automobile producing industry.
D) the only firm selling a particular product.
E) an illegal agreement among firms which most often arises in monopolistically competitive markets.
Topic: Cartel
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
11) A group of firms that has entered into an agreement to restrict output and increase prices and profits is called
A) a compliance.
B) a cartel.
C) an oligopoly.
D) a duopoly.
E) a multi-firm monopoly.
Topic: Cartel
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
12) If a few oil-producing countries in the Middle East jointly decide to limit the production of oil
A) they are forming a cartel.
B) they would like the price of oil to be the same as if the market were perfectly competitive.
C) game theory does not apply to their actions because they are nations, not firms.
D) they will try to operate as a large, monopolistically competitive firm.
E) they will agree to lower the price of oil in order to increase their profits.
Topic: Cartel
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
13) Daryl's Inc. has formed a cartel with the two other firms in its industry. In which of the following market structures does Daryl's operate?
A) monopolistic competition
B) oligopoly
C) perfect competition
D) monopoly
E) legally protected monopoly
Topic: Cartel
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
14) Energizer and Duracell dominate the battery market. It is possible that they could ________ because they operate in ________.
A) form a cartel and collude; an oligopoly
B) earn $0 profit in the long run; a monopolistically competitive market
C) form a cartel; a monopolistically competitive market
D) collude; a perfect competitive market
E) have excess capacity; a natural monopoly
Topic: Oligopoly
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Application of knowledge
15) Travel Trains and The Trolley are the only 2 firms that provide tourist transportation in a resort town. These two firms know that
A) their actions affect each others' profits.
B) they have no control over the prices they charge.
C) they must price discriminate in order to earn a profit.
D) they cannot earn an economic profit in the long run.
E) it is legal for them to jointly determine their prices because they are the only two firms in the market.
Topic: Oligopoly, definition
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Revised
AACSB: Application of knowledge
16) Two doctors are the only veterinarians in town. These vets operate in ________ and can ________.
A) an oligopoly; increase production to achieve economies of scale
B) a natural monopoly; eliminate excess capacity by decreasing their production
C) a duopoly; form an cartel to increase their profits (even though this would be illegal)
D) duopoly; increase consumer surplus by forming a cartel (even though this would be illegal)
E) a duopoly; decrease the deadweight loss in the market by forming a cartel (even though this would be illegal)
Topic: Oligopoly
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Application of knowledge
17) A cartel is most likely to occur in
A) perfect competition as firms compete by reducing cost.
B) oligopoly as firms act together to raise prices and increase profits.
C) monopolistic competition where firms collude to increase profits.
D) oligopoly as firms compete to lower price and increase their own profits.
E) monopoly because it faces no competition.
Topic: Cartel
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
18) "Duopoly" is
A) another name for monopoly.
B) a special type of monopolistic competition.
C) a two-firm oligopoly.
D) a game with three players.
E) the situation when a firm sets a duo (two) of different prices for its customers.
Topic: Duopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
19) A two-firm oligopoly is called a
A) double monopoly.
B) cartel.
C) duopoly.
D) monopolistic oligopoly.
E) dual-market.
Topic: Duopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
20) An oligopoly created because of economies of scale is called a
A) natural oligopoly.
B) legal oligopoly.
C) public oligopoly.
D) monopolistic oligopoly.
E) scale oligopoly.
Topic: Natural oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
21) When economies of scale limit the number of firms in an industry to 3, there is a
A) natural monopoly.
B) natural oligopoly.
C) legal oligopoly.
D) legal cartel.
E) natural monopolistic competition.
Topic: Natural oligopoly
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
22) There are two bookstores in a college town. If another bookstore opened, each of the stores would incur an economic loss. This bookstore market is
A) a natural monopoly.
B) a monopoly.
C) monopolistic competition.
D) a natural oligopoly.
E) a legal oligopoly.
Topic: Natural oligopoly
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
23) A firm faces a small number of competitors. This firm is competing in
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) a perfect multi-firm monopoly.
Topic: Oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
24) If an industry has an HHI of 2,900, the market structure is that of
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either monopoly or perfect competition, depending on the existence or absence of barriers to entry.
Topic: Oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Revised
AACSB: Reflective thinking
25) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the efficient scale for one firm is ________ units per hour.
A) 2,000
B) 4,000
C) 8,000
D) 10,000
E) more than 10,000
Topic: Natural oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Analytical thinking
26) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the lowest price at which a firm could stay in business in the long run is ________ per unit and the quantity demanded in the market at that price is ________ units per hour.
A) $20; 4,000
B) $10; 8,000
C) $10; 4,000
D) $20; 2,000
E) $20; 8,000
Topic: Natural oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Analytical thinking
27) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the figure shows a ________ can profitably operate.
A) natural monopoly in which 1 firm
B) natural oligopoly in which 2 firms
C) natural oligopoly in which 3 firms
D) natural oligopoly in which 4 firms
E) natural oligopoly in which 5 or more firms
Topic: Natural oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Analytical thinking
28) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, economies of scale limit the market to ________ firm(s).
A) 1
B) 2
C) 3
D) 4
E) 8
Topic: Natural oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Analytical thinking
29) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the efficient scale for one firm is ________ units per hour.
A) 2,000
B) 4,000
C) 8,000
D) 6,000
E) 10,000
Topic: Natural oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Analytical thinking
30) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the lowest price at which a firm could stay in business in the long run is ________ per unit and the quantity demanded in the market at that price is ________ units per hour.
A) $15; 6,000
B) $10; 8,000
C) $10; 6,000
D) $25; 2,000
E) $10; 4,000
Topic: Natural oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Analytical thinking
31) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the figure shows a ________ can profitably operate.
A) natural monopoly in which 1 firm
B) natural monopoly in which 2 firms
C) natural oligopoly in which 3 firms
D) natural oligopoly in which 2 firms
E) natural oligopoly in which 8 firms
Topic: Natural oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Analytical thinking
32) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, economies of scale limit the market to ________ firm(s).
A) 1
B) 2
C) 3
D) 4
E) 8
Topic: Natural oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Analytical thinking
33) In the figure above, ________ firms will share the market and the ________.
A) 2; efficient scale is 80 units
B) 2; efficient scale is 40 units
C) 3; efficient scale is 40 units
D) 2; lowest possible price is $20
E) 2; lowest possible price is $15
Topic: Natural oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Analytical thinking
34) The figure above shows a ________ where ________ firm(s) produce(s) ________.
A) natural oligopoly; 3; 30 units each
B) natural duopoly; 2; 45 units each
C) natural monopoly; 2; 90 units
D) monopoly; 1; 90 units
E) natural monopoly; 3; 90 units each
Topic: Natural oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Analytical thinking
35) The figure above shows that ________ occurs at ________ units and that ________ firms should share the market.
A) the efficient scale; 30; 3
B) the lowest marginal cost; 30; 3
C) the efficient scale; 45; 2
D) the highest level of demand; 45; 2
E) an economic profit; 45; 2
Topic: Natural oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Analytical thinking
36) The figure shows the market for the tourist trolley service in a resort town. These trolley services provide transportation to tourists to alleviate parking shortages and traffic congestion. The figure shows
A) a natural monopoly where the efficient scale is 100 riders per day.
B) a natural duopoly where the efficient scale is 200 riders per day.
C) a natural duopoly where the efficient scale is 100 riders per day.
D) an oligopoly where 3 competing firms achieve minimum cost.
E) an oligopoly where 3 competing firms create excess capacity.
Topic: Natural duopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Application of knowledge
37) The figure shows the market for the tourist trolley service in a resort town. These trolley services provide transportation to tourists to alleviate parking shortages and traffic congestion. If ________ operated in the market ________.
A) one firm; it would earn an economic profit and a new firm would be encouraged to enter
B) two firms; the efficient scale for each firm is 200 riders
C) two firms; the efficient scale for each firm is 100 riders
D) three firms; costs would fall and all firms would earn an economic profit
E) both A and C are correct.
Topic: Economies of scale
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Application of knowledge
38) The figure shows the market for the tourist trolley service in a resort town. These trolley services provide transportation to tourists to alleviate parking shortages and traffic congestion. The figure shows that in order to stay in business
A) two firms can share the market and charge a minimum of $24 per ticket.
B) three firms must operate charging at least $32 per ticket.
C) only one firm can operate to avoid economic losses.
D) two firms can share the market but there will be excess capacity.
E) only one firm is needed to serve the market efficiently.
Topic: Oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.1
Status: Old
AACSB: Application of knowledge
39) Light bulbs are made by firms in an oligopoly. This occurs because
i. the market's size and cost structure limit the number of firms that can operate profitably.
ii. the market has excess capacity.
iii. the firms are unwilling to work interdependently.
A) i only
B) i, ii and iii
C) i and iii
D) ii and iii
E) ii only
Topic: Oligopoly, definition
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Application of knowledge
40) When a city licenses only 3 firms to serve the market, the city has created a
A) cartel.
B) legal monopoly.
C) monopolistically competitive market.
D) legal oligopoly.
E) natural oligopoly.
Topic: Legal oligopoly
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
41) One way to identify oligopoly is to
A) determine the market's minimum price.
B) determine the market's maximum price.
C) determine whether the firm's ATC exceeds price.
D) use the Herfindahl-Hirschman Index (HHI).
E) use the Efficiency test.
Topic: Determination of oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
42) Oligopoly is a market structure in which
A) many firms each produce a slightly differentiated product.
B) one firm produces a unique product.
C) a small number of firms compete.
D) many firms produce an identical product.
E) the number of firms is so small that they do not compete with each other.
Topic: Oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
43) The fact that firms in oligopoly are interdependent means that
A) there are barriers to entry.
B) one firm's profits are affected by other firms' actions.
