Question 1

Use the table below to answer the following question.
Table 14.3.1 
-Consider the game shown in Table 14.3.1 based on potential gas prices between two competitors.The game is played repeatedly and the result is a cooperative equilibrium.The payoffs in the table show the economic profit of the firms.The most likely outcome is

Accepted Answer

In a cooperative equilibrium, firms work together to maximize their profits. Setting prices at $1.15/litre would be the most likely outcome as it allows both firms to earn higher profits compared to any other combination of choices, assuming they can avoid the temptation to undercut each other.

Question 2

A contestable market exists whenever

Accepted Answer

A contestable market exists when potential entry into the market by new firms holds down prices. This is different from a market with a high concentration ratio or a market dominated by a monopoly.

Question 3

Two firms are trying to decide how much to budget for research and development.Once a new discovery is made,each firm benefits regardless of which firm developed the innovation.In this R&D game of chicken,the Nash equilibrium is that

Accepted Answer

In a game of chicken regarding R&D investment, the Nash equilibrium typically involves only one firm conducting R&D because each firm benefits from the other's discovery without bearing the costs. However, without specific payoffs or strategies, it's impossible to determine which firm will take on the R&D effort, making option C correct.

Question 4

Consider the cartel of Trick and Gear.The game is repeated indefinitely and each firm employs a tit-for-tat strategy.The equilibrium is called

Accepted Answer

In a repeated game where firms use a tit-for-tat strategy, they are cooperating by matching the other firm's previous action, leading to a cooperative equilibrium.

Question 5

Consider the cartel of Trick and Gear.The game is repeated indefinitely and each firm employs a tit-for-tat strategy.The equilibrium is

Accepted Answer

In a tit-for-tat strategy within an indefinitely repeated game, each firm starts by cooperating (complying with the agreement) and then mimics the other firm's previous action in subsequent rounds. This strategy fosters mutual cooperation, as cheating by one firm would lead to retaliation by the other in the next round, making both firms worse off. Therefore, the equilibrium is that both firms comply with the agreement to avoid the negative consequences of cheating.

Question 6

A tit-for-tat strategy can be used

Accepted Answer

Tit-for-tat is a strategy used in repeated games where a player's current move is based on the opponent's previous move. It is not applicable in single-play games because it relies on the history of interactions to make decisions.

Question 7

A strategy in which a player cooperates in the current period if the other player cooperated in the previous period,but the player cheats in the current period if the other player cheated in the previous period is called a

Accepted Answer

The description given in the question matches the tit-for-tat strategy, which is a well-known and widely used strategy in game theory. This strategy aims to promote cooperation and discourage cheating in repeated games by reciprocating the other player's behavior in the previous round. It starts with cooperation and then mimics the other player's action in each subsequent round, promoting cooperation if the other player cooperates and punishing defection if the other player defects. This strategy has been shown to be effective in various scenarios, including the famous prisoner's dilemma game. Therefore, A is the best choice.

Question 8

Limit pricing is the practice of

Accepted Answer

Limit pricing is a strategy used by an incumbent firm to deter entry of potential rivals into the market. The incumbent firm sets the price at a level that inflicts a loss on the entrant, making it unprofitable for them to enter the market. By doing so, the incumbent firm is able to maintain its market share and keep potential rivals out. Therefore, the best choice is D).

Question 9

In a duopoly game,we observe the following payouts.If the two firms collude they each make an economic profit of $50,000.If one firm cheats,then that firm makes an economic profit of $60,000 and the other incurs an economics loss of $10,000.If both firms cheat,then they both make zero economic profit.What is the Nash equilibrium?

Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the other player's strategy. Here, if one firm cheats while the other doesn't, the cheating firm gains more ($60,000) compared to colluding ($50,000). However, knowing this, both firms are incentivized to cheat to avoid the loss incurred when the other cheats, leading to both making zero economic profit. This outcome, where both firms cheat, is stable since neither can unilaterally improve their payoff by changing their strategy, making it the Nash equilibrium.

Question 10

Limit pricing refers to

Accepted Answer

Limit pricing is a strategy used by an incumbent monopolist to deter entry by setting a price low enough to make it unprofitable for a potential entrant to enter the market. The limit price is typically set just high enough to cover the incumbent's cost of production so that if a potential entrant were to enter the market and match the price, the incumbent would still be able to make a profit, but the entrant would not. As a result, the potential entrant would not enter the market, and the monopolist would continue to enjoy its monopoly profits.

