Chapter 17 - M/C with answers PDF

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Chapter 17 Oligopoly TRUE/FALSE 1. The essence of an oligopolistic market is that there are only a few sellers. ANS: T 2.

Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding oligopolistic markets. ANS: F 3. In a competitive market, strategic interactions among the firms are not important. ANS: T 4.

For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.

ANS: F 5.

Suppose three firms form a cartel and agree to charge a specific price for their output. Each individual firm has an incentive to maintain the agreement because the firm’s individual profits will be the greatest under the cartel arrangement. ANS: F 6.

If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the same level of output as they would produce in a Nash equilibrium. ANS: F 7. Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same. ANS: F 8.

Cartels with a small number of firms have a greater probability of reaching the monopoly outcome than do cartels with a larger number of firms.

ANS: T 9. As the number of firms in an oligopoly becomes very large, the price effect disappears. ANS: T 10.

If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the cartel is equal to what it would be if the market were a monopoly.

ANS: T 11. As the number of firms in an oligopoly increases, the magnitude of the price effect increases. ANS: F 12.

All examples of the prisoner’s dilemma game are characterized by one and only one Nash equilibrium.

ANS: F

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130 13.

Chapter 17/Oligopoly If two players engaged in a prisoner’s dilemma game are likely to repeat the game, they are more likely to cooperate than if they play the game only once.

ANS: T 14.

The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members.

ANS: T 15.

In the prisoners' dilemma game, one prisoner is always better off confessing, no matter what the other prisoner does. ANS: T 16.

In the prisoners' dilemma game, confessing is a dominant strategy for each of the two prisoners.

ANS: T 17.

The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that the two prisoners play in the prisoners' dilemma. ANS: T 18.

In the case of oligopolistic markets, self-interest makes cooperation difficult and it often leads to an undesirable outcome for the firms that are involved.

ANS: T 19.

When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes both parties to cooperate. ANS: T 20.

A tit-for-tat strategy, in a repeated game, is one in which a player starts by cooperating and then does whatever the other player did last time. ANS: T 21.

One way that public policy encourages cooperation among oligopolists is through antitrust law.

ANS: F 22. The Sherman Antitrust Act prohibits competing firms from even talking about fixing prices. ANS: T 23. Resale price maintenance prevents retailers from competing on price. ANS: T 24.

Some business practices that appear to reduce competition, such as resale price maintenance, may have legitimate economic purposes.

ANS: T 25.

In 2007 the U.S. Supreme Court ruled that it was not necessary illegal for manufacturers and distributors to agree on minimum retail prices.

ANS: T

Chapter 17/Oligopoly 26.

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Tying can be thought of as a form of price discrimination.

ANS: T 27.

Policymakers should be aggressive in using their powers to place limits on firm behavior, because business practices that appear to reduce competition never have any legitimate purposes. ANS: F

Sec00 - Oligopoly MULTIPLE CHOICE 1.

In the language of game theory, a situation in which each person must consider how others might respond to his or her own actions is called a a. quantifiable situation. b. cooperative situation. c. strategic situation. d. tactical situation.

ANS: C 2.

In general, game theory is the study of a. how people behave in strategic situations. b. how people behave when the possible actions of other people are irrelevant. c. oligopolistic markets. d. all types of markets, including competitive markets, monopolistic markets, and oligopolistic markets.

ANS: A 3.

Which of the following statements is correct? a. Strategic situations are more likely to arise when the number of decision-makers is very large rather than very small. b. Strategic situations are more likely to arise in monopolistically competitive markets than in oligopolistic markets. c. Game theory is useful in understanding certain business decisions, but it is not really applicable to ordinary games such as chess or tic-tac-toe. d. Game theory is not necessary for understanding competitive or monopoly markets.

ANS: D 4.

In which of the following markets are strategic interactions among firms most likely to occur? a. markets to which patent and copyright laws apply b. the market for piano lessons c. the market for tennis balls d. the market for corn

ANS: C

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Chapter 17/Oligopoly

Sec01 - Oligopoly - Markets with Only a Few Sellers MULTIPLE CHOICE 1.

A distinguishing feature of an oligopolistic industry is the tension between a. profit maximization and cost minimization. b. cooperation and self interest. c. producing a small amount of output and charging a price above marginal cost. d. short-run decisions and long-run decisions.

ANS: B 2.

In studying oligopolistic markets, economists assume that a. there is no conflict or tension between cooperation and self-interest. b. it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly outcome. c. each oligopolist cares only about its own profit. d. strategic decisions do not play a role in such markets.

ANS: C 3.

The simplest type of oligopoly is a. monopoly. b. duopoly. c. monopolistic competition. d. oligopolistic competition.

ANS: B 4.

A special kind of imperfectly competitive market that has only two firms is called a. a two-tier competitive structure. b. an incidental monopoly. c. a doublet. d. a duopoly.