C) they can produce either identical or differentiated goods.
D) there are too many of them for any one firm to influence price.
E) they definitely compete with each other so that the price is driven down to the monopoly level.
Topic: Interdependent
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
44) Collusion results when a group of firms
i. act separately to limit output, lower prices, and decrease economic profits.
ii. act together to limit output, raise prices, and increase economic profits.
iii. in the United States legally fix prices.
A) i only
B) ii only
C) iii only
D) i and iii
E) ii and iii
Topic: Collusion
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
45) A cartel is a group of firms
A) acting separately to limit output, lower price, and decrease economic profit.
B) acting together to limit output, raise price, and increase economic profit.
C) legally fixing prices.
D) acting together to erect barriers to entry.
E) that compete primarily with each other rather than the other firms in the market.
Topic: Cartel
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
46) A market with only two firms is called a
A) duopoly.
B) two-firm monopolistic competition.
C) two-firm monopoly.
D) cartel.
E) two-firm quasi monopoly.
Topic: Duopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
47) The efficient scale of one firm is 20 units and the average total cost at the efficient scale is $30. The quantity demanded in the market as a whole at $30 is 40 units. This market is
A) a natural duopoly.
B) a legal duopoly.
C) a natural monopoly.
D) a legal monopoly.
E) monopolistically competitive.
Topic: Natural duopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
48) Even though four firms can profitably sell hotdogs downtown, the government licenses only two firms. This market is a
A) natural duopoly.
B) legal duopoly.
C) natural monopoly.
D) legal monopoly.
E) market-limited oligopoly.
Topic: Legal duopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
49) To determine if a market is an oligopoly, we need to determine if
A) the market's HHI is less than 900.
B) there are many firms in the market.
C) the firms are so few that they recognize their mutual interdependencies.
D) the firms make identical or differentiated products.
E) cartels are legal in their market.
Topic: Determination of oligopoly
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
18.2 The Oligopolists' Dilemma
1) When oligopolies seek to operate as a single-price monopoly, the firms produce at the point where
A) P = MC.
B) MR = MC.
C) P < ATC.
D) P = MR.
E) MC = ATC.
Topic: Monopoly outcome
Skill: Level 2: Using definitions
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
2) When firms in an oligopoly successfully collude and do not cheat on a cartel agreement, they can make a long-run economic profit similar to
A) perfect competition.
B) monopoly.
C) monopolistic competition.
D) non-colluding oligopolies.
E) the firms in regulated industries.
Topic: Monopoly outcome
Skill: Level 2: Using definitions
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
3) If firms in an oligopolistic industry successfully collude and form a cartel, what price and output will result?
A) the monopoly price and output
B) the competitive price and output
C) the monopolistically competitive price and output
D) a price higher than the monopoly price and, because there is more than one firm in the industry, more output than the monopoly amount
E) a price lower than the competitive price and, because there are only a few firms in the industry, less output than the competitive amount
Topic: Monopoly outcome
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
4) When oligopolies operate like firms in perfect competition, the firms produce at the point where the
A) price is less than the marginal cost.
B) marginal cost equals the price.
C) price exceeds the marginal cost by the greatest amount.
D) price equals the average total cost.
E) marginal cost equals the average total cost.
Topic: Competitive outcome
Skill: Level 2: Using definitions
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
5) If firms in an oligopolistic industry consistently cut their price to sell more output, what price and output will result?
A) the monopoly price and output
B) the competitive price and output
C) the monopolistically competitive price and output
D) a price lower than the competitive price and less output than the competitive amount
E) a price lower than the competitive price and more output than the competitive amount
Topic: Competitive outcome
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
6) The range in which a duopoly's output falls is less than or equal to the output level in ________ and more than or equal to the output level in ________.
A) monopolistic competition; monopoly
B) monopolistic competition; perfect competition
C) perfect competition; monopoly
D) monopoly; monopolistic competition
E) monopoly; perfect competition
Topic: Range of outcomes
Skill: Level 2: Using definitions
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
7) In an oligopoly, output is
A) less than the output in monopoly.
B) greater than the output in perfect competition.
C) in all circumstances the same as the output in perfect competition.
D) somewhere between the output in monopoly and that in perfect competition outcomes.
E) in all circumstances the same as the output in monopoly.
Topic: Range of outcomes
Skill: Level 2: Using definitions
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
8) The possible alternatives for an oligopoly range from the monopoly case with ________ to the perfectly competitive case with ________.
A) high output; low output
B) low prices; high prices
C) low profits; high profits
D) low output; high output
E) no cooperation among the firms; much cooperation among the firms
Topic: Range of outcomes
Skill: Level 2: Using definitions
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
9) The above figure shows the market demand curve for telephone calls. Suppose the marginal cost of a telephone call is 2¢ a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as perfect competitors, there are ________ minutes of calls made per hour.
A) between 0 and 3 million
B) more than 3 million and less than or equal to 5 million
C) more than 5 million and less than or equal to 7 million
D) more than 7 million and less than or equal to 9 million
E) more than 9 million
Topic: Competitive outcome
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Revised
AACSB: Analytical thinking
10) The above figure shows the market demand curve for telephone calls. Suppose the marginal cost of a telephone call is 2¢ a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as a monopoly, there are ________ minutes of calls made per hour.
A) between 0 and 3 million
B) more than 3 million and less than or equal to 5 million
C) more than 5 million and less than or equal to 7 million
D) more than 7 million and less than or equal to 9 million
E) more than 9 million
Topic: Monopoly outcome
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Revised
AACSB: Analytical thinking
11) The above figure shows the market demand curve for telephone calls. Suppose the marginal cost of a telephone call is 2¢ a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as perfect competitors, the price of a call is ________ per minute and if the firms in the industry operate as a monopoly, the price of a call is ________ per minute.
A) 2 cents; more than 3 cents and less than 4 cents
B) more than 3 cents and less than 4 cents; more than 3 cents and less than 4 cents
C) 1 cent; 2 cents
D) 2 cents; either equal to or more than 4 cents
E) either equal to or more than 4 cents; 2 cents
Topic: Range of outcomes
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Revised
AACSB: Analytical thinking
12) The figure above shows a market that a cartel controls. If the firms in the cartel produce ________ units, they will ________.
A) 5; maximize joint profits
B) 5; minimize joint costs
C) 10; create a deadweight loss
D) 10; maximize joint profits
E) between 5 and 10; generate an efficient outcome
Topic: Cartel
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Analytical thinking
13) The graph shows the market for the two zipline firms that operate in a resort city. If the firms decide to ________, they will ________.
A) compete; serve 400 riders together
B) compete; serve 200 riders together
C) collude; serve 400 riders together
D) act like a cartel; be operating illegally
E) A and D are both correct.
Topic: Cartel
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Application of knowledge
14) The graph shows the market for the two zipline firms that operate in a resort city. If the firms maximize profit and decide to collude, together they will produce ________ rides at a price of ________ per ride.
A) 200; $50
B) between 200 and 400; between $30 and $50
C) 200; $30
D) 400; $50
E) 400; $30
Topic: Cartel
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Application of knowledge
15) The graph shows the market for the two zipline firms that operate in a resort city. If the firms decide to compete, the together they will produce ________ rides at a price of ________ per ride.
A) 400; $30
B) 200; $50
C) between 200 and 400; between $30 and $50
D) 400; $50
E) 200; $30
Topic: Cartel cheating
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Application of knowledge
16) Which of the following statements is correct?
A) A firm in oligopoly will charge a price that is lower than the price charged in perfect competition.
B) If firms in oligopoly look only at their own self-interest in deciding the output they should produce, the total market output will exceed that of a monopoly.
C) If one oligopolist reduces the price of its product, its demand curve shifts leftward.
D) Because many producers join to form a cartel, the market becomes monopolistic competition.
E) It is in the self-interest of each firm in an oligopoly to take the actions that maximize all the firms' joint profit.
Topic: Duopolists' dilemma
Skill: Level 2: Using definitions
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
17) The major dilemma facing Boeing and Airbus is the
A) fact that neither will respond to the behavior of the other.
B) certainty surrounding the reaction of each firm to the behavior of the other firm.
C) fact that if each firm separately tries to maximize its profit, it might wind up with less profit that otherwise.
D) competition from other firms that drives their economic profit to zero.
E) fact that when they collude to maximize their profit, the other firm's profit might be larger than its profit.
Topic: Duopolists' dilemma
Skill: Level 2: Using definitions
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
18) Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing output and equally share the economic profit. If firm A increases output
A) both firms' profits increase.
B) firm A's profits increase and firm B's profits decrease.
C) firm B's profits increase and firm A's profits decrease.
D) both firms' profits decrease.
E) firm A's profits increase and firm B's profits do not change.
Topic: Duopolists' dilemma
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
19) Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing output and equally share the economic profit. If firm A increases its output, the market price ________ and total economic profit of the two firms combined ________.
A) falls; decreases
B) falls; increases
C) rises; decreases
D) rises; increases
E) falls; does not change
Topic: Duopolists' dilemma
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
20) If one firm in a duopoly increases its production by one unit beyond the monopoly output, that firm's profit ________, the other firm's profit ________, and the total profit of the duopoly ________.
A) increases; increases; increases
B) does not change; does not change; does not change
C) increases; decreases; does not change
D) increases; does not change; increases
E) increases; decreases; decreases
Topic: Duopolists' dilemma
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
21) Which of the following is TRUE? In the above figure, if the market is
A) a monopoly, output will be Q1 and price will be P3.
B) a monopoly, output will be Q3 and price will be P3.
C) perfect competition, output will be Q2 and price will be P2.
D) perfect competition, output will be Q1 and price will be P1.
