Deck 17: Oligopoly

Question 1

The essence of an oligopolistic market is that there are only a few sellers.

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

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.

Question 5

When prisoners' dilemma games are repeated over and over,sometimes the threat of penalty causes both parties to cooperate.

Question 6

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.

Question 7

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

Question 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.

Question 9

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

Question 10

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.

Question 11

As the number of firms in an oligopoly becomes very large,the price effect disappears.

Question 12

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.

Question 13

Whether an oligopoly consists of 3 firms or 10 firms,the level of output likely will be the same.

Question 14

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

Question 15

In the prisoners' dilemma game,one prisoner is always better off confessing,no matter what the other prisoner does.

Question 16

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

Question 17

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

Question 18

In a competitive market,strategic interactions among the firms are not important.

Question 19

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.

Question 20

As the number of firms in an oligopoly increases,the magnitude of the price effect increases.

Question 21

Explain the practice of tying and discuss why it is controversial.

Question 22

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

Question 23

Describe the output and price effects that influence the profit-maximizing decision faced by a firm in an oligopoly market.How does this differ from output and price effects in a monopoly market?

Question 24

Explain how the output effect and the price effect influence the production decision of the individual oligopolist.

Question 25

Resale price maintenance prevents retailers from competing on price.

Question 26

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.

Question 27

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

Question 28

Assume that demand for a product that is produced at zero marginal cost is reflected in the table below.

a.What is the profit-maximizing level of production for a group of oligopolistic firms that operate as a cartel?
b.Assume that this market is characterized by a duopoly in which collusive agreements are illegal.What market price and quantity will be associated with a Nash equilibrium?

Question 29

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.

Question 30

Ford and General Motors are considering expanding into the Vietnamese automobile market.Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision.

Question 31

Nike and Reebok (athletic shoe companies)are considering whether or not to advertise during the Super Bowl.Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision.Does the repeated game scenario differ from a single period game? Is it possible that a repeated game (without collusive agreements)could lead to an outcome that is better than a single-period game? Explain the circumstances in which this may be true.

Question 32

Explain the practice of resale price maintenance and discuss why it is controversial.

Question 33

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

Question 34

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

Question 35

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.

Question 36

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

Question 37

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.

Question 38

Outline the purpose of antitrust laws.What do they accomplish?

Question 39

What effect does the number of firms in an oligopoly have on the characteristics of the market?

Question 40

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

Question 41

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.

Question 42

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.

Question 43

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.

Question 44

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:


-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

Question 45

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.

Question 46

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.

Question 47

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:


-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

Question 48

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

Question 49

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.

Question 50

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.

Question 51

The simplest type of oligopoly is

A) monopoly.
B) duopoly.
C) monopolistic competition.
D) oligopolistic competition.

Question 52

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:


-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

Question 53

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:


-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

Question 54

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.

Question 55

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:


-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

Question 56

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:


-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

Question 57

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.


-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.

Question 58

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:


-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

Question 59

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.

Question 60

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:


-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

Question 61

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.


-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

Question 62

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.

Question 63

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.


-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

Question 64

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.

Question 65

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.


-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.

Question 66

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.


-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.

Question 67

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.


-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 one-half of that amount.

Question 68

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.

Question 69

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.

Question 70

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.


-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.

Question 71

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.


-Refer to Table 17-3.Assume that 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 much profit will each firm earn when this market reaches a Nash equilibrium?

A) $25,000
B) $90,000
C) $160,000
D) $215,000

Question 72

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.

Question 73

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.


-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.What price will premium digital channel cable TV subscriptions be sold at when this market reaches a Nash equilibrium?

A) $30
B) $60
C) $90
D) $120

Question 74

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.

Question 75

Table 17-4.The information in the table below shows the total demand for high-speed Internet subscriptions in a small urban market.Assume that each company that provides these subscriptions incurs an annual fixed cost of $200,000 (per year)and that the marginal cost of providing an additional subscription is always $80.


-Refer to Table 17-4.Suppose there is only one high-speed Internet service provider in this market and it seeks to maximize its profit.The company will

A) sell 6,000 subscriptions and charge a price of $200 for each subscription.
B) sell 8,000 subscriptions and charge a price of $160 for each subscription.
C) sell 10,000 subscriptions and charge a price of $120 for each subscription.
D) sell 12,000 subscriptions and charge a price of $80 for each subscription.

Question 76

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.


-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.

Question 77

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.


-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 subscriptions will be sold altogether when this market reaches a Nash equilibrium?

A) 6,000
B) 9,000
C) 12,000
D) 15,000

Question 78

Table 17-4.The information in the table below shows the total demand for high-speed Internet subscriptions in a small urban market.Assume that each company that provides these subscriptions incurs an annual fixed cost of $200,000 (per year)and that the marginal cost of providing an additional subscription is always $80.


-Refer to Table 17-4.Assume there are two high-speed Internet service providers that operate 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 $120 and each firm will sell 5,000 subscriptions.
B) each firm will charge a price of $160 and each firm will sell 4,000 subscriptions.
C) each firm will charge a price of $100 and each firm will sell 3,000 subscriptions.
D) each firm will charge a price of $200 and each firm will sell 3,000 subscriptions.

Question 79

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.

Question 80

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.


-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.