ANS: D 5.

An agreement between two duopolists to function as a monopolist usually breaks down because a. they cannot agree on the price that a monopolist would charge. b. they cannot agree on the output that a monopolist would produce. c. each duopolist wants a larger share of the market in order to capture more profit. d. each duopolist wants to charge a higher price than the monopoly price.

ANS: C 6.

Which of the following statements is correct? a. If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly. b. Although the logic of self-interest decreases a duopoly’s price below the monopoly price, it does not push the duopolists to reach the competitive price. c. Although the logic of self-interest increases a duopoly’s level of output above the monopoly level, it does not push the duopolists to reach the competitive level. d. All of the above are correct.

ANS: D

Chapter 17/Oligopoly 7.

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Suppose that Sonny and Cher are duopolists in the music industry. In January, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By February, each singer is considering breaking the agreement. What would you expect to happen next? a. Sonny and Cher will determine that it is in each singer’s best self interest to maintain the agreement. b. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price will decrease. c. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will decrease, and the new equilibrium price will increase. d. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase.

ANS: B 8.

As the number of firms in an oligopoly increases, the a. price approaches marginal cost, and the quantity approaches the socially efficient level. b. price and quantity approach the monopoly levels. c. price effect exceeds the output effect. d. individual firms’ profits increase.

ANS: A 9.

If a certain market were a monopoly, then the monopolist would maximize its profit by producing 1,000 units of output. If, instead, that market were a duopoly, then which of the following outcomes would be most likely if the duopolists successfully collude? a. Each duopolist produces 1,000 units of output. b. Each duopolist produces 600 units of output. c. One duopolist produces 400 units of output and the other produces 600 units of output. d. One duopolist produces 800 units of output and the other produces 400 units of output.

ANS: C

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Chapter 17/Oligopoly

Table 17-1 Imagine a small town in which only two residents, Lisa and Mark, own wells that produce safe drinking water. Each week Lisa and Mark work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Lisa and Mark can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Quantity (in gallons) 0 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 10.

Price $120 110 100 90 80 70 60 50 40 30 20 10 0

Total Revenue (and Total Profit) $0 11,000 20,000 27,000 32,000 35,000 36,000 35,000 32,000 27,000 20,000 11,000 0

Refer to Table 17-1. If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, what price will they charge? a. $20 b. $40 c. $60 d. $70

ANS: C 11.

Refer to Table 17-1. If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, how many gallons of water will be produced and sold? a. 0 b. 500 c. 600 d. 1,200

ANS: C 12.

Refer to Table 17-1. If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, how much profit will each of them earn? a. $0 b. $18,000 c. $32,000 d. $36,000

ANS: B 13.

Refer to Table 17-1. If the market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? a. 0 b. 600 c. 900 d. 1,200

ANS: D

Chapter 17/Oligopoly 14.

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Refer to Table 17-1. What is the socially efficient quantity of water? a. 0 gallons b. 600 gallons c. 900 gallons d. 1,200 gallons

ANS: D 15.

Refer to Table 17-1. If this market for water were perfectly competitive instead of monopolistic, what price would be charged? a. $0 b. $50 c. $60 d. $120

ANS: A 16.

Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from operating as a monopoly. What will be the price of water once Lisa and Mark reach a Nash equilibrium? a. $30 b. $40 c. $50 d. $60

ANS: B 17.

Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from operating as a monopoly. How many gallons of water will be produced and sold once Lisa and Mark reach a Nash equilibrium? a. 600 b. 700 c. 800 d. 900

ANS: C

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Chapter 17/Oligopoly

Table 17-2. The table shows the town of Pittsville’s demand schedule for gasoline. For simplicity, assume the town’s gasoline seller(s) incur no costs in selling gasoline. Quantity (in gallons) 0 100 200 300 400 500 600 700 800 900 1,000 18.

Price $10 9 8 7 6 5 4 3 2 1 0

Total Revenue (and total profit) $0 900 1,600 2,100 2,400 2,500 2,400 2,100 1,600 900 0

Refer to Table 17-2. If the market for gasoline in Pittsville is perfectly competitive, then the equilibrium price of gasoline is a. $8 and the equilibrium quantity is 200 gallons. b. $5 and the equilibrium quantity is 500 gallons. c. $2 and the equilibrium quantity is 800 gallons. d. $0 and the equilibrium quantity is 1,000 gallons.

ANS: D 19.

Refer to Table 17-2. If the market for gasoline in Pittsville is a monopoly, then the profit-maximizing monopolist will charge a price of a. $8 and sell 200 gallons. b. $5 and sell 500 gallons. c. $2 and sell 800 gallons. d. $0 and sell 1,000 gallons.

ANS: B 20.