E) perfect competition, output will be Q3 and price will be P3.
Topic: Competitive outcome
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Analytical thinking
22) In the above figure, the output of an oligopoly will range between
A) 0 and Q1.
B) Q1 and Q2.
C) Q1 and Q3.
D) Q2 and Q3.
E) 0 and Q2.
Topic: Range of outcomes
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Analytical thinking
23) Boeing and Airbus have entered into a cartel agreement that will enable them to boost their profits. What occurs if Boeing decides to cheat on the agreement?
i. Boeing lowers the price of its airplanes.
ii. The total industry output increases.
iii. The total profits in the airplane industry will decrease.
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii
Topic: Range of outcomes
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
24) For a duopoly, the highest price is charged when the duopoly achieves
A) the competitive outcome.
B) the monopoly outcome.
C) an outcome between the competitive outcome and the monopoly outcome.
D) its noncooperative Nash equilibrium.
E) Both answers A and D are correct because both refer to the same price.
Topic: Monopoly outcome
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
25) For a duopoly, the smallest total quantity is produced when the duopoly achieves
A) the competitive outcome.
B) the monopoly outcome.
C) an outcome between the competitive outcome and the monopoly outcome.
D) its noncooperative Nash equilibrium.
E) Both answers A and D are correct because both refer to the same amount of output.
Topic: Monopoly outcome
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
26) For a duopoly, the maximum total profit is reached when the duopoly produces
A) the same amount of output as the competitive outcome.
B) the same amount of output as the monopoly outcome.
C) an amount of output that lies between the competitive outcome and the monopoly outcome.
D) more output than the competitive outcome.
E) less output than the monopoly outcome.
Topic: Monopoly outcome
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
27) If a duopoly has reached the monopoly outcome, a firm can increase its profit by if it and it alone ________ its price and ________ its production.
A) raises; increases
B) raises; decreases
C) lowers; increases
D) lowers; decreases
E) raises; does not change
Topic: Duopolists' dilemma
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
28) If a duopoly has reached the monopoly outcome and only one firm increases its production, that firm's profit ________ and the other firm's profit ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change
Topic: Duopolists' dilemma
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
29) Suppose a duopoly had reached the monopoly outcome and then the first firm increased its production. If the second firm next increases its production, the second firm's profit ________ and the first firm's profit ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change
Topic: Duopolists' dilemma
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
30) If both firms in a duopoly increase their production by one unit beyond the monopoly output, each firm's profit ________ and the total profit of the duopoly ________.
A) increases; increases
B) does not change; does not change
C) decreases; decreases
D) does not change; increases
E) decreases; does not change
Topic: Duopolists' dilemma
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
31) The very best joint outcome possible for the firms in a duopoly is to produce the
A) monopoly level of output.
B) perfectly competitive level of output.
C) amount of output that maximizes total revenue.
D) amount of output that minimizes total cost.
E) Nash equilibrium level of output if the game is not repeated.
Topic: Duopolists' dilemma
Skill: Level 2: Using definitions
Section: Checkpoint 18.2
Status: Old
AACSB: Reflective thinking
32) In the 1970s, OPEC was able to maintain its cartel power and ________. By 2015, the cartel's power decreased and ________.
A) oil prices increased; oil prices decreased
B) oil prices increased; OPEC was charged with violating antitrust law
C) oil prices decreased; oil prices increased
D) economies of scale were attained; OPEC was charged with violating antitrust law
E) diseconomies of scale occurred; oil prices increased
Topic: Eye on the Global Economy: OPEC
Skill: Level 5: Critical thinking
Section: Checkpoint 18.2
Status: Old
AACSB: Analytical thinking
18.3 Game Theory
1) The tool that economists use to analyze the mutual interdependence of oligopolies is
A) economies of scale.
B) the four-firm concentration ratio.
C) game theory.
D) the HHI.
E) the efficient scale.
Topic: Game theory
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
2) Game theory is the tool that economists use to analyze strategic behavior, which is behavior that takes into account the ________ behavior of others and the mutual recognition of ________.
A) unexpected; interdependence
B) unexpected; independence
C) expected; interdependence
D) expected; independence
E) random; profit
Topic: Game theory
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
3) Game theory is used to analyze the interactions among firms in
A) oligopoly.
B) perfect competition.
C) monopoly.
D) monopolistic competition.
E) Both answers A and D are correct.
Topic: Game theory
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
4) Economists use game theory to analyze strategic behavior, which takes into account
A) monopoly situations.
B) the expected behavior of others and the recognition of mutual interdependence.
C) the price-taking behavior of oligopolists.
D) non-price competition.
E) that increased demand decreases the market power of the firms in the market.
Topic: Game theory
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
5) The concepts of mutual interdependence and game theory illustrate the fact that firms competing in oligopoly
A) consider the actions of the rivals before changing the price of their product.
B) ignore the actions of their rivals when considering price changes.
C) engage in frequent price changes.
D) never change prices.
E) will mutually determine the combined best outcome for all players.
Topic: Game theory
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
6) All games have which features?
A) prices, rules, and payoffs
B) rules, markets, and prices
C) rules, strategies, and payoffs
D) rules, strategies, and costs
E) equilibrium, prices, and quantities
Topic: Game theory
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
7) The players in a game theory situation often do not act in their joint interest because of which of the following?
A) They do not realize the benefit of cooperation.
B) Players strive to minimize their opponents' profits.
C) Players do not understand the game and its payoffs.
D) It is not in each player's self-interest to cooperate.
E) Players understand the game but they do not know which action(s) will benefit their joint interest.
Topic: Game theory
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
8) A Nash equilibrium
i. is named after the Nobel prize winning economist, John Nash.
ii. occurs when each player chooses the best strategy given the strategy of the other player.
iii. must give the best possible outcome for both players.
A) i only
B) ii only
C) iii only
D) i and ii
E) ii and iii
Topic: Nash equilibrium
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
9) A Nash equilibrium is defined as
A) making zero economic profit in the long run.
B) forming a cartel with strong penalties for cheaters.
C) relying on other game players to realize the benefit of cooperation.
D) each player taking the best possible action given the action of the other player.
E) each player taking the action that is best for all the players.
Topic: Nash equilibrium
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
10) A Nash equilibrium occurs when each player in a game takes the ________ given the action of the other player.
A) worst possible action for himself or herself
B) best possible action for himself or herself
C) most unpredictable possible action
D) most mutually beneficial possible action
E) best possible action for the other player
Topic: Nash equilibrium
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
11) A Nash equilibrium in the duopoly game
A) means that one player has greater market power.
B) occurs when each player takes the best possible action regardless of the strategy chosen by other firms.
C) will always lead to equilibrium in which the firms' total profit is the largest.
D) can occur only if firms cooperate with each other.
E) means that a firm must be able to determine its actions and the actions of its competitor.
Topic: Nash equilibrium
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
12) The prisoners' dilemma is an example of
A) product differentiation.
B) collusion.
C) game theory.
D) monopolistic competition.
E) decision making in a monopoly.
Topic: Prisoners' dilemma
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
13) The prisoners' dilemma is
A) an example of a duopoly game.
B) a theory about why firms break the law.
C) competition that can occur among firms in monopolistic competition.
D) an example of the monopolist charging high prices.
E) an example of a game that does not have a Nash equilibrium.
Topic: Prisoners' dilemma
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
14) In the prisoners' dilemma, each player is ________ regardless of the other player's actions.
A) forced to confess
B) forced to deny
C) better off confessing
D) better off denying
E) going to go free
Topic: Prisoners' dilemma
Skill: Level 3: Using models
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
15) The equilibrium in the prisoners' dilemma
i. minimizes the prisoners' combined jail time.
ii. has one prisoner confessing and the other denying.
iii. is a Nash equilibrium.
A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii, and iii
Topic: Prisoners' dilemma
Skill: Level 3: Using models
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
16) In a prisoners' dilemma game, in the Nash equilibrium
A) neither player gets his or her best outcome.
B) both players get their best outcome.
C) one player gets his or her best outcome and the other player does not.
D) collusion would not alter the outcome.
E) Either answer A or C might be correct depending on whether the players communicate with each other or do not communicate with each other.
Topic: Prisoners' dilemma
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
17) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is that Bonnie ________ and Clyde ________.
A) confesses; denies
B) confesses; confesses
C) denies; denies
D) denies; confesses
E) denies; either confess or denies, either outcome is consistent with the Nash equilibrium
Topic: Prisoners' dilemma
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
18) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is
A) Bonnie confesses only if she thinks Clyde denies committing the crime.
B) Clyde confesses only if he thinks Bonnie denies committing the crime.
C) both Bonnie and Clyde confess to the crime.
D) both Bonnie and Clyde deny committing the crime.
E) Clyde confesses and Bonnie might either confess or not confess, either outcome is consistent with the Nash equilibrium.
Topic: Prisoners' dilemma
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
19) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Which of the following statements correctly describes the equilibrium choices made by Bonnie and Clyde?
A) The Nash equilibrium is the best outcome for Bonnie and Clyde.
B) There is no equilibrium in this game.
C) In the Nash equilibrium, both Bonnie and Clyde deny committing the crime.
D) Bonnie and Clyde could improve upon the Nash equilibrium if they could communicate.
E) Bonnie and Clyde get the best outcome for themselves because they are not allowed to communicate.
Topic: Nash equilibrium
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
20) The table above shows the payoff matrix for two firms operating a Zipline duopoly in a resort town.
If the firms can collude, industry profits equal ________ and both firms would offer ________ rides each.
