Question 1

In order for the first player to move in a sequential game to be able to gain an advantage from making the first move, the player must:

Accepted Answer

In sequential games, the advantage of making the first move depends on being able to make a credible commitment to a strategy that would not be optimal if the other player moved first. This requires that the player have some way of ensuring that he will stick to the chosen strategy even if it is not in his short-term interest to do so. For example, if the first player could always be trusted to follow a particular plan of action, the second player might be deterred from making a move that would undermine that plan. Therefore, the correct answer is D.

Question 2

The dominant strategy for each of the players in the prisoner's dilemma game does not yield the optimal outcome for each player because:

Accepted Answer

The prisoner's dilemma game is specifically designed so that each player's dominant strategy leads to a suboptimal outcome for both players. This is because the players are not allowed to communicate or cooperate with each other, and so they end up making choices that prioritize their own self-interest over the collective interest of both players. Thus, the best choice in the prisoner's dilemma game is to defect, even though this leads to a worse outcome overall compared to if both players had cooperated.

Question 3

The success of a predatory pricing strategy in an oligopolistic market depends on all of the following except:

Accepted Answer

The success of a predatory pricing strategy in an oligopolistic market does not depend on the number of firms operating in the industry prior to enactment of the policy. It depends on factors such as how far the predatory price is below cost, the period of time for which the predatory price is in effect, and the length of time over which recoupment of profits occurs.

Question 4

Predatory pricing is used primarily to:

Accepted Answer

Predatory pricing is a strategy used by a dominant firm in a market to drive other firms out of the market by temporarily setting prices below their cost of production. The goal is to eliminate competition and establish a monopoly in the market. Therefore, the correct choice is C.

Question 5

The primary objective of a cartel is to:

Accepted Answer

The primary objective of a cartel is to maximize the joint profits of the members of the organization, which involves coordinating their actions to raise prices and restrict output. While individual members may also seek to maximize their own profits, the success of the cartel depends on all members acting in the collective interest. The other choices are either too narrow (A, C) or too ambiguous (D) to capture the main purpose of a cartel.

Question 6

In which of the following situations would each of the members be responsible for producing an equal share of the total amount of output sold by the cartel engaged in joint profit maximization?

Accepted Answer

If marginal costs of production are the same for each member of the cartel, then each member will have the same incentive to produce and sell an equal share of the output in order to maximize joint profits. If any one member were to produce more than their fair share, then the marginal cost of producing additional units of output would increase, reducing the profitability of the cartel as a whole.

Question 7

Which of the following is an example of strategic entry deterrence?

Accepted Answer

Limit pricing is a strategic entry deterrence technique where an incumbent firm sets a low price to deter potential entrants from entering the market. This is achieved by setting the price just high enough to make it unprofitable for potential entrants to enter the market, while also making a profit for the incumbent firm. Marginal cost pricing, price leadership, and mark-up pricing do not directly relate to entry deterrence strategies.

Question 8

Which of following is not a condition that must be met for a cartel to maximize its joint profits?

Accepted Answer

Cartels aim to maximize joint profits by operating where their marginal revenue equals their marginal costs, not specifically in the inelastic portion of the demand curve. The inelastic or elastic nature of the demand curve affects pricing strategy but is not a condition for maximizing joint profits.

Question 9

Assume the four major grocery stores in a large metropolitan area decide to meet secretly to fix prices for meat. It would be easiest to maintain this arrangement when:

Accepted Answer

The easiest way to maintain a secret price-fixing arrangement is when there are few competitors in the market. This reduces the risk of someone breaking from the agreement and the potential for retaliation against non-compliant firms. Therefore, choice A is the best option.

Question 10

Why is the prisoner's dilemma game useful in studying oligopoly behavior?

Accepted Answer

The prisoner's dilemma game is useful in studying oligopoly behavior because it illustrates the problems encountered when making decisions under uncertainty. This is relevant to oligopolies because they must make strategic decisions in a competitive market where the actions of their competitors are unknown. The prisoner's dilemma also highlights the potential for competitors to act in their own self-interest rather than cooperate, which can lead to outcomes that are not optimal for the industry as a whole.

Question 11

In game theory, a Nash equilibrium is defined as:

Accepted Answer

A Nash equilibrium is a strategy profile in which no player can increase their payoff by unilaterally changing their strategy, given the strategies chosen by the other players. This means that all players are choosing their best strategy, given the actions of the other players, which is described in option B. Option A refers to dominant strategies, which may or may not exist in a game, and Option C refers to the concept of a Pareto-optimal outcome, where no player can be made better off without making another player worse off. Option D refers to cooperative games, which is a different concept than Nash equilibrium in non-cooperative games.

Question 12

Limit pricing is used primarily to:

Accepted Answer

Limit pricing is a strategy used by established firms to deter new entrants from entering the market by setting the price low enough that potential competitors will not find it profitable to enter. By doing so, the established firms can maintain their market share and limit competition, thereby reducing the threat of price wars and other competitive pressures that could reduce their profits.

Question 13

A firm could gain from cheating on a cartel agreement by doing all of the following except:

Accepted Answer

Raising its price above the agreed level would not be a way to cheat on a cartel agreement because it would likely result in the firm losing sales to other cartel members who stick to the agreed prices. Cheating typically involves actions that allow a firm to capture more market share or sales at the expense of other cartel members, such as lowering prices or selling more than the agreed quota, not raising prices.

Question 14

Assume a group of firms has formed a cartel and the cartel is in engaged in joint profit maximization. As such, each firm, acting in its own interests, has an incentive to expand production up to the point at which:

Accepted Answer

In a cartel, the firms work together to determine the price of the product being sold. Therefore, each firm's incentive is to expand production up to the point where its marginal cost equals the cartel-determined price of the product. If a firm produces beyond this point, it will drive down the price and reduce the profits of the cartel as a whole.

Question 15

In order for "limit pricing" to be effective, the firm practicing such a strategy must be able to charge a price that is:

Accepted Answer

The answer of In order for "limit pricing" to be...

Question 16

To maximize joint profits, a cartel must determine the level of output at which:

Accepted Answer

The level of output at which marginal revenue equals joint marginal cost will maximize joint profits. At this point, the cartel as a whole will produce the quantity that maximizes total revenue and minimizes total costs.

Question 17

In which of the following scenarios would a predatory pricing scheme have the greatest chance of success, all else constant?

Accepted Answer

Predatory pricing is more likely to succeed when the price is set just below cost, limiting the number of new entrants after the strategy ends, and allowing for quick recoupment of profits. This minimizes the period of loss and reduces the chance of competition resurgence.

Question 18

In game theory, the strategy that results in the highest payoff to a player regardless of what the other player decides to do is called the:

Accepted Answer

The dominant strategy is the best choice for a player because it results in the highest payoff regardless of the other player's decision. The other options (Stackelberg equilibrium, equilibrium strategy, min-max strategy) may also lead to favorable outcomes, but they are not guaranteed to be the optimal choice in every situation.

Question 19

Which of the following statements regarding cartels is not correct?

Accepted Answer

Cartels are not inherently stable, as members may cheat or defect from the agreement in order to increase their own profits. Therefore, it is important for cartels to have mechanisms in place to punish or deter such behavior.

Question 20

Which of the following would make it easier to maintain an effective collusive agreement in a cartel?

Accepted Answer

A decrease in elasticity of demand means that consumers are less responsive to changes in price, making it easier for the cartel to maintain a higher price without losing significant market share. This makes it easier to maintain the collusive agreement.

Quiz 9: Market Structure: Oligopoly