Question 1

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 in game theory because it results in the highest payoff for a player regardless of the other player's decision. The other options may provide a good outcome in some scenarios, but they do not guarantee the highest payoff in all situations.

Question 2

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 the marginal costs of production are the same for each member of the cartel, then it is efficient for each member to produce an equal share of output. This is because they will all have the same cost structure and will be able to sell at the same price, resulting in equal profits for each member. A, B, and C are not necessarily relevant to determining each member's share of output, as revenue, economies of scale, and production scale can all vary without affecting the allocation of output in a joint profit-maximizing cartel.

Question 3

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, firms collude to maximize joint profits. As a result, they jointly determine the price of the product being sold. Therefore, each firm has an incentive to expand production up to the point at which its marginal cost equals the cartel-determined price of the product being sold. This allows the firm to earn the highest possible profit while still contributing to the overall success of the cartel.

Question 4

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 5

In game theory, a Nash equilibrium is defined as:

Accepted Answer

A Nash equilibrium is a point in a game where all players are independently selecting their best strategies given the strategies of the other players. It is a situation where no player can improve their payoff by changing their strategy while the other players keep their strategies unchanged. Choice A is incorrect because a Nash equilibrium may not involve dominant strategies. Choice C is incorrect because the maximum payoff for one player may not be the same as the maximum payoff for another player. Choice D is incorrect because Nash equilibria do not necessarily involve cooperation between players.

Question 6

Predatory pricing is used primarily to:

Accepted Answer

Predatory pricing is a strategy used by a dominant firm in a market to drive out competition by temporarily pricing their products or services below cost, causing other firms to incur losses and exit the market. The goal is to establish a monopoly or dominant market position once competitors have been eliminated.

Question 7

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 8

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

In the prisoner's dilemma game, the dominant strategy for both players is to betray each other, which results in a suboptimal outcome for both. However, if the players were allowed to communicate or cooperate with each other, they could potentially reach a mutually beneficial outcome. Therefore, the best choice would be to allow communication and cooperation between the players, as it would lead to a better outcome for both.

Question 9

Which of the following statements regarding cartels is not correct?

Accepted Answer

This statement is not correct. While oligopolistic firms may be hesitant to change prices frequently, cartels are not necessarily inherently stable. The success of a cartel relies on the ability of its members to trust one another and hold each other accountable for following the agreed-upon pricing and output guidelines. If a member cheats or breaks the agreement, the cartel may break down.

Question 10

Limit pricing is used primarily to:

Accepted Answer

Limit pricing is a strategic pricing practice used by incumbent firms to discourage potential entrants from entering the market by setting a low price that makes it unprofitable for new firms to enter. The incumbent firm sets a price that is below its maximum profit level but a newcomer's entry would force it to lower its price and reduce its profit. Therefore, the incumbent firm sets a limit price, which is a price below its profit-maximizing price, to deter new firms from entering the market.

Question 11

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

Accepted Answer

Limit pricing is a strategic entry deterrence tactic where an incumbent firm sets a low price to deter potential entrants from entering the market. This signals to potential entrants that the incumbent firm will aggressively defend its market share and may engage in a price war if necessary. Marginal cost pricing, price leadership, and mark-up pricing are not examples of strategic entry deterrence.

Question 12

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

Accepted Answer

In order to maximize joint profits, a cartel must produce at a level where the marginal revenue of the entire market equals the joint marginal cost of production. This is because at this level of output, the last unit of production produces a benefit that is equal to the cost of producing it, maximizing the profits for the cartel as a whole. Therefore, option B is the correct answer.

Question 13

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 order for the first player to gain an advantage from making the first move, he must be able to make a credible commitment to his chosen strategy. This means that he must convince the second player that he will follow through with his chosen action, even if the second player responds in a way that makes the first player worse off than he would have been if he had made a different move. Without a credible commitment, the second player may be able to take advantage of any weaknesses or vulnerabilities in the first player's strategy, negating any potential advantage from moving first.

Question 14

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. This is achieved by having the members of the cartel coordinate their production levels and pricing strategies in order to reduce competition and increase their market power, allowing them to charge higher prices and earn greater profits together than they would individually. While individual members may receive different amounts of profit, the ultimate goal is to maximize the collective profits of the cartel as a whole.

Question 15

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 challenges of making decisions under uncertainty. In an oligopoly, each firm must consider how its competitors will react to its decisions, making it difficult to predict the outcome of any one choice. This is similar to the situation faced by the two prisoners in the classic prisoner's dilemma game, where each must decide whether to cooperate or defect and cannot be sure what the other will do. By studying the outcomes of the game and the strategies adopted by the players, we can gain insights into the behavior of oligopolies and the challenges they face.

Question 16

Which of the following is cited as a problem with the kinked demand curve model?

Accepted Answer

The kinked demand curve model does not explain how the initial equilibrium price and quantity are determined, focusing instead on why prices might remain stable despite changes in marginal cost.

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

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

Accepted Answer

The number of firms operating in the industry prior to enactment of the policy is irrelevant to the success of a predatory pricing strategy. The success depends on the other factors such as how low the predatory price is, the duration of the predatory price, and the ability to recoup profits after the strategy is discontinued.

Question 19

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 20

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

Accepted Answer

A decrease in the elasticity of demand for the cartel's product would make it easier to maintain an effective collusive agreement in a cartel because it would make it more difficult for other firms to enter the market and for consumers to switch to substitutes. This would make the cartel's members less susceptible to price-cutting by non-members and less likely to suffer significant losses in sales if they were to raise their prices.

Quiz 9: Market Structure: Oligopoly