A) $10,000; 60
B) $6,000; 100
C) $5,000; 60
D) $5,000; 100
E) $10,000; 320
Topic: Game theory
Skill: Level 3: Using models
Section: Checkpoint 18.3
Status: Old
AACSB: Application of knowledge
21) The table shows the payoff matrix for two firms operating a Zipline duopoly in a resort town. If the firms decide to compete, industry profits equal and both firms would offer ________ rides each.
A) $6,000; 100
B) $5,000; 60
C) $9,000; 100
D) $9,000; 60
E) $10,000; 320
Topic: Game theory
Skill: Level 3: Using models
Section: Checkpoint 18.3
Status: Old
AACSB: Application of knowledge
22) The table shows the payoff matrix for two firms operating a Zipline duopoly in a resort town. The Nash equilibrium for this market produces ________ rides per week with Firm X earning a profit of ________ and Firm Y earning a profit of ________.
A) 200; $3,000; $3,000
B) 220; $3,000; $3,000
C) 200; $5,000; $3,000
D) 120; $10,000; $6,000
E) 220; $4,000; $5,000
Topic: Game theory
Skill: Level 3: Using models
Section: Checkpoint 18.3
Status: Old
AACSB: Application of knowledge
23) The prisoners' dilemma is similar to the problem faced by firms in an oligopoly in the United States because
A) mutual interdependence exists, and collusion is illegal in the United States, so the firms cannot legally communicate.
B) collusion is legal in the United States, and firms can communicate their pricing decisions to each other.
C) failure to cooperate leads to better outcomes than cooperation.
D) private prisons are run by oligopolies.
E) the firms can communicate but mutual interdependence exists.
Topic: Nash equilibrium
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
24) In an oligopoly in which the firms have entered into a cartel agreement, the Nash equilibrium exhibits which of the following?
A) firms jointly maximizing profits
B) the firms cheating on the cartel agreement, which benefits society
C) production at a price and output level close to monopolistic competition in the long run
D) the firms cheating on the cartel agreement, which harms society
E) one firm cheating on the cartel agreement and the other firms complying with the cartel agreement
Topic: Nash equilibrium
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
25) Suppose Intel and AMD can each charge either $300 or $200 for a CPU (the computing unit of a computer). The above table illustrates the payoffs, in millions of dollars, from each of the four possible outcomes that could occur in their duopoly setting. If Intel charges $300 and AMD charges $300, then Intel's profit will be ________ million and AMD's profit will be ________ million.
A) $320; $160
B) $200; $180
C) $500; $100
D) $450; $220
E) $320; $220
Topic: Payoff matrix
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
26) Suppose Intel and AMD can each charge either $300 or $200 for a CPU (the computing unit of a computer). The above table illustrates the payoffs, in millions of dollars, from each of the four possible outcomes that could occur in their duopoly setting. What must Intel's price be for AMD to earn $220 million in profit?
A) $200
B) $400
C) $220
D) either $300 or $400 because AMD earns $220 million in profit either way
E) None of the above answers is correct because the payoff matrix shows that it is not possible for AMD to earn $220 million in profit.
Topic: Payoff matrix
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
27) Suppose Intel and AMD can each charge either $300 or $200 for a CPU (the computing unit of a computer). The above table illustrates the payoffs, in millions of dollars, from each of the four possible outcomes that could occur in their duopoly setting. If Intel charges $200 and AMD charges $300, then Intel's profit will be ________ million and AMD's profit will be ________ million.
A) $200; $180
B) $320; $160
C) $500; $100
D) $450; $220
E) $500; $220
Topic: Payoff matrix
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
28) Long-run economic profits are most likely to be earned in
A) perfect competition and oligopoly.
B) perfect competition and monopoly.
C) monopoly and oligopoly.
D) oligopoly and monopolistic competition.
E) perfect competition and monopolistic competition.
Topic: Duopoly game
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
29) If two duopolists can stick to a cartel agreement to boost their prices, then both
A) make greater economic profits than if they did not collude.
B) price at marginal cost.
C) price below average total cost.
D) decrease their economic profits.
E) increase their production so that each produces more than if they did not collude.
Topic: Duopoly game
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
30) If an oligopolistic game is repeatedly played, which of the following can occur?
A) Players can learn ways to cooperate and make an economic profit.
B) The competitive price and output consistently is the final result.
C) Firms can learn how to cheat more effectively on the other player.
D) One firm will be driven out of business.
E) An implicit agreement is reached in which one firm constantly cheats on the cartel and the other firm complies with it.
Topic: Repeated games
Skill: Level 3: Using models
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
31) The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the Nash equilibrium, Firm A will set a price of ________ and Firm B will set a price of ________.
A) $10; $20
B) $20; $10
C) $10; $10
D) $20; $20
E) $20; something, but more information is needed to determine Firm B's price
Topic: Nash equilibrium
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
32) The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the above game, in the Nash equilibrium
A) Firm A and Firm B are both making $40,000 in economic profit.
B) Firm A and Firm B are both making $55,000 in economic profit.
C) Firm A is making $60,000 and Firm B is making $55,000 in economic profit.
D) Firm A and Firm B are both making $60,000 in economic profit.
E) Firm A and Firm B are both making $35,000 in economic profit.
Topic: Nash equilibrium
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
33) The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. Which of the following statements is correct?
A) If the firms play this game repeatedly, one would end up charging $20 and the other $10.
B) If the firms cooperate, both could make $55,000 in economic profit.
C) The Nash equilibrium in this game is for both firms to set P = $20 because that maximizes their combined profit.
D) Firm B's strategy is to always set P = $20 because that gives Firm B the highest possible profit.
E) If Firm B sets P = $20, then Firm A will maximize its profit by setting its P = $20.
Topic: Repeated games
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
34) Intel and AMD are a duopoly that produces CPU chips.Intel and AMD must choose whether to conduct R&D or not conduct R&D. The table above shows the payoff matrix for the two firms. The numbers are millions of dollars of profit. The Nash equilibrium is for Intel to ________ and for AMD to ________.
A) conduct R&D; conduct R&D
B) conduct R&D; not conduct R&D
C) not conduct R&D; conduct R&D
D) not conduct R&D; not conduct R&D
E) conduct R&D; either conduct R&D or not conduct R&D, the equilibrium could be either choice for AMD
Topic: Nash equilibrium
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Revised
AACSB: Analytical thinking
35) Intel and AMD are a duopoly that produces CPU chips. Intel and AMD must choose whether to conduct R&D or not conduct R&D. The table above shows the payoff matrix for the two firms. If AMD is playing a tit-for-tat strategy, then if Intel conducted R&D last period, AMD
A) definitely conducts R&D this period.
B) definitely does not conduct R&D this period.
C) might conduct R&D or might not conduct R&D, depending on Intel's profit.
D) might conduct R&D or might not conduct R&D, depending on its profit.
E) might conduct R&D or might not conduct R&D, but more information is needed to determine its action.
Topic: Repeated games
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Revised
AACSB: Analytical thinking
36) Intel and AMD are a duopoly that produces CPU chips. Intel and AMD must choose whether to conduct R&D or not conduct R&D. The table above shows the payoff matrix for the two firms. AMD is playing a tit-for-tat strategy and Intel did not conduct R&D last period. Then, of the following answers, Intel's total profit for the next two periods is the highest if Intel ________ R&D this period and ________ R&D next period.
A) conducts; conducts
B) does not conduct; conducts
C) conducts; does not conduct
D) does not conduct; does not conduct
E) conducts; either conducts or does not conduct because the profit is the same in either case
Topic: Repeated games
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Revised
AACSB: Analytical thinking
37) One of the main tools economists use to analyze strategic behavior is
A) the Herfindahl-Hirschman Index.
B) game theory.
C) cartel theory.
D) the collusion index.
E) dual theory, which is used to study duopolies.
Topic: Game theory
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
38) Game theory reveals that
A) the equilibrium might not be the best solution for the parties involved.
B) firms in oligopoly are not interdependent.
C) each player looks after what is best for the industry.
D) if all firms in an oligopoly take the action that maximizes their profit, then the equilibrium will have the largest possible combined profit of all the firms.
E) firms in an oligopoly choose their actions without regard for what the other firms might do.
Topic: Game theory
Skill: Level 3: Using models
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
39) A Nash equilibrium occurs
A) when each player acts without considering the actions of the other player.
B) when each player takes the best possible action given the action of the other player.
C) only when players use the tit-for-tat strategy.
D) only when the game is played in Nashville, TN.
E) when each player takes the action that makes the combined payoff for all players as large as possible.
Topic: Nash equilibrium
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
40) The prisoners' dilemma game
A) shows that prisoners are better off if they cooperate.
B) shows it is easy to cooperate.
C) has an equilibrium in which both prisoners are made as well off as possible.
D) would have the same outcome even if the prisoners can communicate and cooperate.
E) has an equilibrium in which one prisoner is made as well off as possible and the other prisoner is made as worse off as possible.
Topic: Prisoners' dilemma
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
41) A collusive agreement to form a cartel is difficult to maintain because
A) each member firm can increase its profit by cutting its price and selling more.
B) forming a cartel is legal but frowned upon throughout the world.
C) supply will decrease because of the high cartel price.
D) demanders will rebel once they realize a cartel has been formed.
E) each firm can increase its profit if it decreases its production even more than the decrease set by the cartel.
Topic: Duopolists' dilemma
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
42) Firms in oligopoly can achieve an economic profit
A) always in the long run.
B) if they cooperate.
C) only if the demand for their products is inelastic.
D) only if the demand for their products is elastic.
E) if they reach the non-cooperative equilibrium.
Topic: Duopoly game
Skill: Level 3: Using models
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
43) When duopoly games are repeated and a "tit for tat" strategy is used
A) the competitive outcome is more likely to be reached than when the game is played once.
B) the monopoly outcome is more likely to be reached than when the game is played once.
