Chapter 17 Test Bank final- NEW PDF

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Chapter 17 Oligopoly MULTIPLE CHOICE 1. Which of the following statements about oligopolies is not correct? a. An oligopolistic market has only a few sellers. b. The actions of any one seller can have a large impact on the profits of all other sellers. c. Oligopolistic firms are interdependent in a way that competitive firms are not. d. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenues. ANS: D PTS: 1 DIF: 1 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Markets MSC: Definitional 2. 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 PTS: 1 DIF: 1 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Definitional 3. 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 PTS: 1 DIF: 2 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Definitional 4. 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 PTS: 1 DIF: 2 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Interpretive 5. 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 PTS: 1 DIF: 2 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Interpretive

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2 ❖ Chapter 17/Oligopoly

6. Game theory is important for understanding which of the following market types? a. perfectly competitive and oligopolistic markets b. perfectly competitive markets but not oligopolistic markets c. oligoplistic but not perfectly competitive markets d. neither oligopolistic nor perfectly competitive markets. ANS: C PTS: 1 DIF: 1 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Definitional 7. In choosing among alternative courses of action, Raj must consider how others might respond to the action he takes. In the language of game theory, we say that Raj must think a. openly. b. strategically. c. dominantly. d. cooperatively. ANS: B PTS: 1 DIF: 1 REF: 17-0 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Game theory MSC: Definitional 8. We must be knowledgeable of how people behave in strategic situations if we are to understand a. perfectly competitive markets. b. monopolistically competitive markets. c. oligopolistic markets. d. All of the above are correct. ANS: C PTS: 1 DIF: 1 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory | Markets MSC: Interpretive 9. In an oligopoly, each firm knows that its profits a. depend only on how much output it produces. b. depend only on how much output its rival firms produce. c. depend on both how much output it produces and how much output its rival firms produce. d. will be zero in the long run because of free entry. ANS: C PTS: 1 DIF: 2 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Interdependence MSC: Interpretive MARKETS WITH ONLY A FEW SELLERS 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 PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive 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 PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Cooperation MSC: Interpretive

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Chapter 17/Oligopoly ❖ 3

3. The simplest type of oligopoly is a. monopoly. b. duopoly. c. monopolistic competition. d. oligopolistic competition. ANS: B PTS: 1 NAT: Analytic LOC: Oligopoly

DIF: 1 TOP: Duopoly

REF: 17-1 MSC: Interpretive

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 PTS: 1 DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Definitional 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 PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive 6. An agreement among firms in a market about quantities to produce or prices to charge is called a. collusion. b. a strategic situation. c. excess capacity. d. tying. ANS: A PTS: 1 DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Collusion MSC: Definitional 7. 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 a bove the monopoly level, it does not push the duopolists to reach the competitive level. d. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive 8. Suppose that Jay-Z and Beyonce 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. Jay-Z and Beyonce will determine that it is in each singer’s best self interest to maintain the agreement. b. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price will decrease. c. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will decrease, and the new equilibrium price will increase. d. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase. ANS: B PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive

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4 ❖ Chapter 17/Oligopoly

9. 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 PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive 10. 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 PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Applicative THE ECONOMICS OF COOPERATION 1. When firms are faced with making strategic choices in order to maximize profit, economists typically use a. the theory of monopoly to model their behavior. b. the theory of aggressive competition to model their behavior. c. game theory to model their behavior. d. cartel theory to model their behavior. ANS: C PTS: 1 DIF: 1 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Interpretive 2. When strategic interactions are important to pricing and production decisions, a typical firm will a. set the price of its product equal to marginal cost. b. consider how competing firms might respond to its actions. c. generally operate as if it is a monopolist. d. consider exiting the market. ANS: B PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Interpretive 3. Game theory is important for the understanding of a. competitive markets. b. monopolies. c. oligopolies. d. all market structures. ANS: C PTS: 1 DIF: 1 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Interpretive

REF:

17-2

4. Game theory is necessary for understanding a. all market structures. b. competition and oligopoly, but it is not necessary for understanding monopoly. c. monopoly and oligopoly, but it is not necessary for understanding competition. d. oligopoly, but it is not necessary for understanding monopoly or competition. ANS: D PTS: 1 DIF: 1 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Interpretive

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Chapter 17/Oligopoly ❖ 5

5. The prisoners' dilemma provides insights into the a. difficulty of maintaining cooperation. b. benefits of avoiding cooperation. c. benefits of government ownership of monopoly. d. ease with which oligopoly firms maintain high prices. ANS: A PTS: 1 DIF: 2 REF: NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive

17-2

6. In the prisoners' dilemma game, self-interest leads a. each prisoner to confess. b. to a breakdown of any agreement that the prisoners might have made before being questioned. c. to an outcome that is not particularly good for either prisoner. d. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive 7. The likely outcome of the standard prisoners' dilemma game is that a. neither prisoner confesses. b. exactly one prisoner confesses. c. both prisoners confess. d. Not enough information is given to answer this question. ANS: C PTS: 1 DIF: 1 REF: NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive

17-2

8. The prisoners' dilemma is an important game to study because a. most games present zero-sum alternatives. b. it identifies the fundamental difficulty in maintaining cooperative agreements. c. strategic decisions faced by prisoners are identical to those faced by firms engaged in competitive agreements. d. all interactions among firms are represented by this game. ANS: B PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive 9. The prisoners’ dilemma game a. provides insight into why cooperation is individually rational. b. provides insight into why cooperation is difficult. c. is a game in which neither player has a dominant strategy. d. is a game in which exactly one of the two players has a dominant strategy. ANS: B PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive 10. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is one a. in which neither Bonnie nor Clyde confesses. b. in which both Bonnie and Clyde confess. c. that involves neither Bonnie nor Clyde pursuing a dominant strategy. d. that is ideal in terms of Bonnie’s self-interest and in terms of Clyde’s self-interest. ANS: B PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive

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6 ❖ Chapter 17/Oligopoly

11. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is a. a very good outcome for both players. b. a very good outcome for Bonnie, but a bad outcome for Clyde. c. a very good outcome for Clyde, but a bad outcome for Bonnie. d. a bad outcome for both players. ANS: D PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive 12. In a game, a dominant strategy is a. the best strategy for a player to follow only if other players are cooperative. b. the best strategy for a player to follow, regardless of the strategies followed by other players. c. a strategy that must appear in every game. d. a strategy that leads to one player's interests dominating the interests of the other players. ANS: B PTS: 1 DIF: 1 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Definitional 13. A dominant strategy is one that a. makes every player better off. b. makes at least one player better off without hurting the competitiveness of any other player. c. increases the total payoff for the player. d. is best for the player, regardless of what strategies other players follow. ANS: D PTS: 1 DIF: 1 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Definitional PUBLIC POLICY TOWARD OLIGOPOLIES 1. From society’s standpoint, cooperation among oligopolists is a. desirable, because it leads to less conflict among firms and a wider variety of products for consumers. b. desirable, because it leads to an outcome closer to the competitive outcome than what would be observed in the absence of cooperation. c. undesirable, because it leads to output levels that are too low and prices that are too high. d. undesirable, because it leads to output levels that are too high and prices that are too high. ANS: C PTS: 1 DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Cooperation | Oligopoly MSC: Interpretive 2. A law that encourages market competition by prohibiting firms from gaining or exercising excessive market power is a. a patent. b. impossible to enforce. c. an antitrust law. d. an externality law. ANS: C PTS: 1 DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Definitional

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Chapter 17/Oligopoly ❖ 7

3. The primary purpose of antitrust legislation is to a. protect small businesses. b. protect the competitiveness of U.S. markets. c. protect the prices of American-made products. d. ensure firms earn only a fair profit. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: The role of government TOP: MSC: Interpretive

REF: 17-3 Antitrust

4. To move the allocation of resources closer to the social optimum, policymakers should typically try to induce firms in an oligopoly to a. collude with each other. b. form various degrees of cartels. c. compete rather than cooperate with each other. d. cooperate rather than compete with each other. ANS: C PTS: 1 DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Economic welfare MSC: Interpretive 5. Which of the following statements is true? a. The proper scope of antitrust laws is well defined and definite. b. Antitrust laws focus on granting certain firms the option to form a cartel. c. Policymakers have the difficult task of determining whether some firms' decisions have legitimate purposes even though they appear anti-competitive. d. There is always a need for policymakers to try to limit a firm's pricing power, regardless of whether the firm's market is competitive, a monopoly, or an oligopoly. ANS: C PTS: 1 DIF: 2 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Interpretive 6. Which of the following is necessarily a problem with antitrust laws? a. They may target a business whose practices appear to be anti-competitive but in fact have legitimate purposes. b. They promote competition. c. They limit monopoly power. d. They prohibit firms from entering or exiting a market. ANS: A PTS: 1 DIF: 2 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Interpretive 7. Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust laws? a. the U.S. Justice Department b. private citizens c. corporations d. All of the above are correct. ANS: D PTS: 1 DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Interpretive 8. Which government entity is charged with investigating and enforcing antitrust laws? a. the U.S. Justice Department b. the U.S. Commerce Department c. the U.S. Treasury Department d. the Bureau of Alcohol, Tobacco, and Firearms ANS: A PTS: 1 DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Interpretive

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8 ❖ Chapter 17/Oligopoly 9. Who wrote, "People of the same trade seldom meet together, but the conversation ends in a conspiracy against the public, or in some diversion to raise prices."? a. Thomas Jefferson b. Adam Smith c. Bill Gates d. Robert Axelrod ANS: B PTS: 1 DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive 10. The Sherman Antitrust Act a. was passed to encourage judicial leniency in the review of cooperative agreements. b. was concerned with self-interest dominated Nash equilibriums in prisoners' dilemma games. c. enhanced the ability to enforce cartel agreements. d. restricted the ability of competitors to engage in cooperative agreements. ANS: D PTS: 1 DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Interpretive 11. The Sherman Act made cooperative agreements a. unenforceable outside of established judicial review processes. b. enforceable with proper judicial review. c. a criminal conspiracy. d. a crime, but did not give direction on possible penalties. ANS: C PTS: 1 DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Interpretive 12. The Sherman Antitrust Act was passed in a. 1836. b. 1890. c. 1914. d. 1946. ANS: B PTS: 1 DIF: 1 NAT: Analytic LOC: The role of government TOP: MSC: Definitional

REF: 17-3 Antitrust

13. The Sherman Antitrust Act prohibits price-fixing in the sense that a. competing executives cannot even talk about fixing prices. b. competing executives can talk about fixing prices, but they cannot take action to fix prices. c. a price-fixing agreement can lead to prosecution provided the government can show that the public was not well-served by the agreement. d. None of the above is correct. The Sherman Act did not address the matter of price-fixing. ANS: A PTS: 1 DIF: 2 REF: 17-3 NAT: Analy...