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Exam 17: Oligopoly

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Question 81

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Laurel and Janet are competitors in a local market and each is trying to decide if it is worthwhile to advertise.If both of them advertise,each will earn a profit of $5,000.If neither of them advertise,each will earn a profit of $10,000.If one advertises and the other doesn't,then the one who advertises will earn a profit of $12,000 and the other will earn $2,000.In this version of the prisoners' dilemma,if the game is played only once,Laurel should

A) advertise,but if the game is to be repeated many times she should probably not advertise.
B) advertise,and if the game is to be repeated many times she should still probably advertise.
C) not advertise,but if the game is to be repeated many times she should probably advertise.
D) not advertise,and if the game is to be repeated many times she should still not advertise.

E) A) and B)
F) A) and C)

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Question 82

Multiple Choice

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Predatory pricing refers to

A) a firm selling certain products together rather than separately.
B) a monopoly firm reducing its price in an attempt to maintain its monopoly.
C) firms colluding to set prices.
D) All of the above are examples of predatory pricing.

E) A) and B)
F) All of the above

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Question 83

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Table 17-7.The table shows the demand schedule for a particular product. -Refer to Table 17-7.If this market is perfectly competitive and the marginal cost is constant at $2 per unit,then how much output will be produced?

Two suspected drug dealers are stopped by the highway patrol for speeding.The officer searches the car and finds a small bag of marijuana and arrests the two.During the interrogation,each is separately offered the following: "If you confess to dealing drugs and testify against your partner,you will be given immunity and released while your partner will get 10 years in prison.If you both confess,you will each get 5 years." If neither confesses,there is no evidence of drug dealing,and the most they could get is one year each for possession of marijuana.If each suspected drug dealer follows a dominant strategy,what should he/she do?

Which of the following statements is (are) true of the prisoners' dilemma? (i) Rational self-interest leads neither party to confess. (ii) Cooperation between the prisoners is difficult to maintain. (iii) Cooperation between the prisoners is individually rational.

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

Figure 17-3.Katie and Taylor are roommates.On a particular day,their lawn needs to be mowed.Each person has to decide whether to take part in mowing the lawn.At the end of the day,either the lawn will be mowed (if one or both roommates take part in mowing) ,or it will remain unmowed (if neither roommate mows) .With happiness measured on a scale of 1 (very unhappy) to 10 (very happy) ,the possible outcomes are as follows: -Refer to Figure 17-3.In pursuing her own self-interest,Taylor will

Even when allowed to collude,firms in an oligopoly may choose to cheat on their agreements with the rest of the cartel.Why?

Which of the following statements is true?

Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding oligopolistic markets.

Antitrust laws in general are used to

Table 17-23 Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs,and thus increase their profits,if they reduced their advertising budgets.But in order for the plan to work,each firm must agree to refrain from advertising.Each firm believes that advertising works by increasing the demand for the firm's product,but each firm also believes that if neither firm advertises,the costs savings will outweigh the lost sales.Listed in the table below are the individual profits for each firm. -Refer to Table 17-23.Suppose that the two firms,A and B,make an agreement to withhold any advertising for one month in order to lower each firm's costs and raise each firm's profits.If the firms reach the Nash equilibrium,

When a group of firms acts in unison to maximize profits as if they were a monopoly,they form a __________.

Figure 17-4.Two companies,Acme and Bilco,are sellers in the same market.Each company decides whether to charge a high price or a low price.In the figure,the dollar amounts are payoffs and they represent annual profits for the two companies. -Refer to Figure 17-4.If the two companies make their pricing decisions independently,then it is likely that Acme will

Figure 17-2.Hector and Bart are roommates.On a particular day,their apartment needs to be cleaned.Each person has to decide whether to take part in cleaning.At the end of the day,either the apartment will be completely clean (if one or both roommates take part in cleaning) ,or it will remain dirty (if neither roommate cleans) .With happiness measured on a scale of 1 (very unhappy) to 10 (very happy) ,the possible outcomes are as follows: -Refer to Figure 17-2.In pursuing his own self-interest,Hector will

As the number of firms in an oligopoly increases,

The paradoxical nature of oligopoly can be demonstrated by the fact that,even though the monopoly outcome is best for the oligopolists,

Which of the following questions about predatory pricing remains unresolved?

The Sherman Antitrust Act prohibits competing firms from even talking about fixing prices.

If the members of an oligopoly could agree on a total quantity to produce and a price to charge,what quantity and price would they choose? Will this choice represent a Nash equilibrium?