C) both firms begin to incur economic losses.
D) one firm goes out of business.
E) because the game is repeated it is impossible to predict whether the competitive or the monopoly outcome is more likely.
Topic: Repeated games
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
44) Oligopoly is
A) always efficient.
B) efficient only if the firms cooperate.
C) efficient only if the firms play non-repeated games.
D) generally not efficient.
E) efficient only if the firms innovate.
Topic: Efficiency of oligopoly
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
45) The smart-phone market can be considered a(n) ________ because ________.
A) oligopoly; there are large profits for the firms that dominate the market
B) monopoly; Apple makes the largest profit in the market
C) monopolistically competitive market; the few firms make a profit and produce a variety of phones
D) oligopoly; there are few barriers to entry
E) monopolistically competitive market; the firms charge a markup over marginal cost
Topic: Eye on the cell-phone oligopoly
Skill: Level 5: Critical thinking
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
18.4 Antitrust Law
1) The focus of antitrust legislation is to
A) encourage cartels to form because they are easier to regulate.
B) maintain competition.
C) force society to act in the best interest of producers.
D) limit the power of regulatory bodies.
E) ensure that producers earn enough profit to stay in business so that consumers are not harmed by too many businesses closing.
Topic: Antitrust law
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
2) Which of the following are U.S. antitrust laws?
i. The Rockefeller Act
ii. The Sherman Act
iii. The Natural Monopoly Act
A) i and ii
B) ii and iii
C) ii only
D) i, ii, and iii
E) i only
Topic: Sherman Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
3) The first antitrust law in the United States was the
A) Sherman Act, passed in 1960.
B) Clayton Act, passed in 1914.
C) Clayton Act, passed in 1830.
D) Sherman Act, passed in 1890.
E) Sherman Act, passed in 1933.
Topic: Sherman Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
4) Section 1 of the Sherman Antitrust Act declares what to be illegal?
A) every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations
B) mergers of a horizontal nature
C) any attempt to monopolize an industry
D) sharing of technology among competing firms or mergers where the effect is to lessen competition
E) exiting an industry if the remaining firm or firms have a market share that is too large
Topic: Sherman Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
5) According to Section 2 of the Sherman Act, which of the following is a felony?
A) mergers of a vertical nature
B) horizontal mergers
C) attempts to monopolize an industry
D) price increases among competing firms that occur simultaneously
E) using the HHI to justify a merger
Topic: Sherman Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
6) Which antitrust law has two main provisions, one against conspiring with others to restrict competition and the other making it a felony to monopolize or attempt to monopolize?
A) Sherman Act
B) Clayton Act
C) Robinson-Patman Act
D) Celler-Kefauver Act
E) Bade-Parkin Act
Topic: Sherman Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
7) As a result of a wave of mergers in the early part of the twentieth century, which act was passed?
A) the Anti-Merger Act of 1900
B) the Sherman Act of 1909
C) the Clayton Act of 1914
D) the Horizontal Merger Act of 1919
E) the Pro-Competition Act of 1912
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
8) In the United States, antitrust laws
A) do not allow one person to be a director of two competing firms if being a member "substantially lessens competition."
B) break up a company if it is too large because "size itself is an offense."
C) do not always prosecute firms if they have fixed their prices.
D) regard excess competition as a felony under Section 3 of the Sherman Act.
E) place a maximum limit of 125 firms that are allowed to compete in any market.
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
9) Which of the following does antitrust law prohibit if it substantially lessens competition or creates a monopoly?
i. acquiring a competitor's shares or assets
ii. territorial confinement
iii. becoming a director of a competing firm
A) i only
B) iii only
C) i and iii
D) i and ii
E) i, ii, and iii
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
10) Under the Clayton Act and its amendments, which of the following activities is illegal if it creates monopoly?
A) exit of a firm from a market with 4 or fewer surviving firms
B) price hikes among competing firms
C) price discrimination
D) patents that result in price hikes
E) entry of a firm into a new market
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
11) Under the Clayton Act and its amendments, which of the following activities is illegal if it creates monopoly?
i. contracts that require other goods to be bought from the same firm
ii. contracts that prevent a buyer from reselling a product outside a specified area
iii. becoming a director of a competing firm
A) i only
B) ii only
C) ii and iii
D) i and iii
E) i, ii, and iii
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
12) Tying arrangements
A) require retailers to charge a specific price determined by the manufacturer.
B) require a buyer to purchase one product in order to buy another, different product.
C) are illegal under the Sherman Act.
D) always allow a firm to increase its market power.
E) are always illegal under the Clayton Act.
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
13) Which of the following is an example of a tying arrangement?
A) preventing a buyer from reselling a product outside a specific area
B) selling one product only if another product is purchased
C) forcing the purchase of all necessities from a single firm
D) prohibiting a seller from selling a competing item
E) selling different units of a good to the same buyer at different prices
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
14) Tying arrangements
A) work only in perfectly competitive markets.
B) are illegal under the Sherman Act.
C) are illegal under the Clayton Act if they create monopoly.
D) are illegal under the Clayton Act and the Sherman Act only if they used along with predatory pricing.
E) are always illegal under the Clayton Act.
Topic: Clayton Act
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
15) If a firm, Best Computer Buys, requires its customers to buy software from it whenever the customers purchase a computer, the company's policy is called
A) an exclusive deal.
B) a territorial confinement.
C) a tying arrangement.
D) pricing discrimination.
E) predatory pricing.
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
16) In the 1970s, when a gasoline price ceiling was imposed that was below the equilibrium price of gasoline, some gas stations required that buyers of gas also purchase other products sold at the station. This policy is an example of which of the following?
A) price discrimination
B) tying arrangements
C) exclusive dealing
D) requirements contract
E) resale price maintenance
Topic: Clayton Act
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
17) Which of the following is an example of exclusive dealing?
A) preventing a buyer from reselling a product outside a specific area
B) forcing a buyer to buy other goods from a supplier
C) forcing the purchase of all necessities from a single firm
D) prohibiting a seller from selling a competing item
E) selling different units of a good to the same buyer at different prices
Topic: Clayton Act
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
18) If Polka Cola prevents all of its retail outlets from selling any other competing soft drink, it is engaged in
A) a tying agreement.
B) a requirement contract.
C) an exclusive deal.
D) territorial confinement.
E) resale price maintenance.
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
19) Which of the following is an example of a territorial confinement?
A) preventing a buyer from reselling a product outside a specific area
B) selling one product only if another product is purchased
C) forcing the purchase of all necessities from a single firm
D) prohibiting a seller from selling a competing item
E) selling different units of a good at different prices to the same customer
Topic: Clayton Act
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
20) Which of the following provisions requires a firm to buy all of a particular item from a single firm?
A) tying arrangement
B) requirements contracts
C) exclusive dealing
D) territorial confinement
E) quantity discrimination
Topic: Clayton Act
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
21) Which of the following is always a violation of the antitrust law?
A) price fixing
B) price discrimination
C) resale price maintenance
D) predatory pricing
E) tying arrangements
Topic: Price fixing
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
22) Price fixing
A) always is a violation of the law.
B) is allowed only if otherwise a firm would go bankrupt.
C) is one of the business practices prohibited by the Clayton Act.
D) is a violation of the law only when it is combined with predatory pricing.
E) is legal if the businesses have received prior clearance from the Justice Department.
Topic: Price fixing
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
23) Under what conditions would it be legal for two bakeries in Minneapolis to explicitly agree to raise their prices by 5 percent?
A) if the price rise was not predatory
B) if the price rise did not measurably increase producer surplus
C) never
D) if the price rise did not harm consumers in the long run by reducing competition
E) if the price rise was necessary to keep one or both bakeries from closing
Topic: Price fixing
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
24) Setting a price so low that competitors are driven out of a market and then boosting the price is called
A) predatory pricing.
B) a tying arrangement.
C) resale price maintenance.
D) price fixing.
E) price discrimination.
Topic: Predatory pricing
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
25) When an oligopoly reduces its price with the intent of driving away its competitors, it is said to be engaging in
A) pricing differential.
B) predatory pricing.
C) price fixing.
D) a price-tying agreement.
E) price discrimination.
Topic: Predatory pricing
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
26) Economists are skeptical that ________ occurs very often because firms engaging in it are certain to suffer an economic loss for a period of time.
A) a tying arrangement
B) inefficient resale price maintenance
C) predatory pricing
D) efficient resale price maintenance
E) exclusive dealing
Topic: Predatory pricing
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
27) ________ is an agreement between a manufacturer and a distributor on the price at which a product will be resold.
A) Resale price maintenance
B) Price discrimination
C) Price fixing
D) Predatory pricing
E) A tying arrangement
Topic: Resale price maintenance
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
28) The manufacturer of perfume enters into an agreement with several distributors about the price at which the distributors can resell the perfume. The distributors who do not agree to the pricing suggestion are not able to sell the perfume. The agreement between manufacturers and distributors is
A) resale price maintenance.
B) an interlocking dealership chain.
C) always inefficient.
D) a tying arrangement.
E) an example of an exclusive deal.
Topic: Resale price maintenance
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
29) Resale price maintenance can be illegal
A) under the Clayton Act.
B) under the Sherman Act.
C) only if the distributors engage in predatory pricing.
D) if distributors tell the manufacturer the maximum price at which they will sell the product.
E) only when it is combined with territorial confinement.
Topic: Resale price maintenance
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
30) Resale price maintenance is efficient if
A) it is used in conjunction with a tying arrangement.
B) the manufacturer does not engage in predatory pricing.
C) retailers charge the lowest price for the product.
D) it enables a manufacturer to induce an efficient standard of service from retailers.
E) it takes the place of an exclusive deal.