Question 11

When a firm cooperates if the other cooperates,but plays the Nash equilibrium strategy forever if the other cheats,the strategy is a

Accepted Answer

The strategy described is a trigger strategy, where a player cooperates as long as the other player cooperates, but will switch to a non-cooperative strategy if the other player cheats. This is a way to incentivize cooperation and deter cheating.

Question 12

Two firms,Alpha and Beta,produce identical computer hard drives.They have identical costs,and the hard drives they produce are identical.The industry is a natural duopoly.Alpha and Beta enter into a collusive agreement,according to which they split the market equally.If both firms cheat on the agreement so the market is the same as a competitive market,

Accepted Answer

In a competitive market, firms typically earn zero economic profit in the long run because of free entry and exit. When both firms cheat on a collusive agreement, they act more competitively, driving down prices and profits to the point where only normal profits (zero economic profit) are made.

Question 13

Which of the following quotes shows a contestable market in the widget industry?

Accepted Answer

A contestable market is characterized by the threat of potential competition, which leads firms to behave competitively even when the market has few competitors. Choice A reflects this by showing a firm producing extra widgets at a short-term loss to deter new entrants, which is a strategic move in a contestable market to maintain market share and discourage competition.

Question 14

The maximum total economic profit that can be made by colluding duopolists

Accepted Answer

The maximum total economic profit that can be made by colluding duopolists equals the economic profit made by a monopoly because, through collusion, the duopolists effectively operate as a single monopoly, maximizing their combined profits by reducing output and increasing prices, similar to a monopolist's strategy.

Question 15

Use the information below to answer the following questions.
Fact 14.2.1
Two firms,FastNet and SmartCast are the only Internet providers in a city.They have identical costs and one firm's service is a perfect substitute for the other firm's service.The industry is a natural duopoly.FastNet and SmartCast decide to collude and agree to share the market equally.
-Refer to Fact 14.2.1.What is the result if both firms cheat on the agreement?

Accepted Answer

If both firms cheat on the agreement, they will end up with a lower economic profit than if they had both complied with the agreement. This is because they will end up competing with each other, driving down prices and increasing output, which will result in lower profits for both firms.

Question 16

Which of the following quotes shows cheating on a cartel in the widget industry?

Accepted Answer

Option B shows cheating on a cartel in the widget industry because the speaker is producing more widgets than they agreed to produce in the meeting with Wally. This goes against the agreement made within the cartel to keep production levels and prices stable.

Question 17

A trigger strategy can be used

Accepted Answer

Trigger strategies are relevant in repeated games because they involve a conditional strategy that depends on the history of play, which doesn't exist in single-play games. They are used to enforce cooperation or to deter defection in repeated interactions, not applicable in a one-time game scenario.

Question 18

Consider a "prisoners' dilemma" game consisting of two firms in collusion to maximize profit.The game is repeated indefinitely and each player employs a tit-for-tat strategy.The equilibrium when the two firms share the monopoly profit is called a

Accepted Answer

In a repeated prisoners' dilemma game with a tit-for-tat strategy, firms can sustain cooperation and share monopoly profits, leading to a cooperative equilibrium.

Question 19

Use the information below to answer the following questions.
Fact 14.2.1
Two firms,FastNet and SmartCast are the only Internet providers in a city.They have identical costs and one firm's service is a perfect substitute for the other firm's service.The industry is a natural duopoly.FastNet and SmartCast decide to collude and agree to share the market equally.
-Refer to Fact 14.2.1.What is the Nash equilibrium?

Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the strategies of the other players. In the scenario described, both firms have an incentive to cheat on the agreement to increase their own profits, assuming the other firm will stick to the agreement. This leads to a situation where both firms end up cheating as their best response to the other firm's strategy.

Question 20

Use the information below to answer the following questions.
Fact 14.2.1
Two firms,FastNet and SmartCast are the only Internet providers in a city.They have identical costs and one firm's service is a perfect substitute for the other firm's service.The industry is a natural duopoly.FastNet and SmartCast decide to collude and agree to share the market equally.
-Refer to Fact 14.2.1.Which of the following actions maximizes the industry's economic profit?

Accepted Answer

If both firms comply with the agreement to share the market equally, they will be able to maximize their joint profits as they would each have 50% market share and avoid engaging in damaging price competition. Cheating on the agreement would likely lead to a price war and a decrease in profits for both firms. If new firms enter the market, it could lead to increased competition and lower profits for FastNet and SmartCast. Choosing to charge the price that would exist in a perfectly competitive market may not be feasible due to the natural duopoly in the industry. Therefore, complying with the agreement is the best option for the two firms to maximize their profits.

Quiz 14: Oligopoly