Refer to Table 17-2. If there are exactly two sellers of gasoline in Pittsville and if they collude, then which of the following outcomes is most likely? a. Each seller will sell 500 gallons and charge a price of $5. b. Each seller will sell 500 gallons and charge a price of $2.50. c. Each seller will sell 350 gallons and charge a price of $3. d. Each seller will sell 250 gallons and charge a price of $5.

ANS: D 21.

Refer to Table 17-2. If there are exactly three sellers of gasoline in Pittsville and if they collude, then which of the following outcomes is most likely? a. Each seller will sell 166.67 gallons and charge a price of $1.33. b. Each seller will sell 166.67 gallons and charge a price of $5. c. Each seller will sell 200 gallons and charge a price of $4. d. Each seller will sell 233.33 gallons and charge a price of $5.

ANS: B

Chapter 17/Oligopoly 22.

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Refer to Table 17-2. Suppose there are exactly two sellers of gasoline in Pittsville: Exxoff and BQ. If Exxoff sells 300 gallons and BQ sells 400 gallons, then a. Exxoff’s profit is $900 and BQ’s profit is $1,200. b. Exxoff’s profit is $2,100 and BQ’s profit is $2,400. c. there is an excess demand for gasoline in Pittsville. d. there is an excess supply of gasoline in Pittsville.

ANS: A 23.

Refer to Table 17-2. Suppose there are exactly two sellers of gasoline in Pittsville: Exxoff and BQ. Currently, Exxoff sells 300 gallons and BQ sells 400 gallons. Which of the following statements is correct? (Hint: Perform simple interpolation between rows of the chart where necessary.) a. The current situation is a Nash equilibrium. b. The current situation is not a Nash equilibrium, as indicated by the fact that Exxoff’s profit would increase if it increased its output to 400 gallons and BQ kept its output at 400 gallons. c. The current situation is not a Nash equilibrium, as indicated by the fact that BQ’s profit would increase if it decreased its output to 350 gallons and Exxoff kept its output at 300 gallons. d. The current situation is not a Nash equilibrium, as indicated by the fact that both sellers’ profits would increase if they colluded, decided on a total level of output, and agreed to each produce onehalf of that amount.

ANS: C 24.

Which of the following statements is correct? a. When duopoly firms reach a Nash equilibrium, their combined level of output is the monopoly level of output. b. When oligopoly firms collude, they are behaving as a cartel. c. In an oligopoly, self-interest drives the market to the competitive outcome. d. An oligopoly is an example of monopolistic competition.

ANS: B 25.

As the number of firms in an oligopoly increases, the magnitude of the a. output effect increases. b. output effect decreases. c. price effect increases. d. price effect decreases.

ANS: D 26.

As the number of sellers in an oligopoly becomes very large, a. the quantity of output approaches the socially efficient quantity. b. the price approaches marginal cost. c. the price effect is diminished. d. All of the above are correct.

ANS: D 27.

In markets characterized by oligopoly, a. the oligopolists earn the highest profit when they cooperate and behave like a monopolist. b. collusive agreements will always prevail. c. collective profits are always lower with cartel arrangements than they are without cartel arrangements. d. pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market.

ANS: A

138 28.

Chapter 17/Oligopoly As a group, oligopolists would always be better off if they would act collectively a. as if they were each seeking to maximize their own individual profits. b. in a manner that would prohibit collusive agreements. c. as a single monopolist. d. as a single perfectly competitive firm.

ANS: C 29.

As a group, oligopolists would always earn the highest profit if they would a. produce the perfectly competitive quantity of output. b. produce more than the perfectly competitive quantity of output. c. charge the same price that a monopolist would charge if the market were a monopoly. d. operate according to their own individual self-interests.

ANS: C 30.

Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together, a. they are unable to maintain the same degree of monopoly power enjoyed by a monopolist. b. each firm's profit always ends up being zero. c. society is worse off as a result. d. Both a and c are correct.

ANS: A Table 17-3. The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero. Quantity 0 3,000 6,000 9,000 12,000 15,000 18,000 31.

Price (per year) $180 $150 $120 $ 90 $ 60 $ 30 $ 0

Refer to Table 17-3. If there is only one digital cable TV company in this market, what price would it charge for a premium digital channel subscription to maximize its profit? a. $30 b. $60 c. $90 d. $150

ANS: C 32.

Refer to Table 17-3. Assume there are two digital cable TV companies operating in this market. If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their agreement will stipulate that a. each firm will charge a price of $90 and each firm will sell 4,500 subscriptions. b. each firm will charge a price of $90 and each firm will sell 9,000 subscriptions. c. each firm will charge a price of $120 and each firm will sell 3,000 subscriptions. d. each firm will charge a price of $150 and each firm will sell 1,500 subscriptions.

ANS: A

Chapter 17/Oligopoly 33.

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Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions. How much profit will each company earn? a. $610,000 b. $550,000 c. $410,000 d. $205,000

ANS: D 34.

Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell. How many premium digital channel cable TV subscr...