Topic: Resale price maintenance
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
31) The Shiny Watch company, a manufacturer of expensive watches, requires all of its retailers to sell its watches for a specific price. Which of the following statements are TRUE?
i. The Shiny Watch company is engaged in predatory pricing.
ii. The Shiny Watch company is definitely violating the law
iii. The Shiny Watch company creates an efficient outcome it its retailers provide an efficient level of service.
A) i, ii and iii
B) ii only
C) iii only
D) i and ii
E) ii and iii
Topic: Resale price maintenance
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Analytical thinking
32) A group of firms in Sunnyvale have a complaint about one of their competitors. They charge that Big Box Building Supply charges such low prices that they can't stay in business. Which of the following is the most likely response from an economist?
A) Big Box Building Supply isn't engaged in predatory pricing because new firms can always enter and compete away any monopoly profits.
B) Big Box Building Supply is engaged in price fixing and should be prosecuted for violating antitrust law.
C) The firms have a valid complaint against Big Box Building Supply because it is engaged in resale price maintenance.
D) The firms don't have a valid complaint against Big Box Building Supply because it is operating like a natural monopoly.
E) Big Box Building Supply is engaged in resale price maintenance but most likely is providing efficient service.
Topic: Antitrust law
Skill: Level 5: Critical thinking
Section: Checkpoint 18.4
Status: Old
AACSB: Analytical thinking
33) The government believes that which entry barrier has allowed Microsoft to gain monopoly power?
A) ownership of the entire supply of a resource
B) patents
C) trademarks
D) economies of scale and network economies
E) territorial confinement
Topic: United States versus Microsoft
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
34) The U.S. courts found Microsoft
A) did not violate antitrust law.
B) violated the Sherman Act.
C) violated the Cellar-Kefauver Act.
D) engaged in predatory pricing.
E) violated the price discrimination clause of the Clayton Act.
Topic: United States versus Microsoft
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
35) If the Herfindahl-Hirschman Index in an industry is above 1,500, a merger that increases the Herfindahl-Hirschman Index by over 100 points will
A) be allowed by the government.
B) be challenged by the government.
C) be encouraged by the government.
D) increase competition in that industry.
E) never be allowed to happen.
Topic: Merger rules
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Revised
AACSB: Reflective thinking
36) The Federal Trade Commission uses ________ to help determine whether to challenge a possible merger.
A) the Sherman Act
B) the Clayton Act
C) the Herfindahl-Hirschman Index
D) the antitrust law of natural monopolies
E) the four-firm concentration ratio
Topic: Merger rules
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
37) If an industry has a Herfindahl-Hirschman index of 800, it is considered a
A) competitive market.
B) moderately concentrated market.
C) concentrated market.
D) monopoly.
E) small market.
Topic: Merger rules
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
38) If the Herfindahl-Hirschman Index (HHI) for a market is between 1,500 and 2,500, the Federal Trade Commission will examine
A) all mergers.
B) no mergers.
C) mergers that raise the HHI by 100 or more points.
D) mergers that raise the HHI by 100 or fewer point.
E) mergers that lower the HHI by 100 or more points.
Topic: Merger rules
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Revised
AACSB: Reflective thinking
39) Suppose there are 6 firms in an industry with the following market shares. If the two smallest firms want to merge, how will the Federal Trade Commission reply?
Firm 1: 30
Firm 2: 25
Firm 3: 25
Firm 4: 10
Firm 5: 7
Firm 6: 3
A) The firms will be allowed to merge and compete with the larger firms.
B) The firms will be challenged because the merger will raise the HHI by more than 50 points.
C) The firms will not be allowed to merge.
D) The firms will be challenged because the merger will raise the HHI by more than 100 points.
E) The firms will be challenged because the merger will raise the HHI by more than 250 points.
Topic: Merger rules
Skill: Level 4: Applying models
Section: Checkpoint 18.4
Status: Old
AACSB: Analytical thinking
40) Federal Trade Commission guidelines state that it will challenge mergers in markets for which the Herfindahl-Hirschman Index is
A) a positive number.
B) below 1,000 points.
C) between 1,500 and 2,500, and the merger would reduce the index by 100 points.
D) between 1,500 and 2,500, and the merger would increase the index by 100 points.
E) more than 1,800.
Topic: Merger rules
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Revised
AACSB: Reflective thinking
41) Suppose that an industry has an HHI of 1,900. Two firms in the industry want to merge. Under which conditions will the Federal Trade Commission challenge the merger?
A) The market is considered competitive, so the merger will not be challenged.
B) The merger will be challenged if it raises the HHI by 50 or more points.
C) The merger will be challenged if it raises the HHI by 100 or more points.
D) The merger will be challenged if it raises the HHI by 200 or more points.
E) The merger will be challenged if it raises the HHI by 500 or more points.
Topic: Merger rules
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Revised
AACSB: Reflective thinking
42) The Federal Trade Commission ________ the merger between AT&T and T-Mobile because the merger was projected to ________.
A) did not approve; increase the HHI by at least 700 points and reduce market competitiveness
B) approved; increase the HHI by only 700 points and not substantially affect market competitiveness
C) approved; decrease the HHI by almost 500 points
D) did not approve; increase the four-firm concentration ratio by 20 percent
E) did not approve; cause the firms to engage in predatory pricing
Topic: Eye on the U.S. Economy: Wireless Service Merger Decisions
Skill: Level 5: Critical thinking
Section: Checkpoint 18.4
Status: Old
AACSB: Analytical thinking
43) The first antitrust act was ________ passed in ________.
A) the Clayton Act; 1890
B) the Sherman Act; 1890
C) the Clinton Act; 1999
D) the Rockefeller Act; 1890
E) the Clayton Act; 1914
Topic: Sherman Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
44) The Clayton Act
A) replaced the Sherman Act.
B) along with its amendments, outlawed several business practices if they substantially lessened competition or created monopoly.
C) along with its amendments, prohibited all business practices that substantially lessen competition or create monopoly.
D) was the first anti-trust law in the United States.
E) was repealed in 1985.
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
45) Which of the following is (are) prohibited if it substantially lessens competition or creates a monopoly?
i. price discrimination
ii. tying arrangements
iii. exclusive dealing
A) i only
B) ii only
C) ii and iii
D) iii only
E) i, ii, and iii
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
46) If Polka Cola agrees to sell its cola to a retailer only if the retailer also buys a lemon-lime drink, Polka Up, then Polka Cola is engaged in
A) a tying arrangement.
B) a requirement contracts.
C) an exclusive deal.
D) territorial confinement.
E) price discrimination.
Topic: Tying arrangements
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
47) Which of the following is always illegal?
A) possessing a very large market share
B) selling at a price below other producers because of efficiency
C) price fixing
D) attempting to merge with a competitor
E) price discrimination
Topic: Price fixing
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
48) Resale price maintenance
A) can lead to efficiency by preventing low-price shops from being free riders.
B) can lead to inefficiency by preventing low-price shops from being free riders.
C) is always legal.
D) is a clear example of predatory pricing.
E) is an example of a tying arrangement.
Topic: Resale price maintenance
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
49) Predatory pricing occurs when a firm sets a ________ price to drive competitors out of business with the intention of then setting a ________ price.
A) monopoly; high
B) monopoly; low
C) low; monopoly
D) low; low
E) high; monopoly
Topic: Predatory pricing
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
50) In the case against Microsoft, it was claimed that combining Internet Explorer and Windows was
A) predatory pricing.
B) an illegal tying agreement.
C) creating one product that is convenient for the consumers.
D) illegal territorial confinement.
E) an inefficient resale maintenance agreement.
Topic: United States versus Microsoft
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
51) In a concentrated industry with a Herfindahl-Hirschman Index that exceeds 1,800, the Federal Trade Commission will challenge any merger that increases the Herfindahl-Hirschman index by a minimum of
A) 50 points.
B) 100 points.
C) 1,000 points.
D) 1,800 points.
E) 10,000 points.
Topic: Merger rules
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
52) In 2016, Disney thought about buying Netflix. Before the firms will be allowed the merge, the Justice Department will decide if the merger
A) violates the Sherman Act.
B) results in predatory pricing.
C) violates the Robinson-Patman Act.
D) results in resale price maintenance.
E) creates excess capacity.
Topic: Sherman Act
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Application of knowledge
53) In 2016, a federal judge prohibited Staples and Office Depot from merging because
A) the resulting HHI would have been too high.
B) the resulting HHI would have been too low.
C) the firms' cost would have increased too much.
D) too many employees would have to be fired.
E) there would be too many office supply stores.
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Application of knowledge
18.5 Chapter Figures
The figure above shows the market for airplanes.
1) Suppose the airplane market is an oligopoly. If the firms act as a monopolist, the price will be ________ and if the firms act as competitors the price will be ________.
A) $13 million per plane; $1 million per plane
B) $1 million per plane; $13 million per plane
C) $13 million per plane; $13 million per plane
D) $1 million per plane; $1 million per plane
E) None of the above answers is correct.
Topic: Range of outcomes
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Analytical thinking
2) Suppose the airplane market is an oligopoly. According to the figure above, if the firms act as a monopolist, the quantity produced will be ________ planes per week, and if the firms act as competitors, the quantity produced will be ________ planes per week.
A) 6; 12
B) 12; 6
C) 0; 6
D) 12; 0
E) None of the above answers is correct.
Topic: Range of outcomes
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Analytical thinking
3) Suppose the airplane market is an oligopoly. According to the figure above, the price can range as high as ________ and as low as ________.
A) $13 million per plane; $1 million per plane
B) $30 million per plane; $13 million per plane
C) $13 million per plane; $13 million per plane
D) $1 million per plane; $1 million per plane
E) None of the above answers is correct.
Topic: Range of outcomes
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Analytical thinking
4) Suppose the airplane market is an oligopoly. According to the figure above, the quantity produced can range as high as ________ planes per week and as low as ________ planes per week.
A) 10; 4
B) 12; 6
C) 6; 0
D) 12; 0
E) None of the above answers is correct.
Topic: Range of outcomes
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Analytical thinking
18.6 Integrative Questions
1) A characteristic common in both oligopoly and monopolistic competition is
A) a small number of firms compete in the market.
B) natural or legal barriers prevent the entry of new firms into the market.
C) each firm faces a downward-sloping demand curve.
D) the firms in the market are interdependent.
E) each firm has a large share of the market.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
2) If the HHI for an industry equals 3,200
A) firms in the industry must enter a cartel in order to earn an economic profit.
B) firms in the industry are most likely to make zero economic profit.
C) the industry is probably an oligopoly.
D) firms in the industry are likely to act independently of each other.
E) the industry is almost surely monopolistic competition.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
3) Which of the following are characteristics of an oligopoly?
i. The HHI for an oligopoly is between 100 and 3500.
ii. There are a few firms that compete.
iii. The firms can increase their profit by forming a cartel.
A) i and ii
B) i and iii
C) ii and iii
D) i, ii, and iii
E) i only
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
4) When a market has barriers to entry
A) then in the long run it is possible for the firms to incur economic losses.
B) then in the long run the only possible outcome for the firms to make zero economic profit.
C) then in the long run it might be possible for the firms to make a positive economic profit.
D) oligopolies cannot be created.
E) the HHI almost always falls below 1,000.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
5) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, then ________ limit(s) the market to 3 firms.
A) economies of scale
B) a "tit for tat" strategy
C) collusion
D) a Nash equilibrium
E) legal requirements
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
6) The figure above shows the market demand curve and the ATC curve for a firm. Each firm in the market has the same ATC curve. If the firms in the industry agree to form a cartel, the firms in the industry make an economic profit if there are ________ firms, each producing ________ units per hour.
A) 3; 4,000
B) 4; 3,000
C) 2; 6,000
D) 2; 4,000
E) 2; 12,000
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
7) If a legal oligopoly exists
A) the firms always engage in a "tit for tat" strategy.
B) there is the possibility that the market is large enough for more firms.
C) the firms never collude.
D) monopoly profits cannot be earned.
E) the firms may legally merge and become a monopoly.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
8) A cartel is
A) another name for a firm in an oligopoly.
B) a collusive agreement among a number of firms.
C) a government body that regulates an industry.
D) an antitrust law.
E) a type of regulation that focuses on quantities rather than price.
Topic: Integrative
Skill: Level 1: Definition
Section: Integrative
Status: Old
AACSB: Reflective thinking
9) Firms operating in an oligopoly
A) always compete on price.
B) always compete on price, product quality and marketing.
C) can make the same profit as a monopoly but there is no assurance that they will do so.
D) usually achieve the competitive outcome.
E) always make the same profit as a monopoly.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
10) The range of output for a duopoly ranges between the
A) perfectly competitive outcome and the monopolistically competitive outcome.
B) efficient scale and the perfectly competitive outcome.
C) minimum of ATC and the efficient scale.
D) monopoly outcome and the perfectly competitive outcome.
E) short-run perfectly competitive outcome and the long-run perfectly competitive outcome.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
11) What is the conclusion in the prisoners' dilemma?
A) Firms should not enter a legal duopoly.
B) Two prisoners acting in their own best interest harm their joint interest.
C) There is no Nash equilibrium available to the prisoners.
D) Prisoners do not act interdependently.
E) Duopolies almost always reach their best outcome.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
12) Which of the following can be games played by firms in an oligopoly?
i. choosing how much to spend on advertising
ii. choosing how much to spend on R&D
iii. choosing to enter a legal duopoly
A) i and ii
B) i and iii
C) ii and iii
D) ii only
E) iii only
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
13) Tying arrangements are
A) illegal if they substantially lessen competition.
B) used by regulators to force a monopoly to produce an efficient amount of production.
C) used by regulators to force a monopoly to charge an efficient price.
D) illegal according to the Sherman Act.
E) necessary in order for a firm to price discriminate.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
14) Resale price maintenance is a form of
A) regulation.
B) marginal cost pricing.
C) average cost pricing.
D) agreeing about the price that will be charged.
E) setting the price cap under price cap regulation.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
15) If a firm engages in predatory pricing, it
A) is following marginal cost pricing.
B) is following average cost pricing.
C) sets a low price to drive rivals out of business.
D) has been regulated using a price cap.
E) is guilty of price fixing.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
16) Because it was found guilty of violating the Sherman Act, Microsoft will be subject to
A) rate of return regulation.
B) marginal cost pricing.
C) price cap regulation.
D) predatory pricing.
E) None of the above answers is correct.
Topic: Integrative
Skill: Level 1: Definition
Section: Integrative
Status: Old
AACSB: Reflective thinking
17) When the Federal Trade Commission decides whether to allow firms in an industry to merge, it uses the ________ to guide its decision.
A) social interest theory
B) HHI
C) capture theory
D) Sherman Act
E) predatory pricing theory
Topic: Integrative
Skill: Level 1: Definition
Section: Integrative
Status: Old
AACSB: Reflective thinking
18.7 Essay: What Is Oligopoly?
1) Describe the characteristics of an oligopoly.
Topic: Oligopoly, definition
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Written and oral communication
2) "Because firms in an oligopoly are so large, they do not need to consider each other's actions." Is the previous statement correct or incorrect? Explain your answer.
Topic: Oligopoly
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Written and oral communication
3) What market structures other than oligopoly have the characteristic of one firm's actions affecting the actions of its competitors? Explain your answer.
Topic: Oligopoly
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Written and oral communication
4) What is a cartel?
Topic: Cartel
Skill: Level 1: Definition
Section: Checkpoint 18.1
Status: Old
AACSB: Written and oral communication
5) Explain what a cartel is and the difficulties faced in maintaining a cartel.
Topic: Cartel
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Written and oral communication
6) Why are cartels among firms usually kept secret?
Topic: Cartel
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Written and oral communication
7) What is the legal status of a cartel among firms in the United States?
Topic: Cartel
Skill: Level 2: Using definitions
Section: Checkpoint 18.1
Status: Old
AACSB: Reflective thinking
18.8 Essay: The Oligopolists' Dilemma
1) "If firms in an oligopoly operate as a monopoly, the industry produces the most output and if they operate as perfect competitors, the industry produces the least output." Is the previous statement correct or incorrect? Why?
Topic: Range of outcomes
Skill: Level 2: Using definitions
Section: Checkpoint 18.2
Status: Old
AACSB: Written and oral communication
2) What is the best outcome for society: When firms in an oligopoly operate as a monopoly or when they act as perfect competitors? Briefly explain your answer.
Topic: Range of outcomes
Skill: Level 5: Critical thinking
Section: Checkpoint 18.2
Status: Old
AACSB: Written and oral communication
3) In the Boeing/Airbus oligopoly example discussed in the text, why did Boeing and Airbus have an incentive to produce more planes than the monopoly outcome?
Topic: Range of outcomes
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Written and oral communication
4) The above figure shows the market for the three moving companies in a small nation. If the movers act as perfect competitors, what is the price per mile and the number of miles per year? If the movers collude and act as a single monopoly, what is the price per mile and the number of lines per year?
Topic: Range of outcomes for an oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Analytical thinking
5) The figure above shows the market demand curve for a market with three firms. It also shows a firm's marginal cost curve. In this oligopoly, what is the range of output and prices? Why does this range of outcomes exist?
Topic: Range of outcomes for an oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.2
Status: Old
AACSB: Analytical thinking
6) The table above has the market demand schedule in an industry that has two firms in it. The marginal cost of this product is zero because these two firms have exclusive ownership of the resource and it does not cost any additional amount to produce additional units.
a. If the firms cooperate with each other so that they operate as a monopoly, what price will they charge and what (total) output will they produce?
b. If the firms cannot cooperate but instead behave as perfect competitors, what will be the price and the (total) output they produce?
a. As a monopoly, the price will be $15 and the total output will be 30 units. This price and output combination is where they maximize their total profit because it is here that the marginal revenue equals zero. (The marginal revenue equals zero because this is the price and output combination for which total revenue is maximized and marginal revenue equals zero when total revenue is maximized.)
b. The perfectly competitive price is equal to marginal cost. Because marginal cost is equal to zero, the price will be $0 and the output will be 60 units.
Topic: Range of outcomes for an oligopoly
Skill: Level 4: Applying models
Section: Checkpoint 18.2
Status: Old
AACSB: Analytical thinking
18.9 Essay: Game Theory
1) What three characteristics do all games have in common?
Topic: Games
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Reflective thinking
2) What is a Nash equilibrium? Is this equilibrium the best outcome for the players? Give an example.
Topic: Nash equilibrium
Skill: Level 1: Definition
Section: Checkpoint 18.3
Status: Old
AACSB: Written and oral communication
3) "A Nash equilibrium occurs when both parties to a game end up worse off as a result of the decisions that are made." Is the previous definition of a Nash equilibrium correct or incorrect?
Topic: Nash equilibrium
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Written and oral communication
4) OPEC, the Organization of Petroleum Exporting Countries, was formed in Baghdad in 1960. Since its formation, this cartel has suffered from a major problem with respect to the quota (limit) of output it assigns each member nation. What is OPEC's goal and what sort of quota do you think the cartel assigns? How and why do nations cheat on their quota? What happens when a nation cheats on its quota?
Topic: Cartel cheating
Skill: Level 5: Critical thinking
Section: Checkpoint 18.3
Status: Old
AACSB: Written and oral communication
5) Why do oligopoly firms find it difficult to cooperate and not cheat on a cartel agreement?
Topic: Cartel cheating
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Written and oral communication
6) In a cartel, how does the number of firms affect the likelihood that the cartel will be able to successfully maintain a high price?
Topic: Cartel cheating
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Written and oral communication
7) What is the dilemma faced by firms in oligopoly?
Topic: Oligopolists' dilemma
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Written and oral communication
8) "The duopolists' dilemma occurs when firms in a duopoly coordinate their decisions to achieve the best possible outcome." Is the previous statement correct or incorrect? Why?
Topic: Duopolists' dilemma
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Written and oral communication
9) What is game theory and what light does it shed on the duopolists' dilemma?
Topic: Duopolists' dilemma
Skill: Level 2: Using definitions
Section: Checkpoint 18.3
Status: Old
AACSB: Written and oral communication
10) Does an oligopoly produce the efficient quantity of output or does it create a deadweight loss? Do the firms want to produce the efficient quantity of output? Explain your answer.
If the firms can play repeated games, detecting and punishing overproduction, the oligopoly is more likely to restrict output to the monopoly level. This outcome is inefficient because marginal cost does not equal marginal benefit. A deadweight loss is created. From the firms' perspective, this outcome is more desirable because the firms make an economic profit.
Topic: Efficiency of oligopoly
Skill: Level 3: Using models
Section: Checkpoint 18.3
Status: Old
AACSB: Written and oral communication
11) Sally's Mom is pretty sure her twins, Tim and John, together cut the hair off Sally's Barbie doll. She talks to them separately and gives them the following options. If they both confess they will have to pay Sally $10 each. If Tim confesses and John does not confess, Tim pays $15 and John pays $8. If Tim does not confess and John confesses, Tim has to pay $8 and John $15. If both do not confess, they both pay her $14. Sally's Mom has them in separate rooms and they cannot talk to each other.
a. Complete the payoff matrix below.
b. If they reach the Nash equilibrium, what will Tim and John do?
a. The complete payoff matrix is above.
b. Tim and John will both deny involvement. Sally's doll remains bald, but Tim and John each pay Sally $14 so Sally has $28 for a new doll.
Topic: Prisoners' dilemma
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
12) Two competing firms in a duopoly must decide whether or not to offer consumers a coupon for their good. The payoff matrix above represents the daily profit available to the firms under the different coupon strategies.
a. What strategies and payoffs are represented by quadrant A?
b. What strategy will Firm 1 pursue if it believes that Firm 2 is offering a coupon?
c. What quadrant represents the equilibrium that will result if the firms act independently (compete)?
d. What quadrant represents the equilibrium that will result if the firms successfully collude?
a. In quadrant A, Firm 1 offers a coupon while Firm 2 does not. As a result, Firm 1 earns $150 in profits and Firm 2 earns $60.
b. If Firm 2 is offering a coupon and Firm 1 does not, Firm 1 will earn $75. If Firm 1 also offers a coupon, it will earn $100. Therefore, Firm 1 will also offer a coupon.
c. Quadrant C.
d. Quadrant B.
Topic: Duopolists' dilemma
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
13) Two firms are introducing an improved version of their toothpastes. They must decide whether or not to advertise their products. The table above gives the payoff matrix in terms of the economic profits they expect in each case. The payoffs are in terms of millions of dollars.
a. What is the Nash equilibrium for the game?
b. If they could cooperate, what strategy would they prefer? What would be the payoff?
a. The Nash equilibrium has each firm advertising and hence each firm receiving $100 million in economic profit because both decided to advertise.
b. If they could cooperate, they would both choose not to advertise. In this case, each would make $140 million in economic profit.
Topic: Duopolists' dilemma
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
14) Two firms are competing in a duopoly and are trying to decide which price to set. The two prices under consideration are a high monopoly price and a low competitive level. If both seller A and seller B chose the monopoly price, each will make $20 million of economic profit. However, if one picks the monopoly price while the other picks the competitive price, the high-price firm will lose $1 million while the low-price firm will make $32 million. If both sell at the competitive level, they both make zero economic profit. Complete the payoff matrix below and determine the Nash equilibrium.
The completed payoff matrix is above and has the economic profits in millions of dollars. The Nash equilibrium is for both to charge the competitive, low, price and make zero economic profit.
Topic: Duopolists' dilemma
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
15) Suppose two companies, Sony and Magnavox, are competing in a duopoly. If both companies charge a high price, they each make $700 million in economic profit. If both companies charge a low price, they each make $500 million in economic profit. If one company charges a high price and the other a low price, the company charging the higher price makes $450 million in economic profit and the company charging the lower price makes $800 million in economic profit.
a. Complete the payoff matrix below for Sony and Magnavox.
b. Find the Nash equilibrium.
a. The completed payoff matrix is above, with the entries in millions of dollars.
b. The Nash equilibrium has each firm charging a low price and earning $500 million in economic profit.
Topic: Duopolists' dilemma
Skill: Level 4: Applying models
Section: Checkpoint 18.3
Status: Old
AACSB: Analytical thinking
18.10 Essay: Antitrust Law
1) Does section 2 of the Sherman Act make it a felony to "attempt" to monopolize an industry, or must the attempt succeed before it is a felony?
Topic: Sherman Act
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
2) "The Clayton Act repealed the Sherman Act so that only the Clayton Act remains in force." Is the previous statement correct or incorrect?
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
3) What are the actions that are prohibited according to the Clayton Act and its amendments? What conditions must be met for these actions to be prohibited?
1. Price discrimination.
2. Tying arrangements.
3. Requirements contracts.
4. Exclusive dealing.
5. Territorial confinement.
6. Acquiring a competitor's shares or assets.
7. Becoming a director of a competing firm.
Topic: Clayton Act
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Old
AACSB: Written and oral communication
4) Briefly explain resale price maintenance. Is it legal or illegal? Does it create efficiency or inefficiency?
Topic: Resale price maintenance
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Written and oral communication
5) What is meant by the term "exclusive dealing"? Give an example of an exclusive deal. When is it illegal?
Topic: Clayton Act
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Written and oral communication
6) If Sony required all its retailers not to sell televisions from other companies, Sony would be engaging in what kind of activity? Is Sony's requirement legal or does it violate the Clayton Act?
Topic: Clayton Act
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Written and oral communication
7) Explain how the courts have ruled on price fixing.
Topic: Price fixing
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Written and oral communication
8) If price fixing is necessary because without it a firm will go bankrupt, is the price fixing legal?
Topic: Price fixing
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Reflective thinking
9) Describe the Department of Justice's claims against Microsoft.
Topic: United States versus Microsoft
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Old
AACSB: Written and oral communication
10) What are the merger rules used by the Federal Trade Commission to help decide whether firms are allowed to merge?
Topic: Merger rules
Skill: Level 1: Definition
Section: Checkpoint 18.4
Status: Revised
AACSB: Written and oral communication
11) In a market with a Herfindahl-Hirschman Index of 2,000, according to their guidelines, will the Department of Justice challenge a merger that would increase the index by 250?
Topic: Merger rules
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Revised
AACSB: Written and oral communication
12) "If an industry's Herfindahl-Hirschman Index is below 1,500, a merger between any two firms in that industry will be disallowed." Comment on the accuracy of the previous statement.
Topic: Merger rules
Skill: Level 2: Using definitions
Section: Checkpoint 18.4
Status: Revised
AACSB: Written and oral communication
13) In 1911, Standard Oil Co. was declared a monopoly by the government under the Sherman Act and the company was ordered to break itself up into competing companies. Two oil companies, Exxon and Mobil, were the result of this breakup. A few years ago, Exxon and Mobil merged again to form ExxonMobil Corporation. Why did the government allow this merger now?
Topic: Merger rules
Skill: Level 5: Critical thinking
Section: Checkpoint 18.4
Status: Old
AACSB: Written and oral communication
14) Suppose the industry for washing machines has only four firms. The market shares are: Firm A, 40 percent; Firm B, 20 percent; Firm C 20, percent; and Firm D, 20 percent.
a. What is the Herfindahl-Hirschman Index (HHI)?
b. If Firms C and D were to announce a merger, would the Federal Trade Commission oppose the merger?
a. The HHI is 2,800.
b. Yes, the Federal Trade Commission would oppose the merger. If the merger occurred, the new HHI would be 3,600. The merger would increase the HHI by 800 points. The Federal Trade Commission's guidelines are to challenge a merger if the initial HHI exceeds 2,500 and the merger raises the HHI by more than 200 points. The merger considered in the problem easily falls under these guidelines.
Topic: Merger rules
Skill: Level 3: Using models
Section: Checkpoint 18.4
Status: Revised
AACSB: Analytical thinking
15) A market has ten firms, whose market shares are given in the table above.
a. If firms I and J wanted to merge, according to the Department of Justice guidelines, would the Federal Trade Commission challenge the merger?
b. If firms A and B wanted to merge, according to the Federal Trade Commission guidelines, would the Federal Trade Commission challenge the merger?
a. The decision whether to challenge the merger depends, in part, on the market's Herfindahl-Hirschman Index (HHI). The HHI for the market initially is 1,150. Thus the Federal Trade Commission guidelines say it will not challenge a merger even if the merger raises the HHI by 100 or more points. If firms I and J merge, the HHI becomes 1,200. The Federal Trade Commission will not challenge this merger.
b. If firms A and B merge, the HHI becomes 1,600. The Federal Trade Commission will not challenge this merger.
Topic: Merger rules
Skill: Level 3: Using models
Section: Checkpoint 18.4
Status: Old
AACSB: Analytical thinking
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