Question 1

A cooperative agreement among oligopolists is less likely to be maintained,

Accepted Answer

The answer of A cooperative agreement among oligopolists is less...

Question 2

Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. 
-Refer to Figure 17-5. If the two companies make their pricing decisions independently, then it is likely that QRS will

Accepted Answer

QRS has a higher payoff if they charge a low price regardless of what ABC does. This is because their payoff is highest when they both charge a low price, as this results in a combined profit of $20 million. Therefore, QRS will most likely charge a low price regardless of whether ABC charges a high price or a low price.

Question 3

The primary purpose of antitrust legislation is to

Accepted Answer

The primary purpose of antitrust legislation is to protect the competitiveness of U.S. markets by preventing monopolies or unfair business practices that could harm competition and ultimately harm consumers by leading to higher prices, reduced innovation and less consumer choice. While protecting small businesses and ensuring fair profits may be a secondary goal, the primary focus is on preserving market competition.

Question 4

Suppose that antitrust laws were successful in moving the allocation of resources in the computer software industry closer to the social optimum. This situation would illustrate which of the following Ten Principles of Economics?

Accepted Answer

This situation illustrates the principle that governments can sometimes improve market outcomes through antitrust laws. By enforcing competition and preventing monopolies, the market can move closer to the social optimum.

Question 5

Table 17-29
Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's energy drinks, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm W
Breaks agreement Maintains agreement
and advertises and does not advertise
 
-Refer to Table 17-29 Does either Firm W or Firm H have a dominant strategy?

Accepted Answer

The answer of Table 17-29
Suppose that two firms, Wild Willy's...

Question 6

Table 17-29
Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's energy drinks, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm W
Breaks agreement Maintains agreement
and advertises and does not advertise
 
-Refer to Table 17-29. What is the outcome of this game?

Accepted Answer

The answer of Table 17-29
Suppose that two firms, Wild Willy's...

Question 7

Table 17-29
Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's energy drinks, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm W
Breaks agreement Maintains agreement
and advertises and does not advertise
 
-Refer to Table 17-29. Which of the following statement(s) correctly characterizes the outcome of this game?

Accepted Answer

The answer of Table 17-29
Suppose that two firms, Wild Willy's...

Question 8

Table 17-28
Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm A
Breaks agreement Maintains agreement
and advertises and does not advertise
 
-Refer to Table 17-28. What is the outcome of this game?

Accepted Answer

The answer of Table 17-28
Suppose that two firms determine that...

Question 9

Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. 
-Refer to Figure 17-5. If this game is played only once, then the most likely outcome is that

Accepted Answer

The answer of Figure 17-5. Two companies, ABC and QRS,...

Question 10

A cooperative agreement among oligopolists is more likely to be maintained,

Accepted Answer

Cooperative agreements among oligopolists (such as cartels) are more likely to be maintained when the game is repeated over time. This repetition allows for the punishment of cheaters, thereby sustaining cooperation.

Question 11

Table 17-28
Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm A
Breaks agreement Maintains agreement
and advertises and does not advertise
 
-Refer to Table 17-28. Which of the following statement(s) correctly characterizes the outcome of this game?

Accepted Answer

The answer of Table 17-28
Suppose that two firms determine that...

Question 12

Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. 
-Refer to Figure 17-5. The situation faced by ABC and QRS is

Accepted Answer

The situation faced by ABC and QRS is a classic example of a prisoner's dilemma game, where each player has dominant strategy to choose a low price regardless of what the other player does, leading to a Nash equilibrium where both players earn lower profits than if they had cooperated and chosen high prices. Therefore, option A is correct. Option B is also correct because there is no binding agreement between the players that can enforce cooperation. Option C is a specific example of a prisoner's dilemma game, so it is also correct.

Question 13

A law that encourages market competition by prohibiting firms from gaining or exercising excessive market power is

Accepted Answer

The law being described is an antitrust law, which is designed to promote competition and prevent oligopolies or monopolies from forming in the market. Antitrust laws prohibit a range of anti-competitive behaviors, such as price fixing and collusion, and can also address issues such as mergers and acquisitions that may be harmful to competition.

Question 14

Table 17-29
Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's energy drinks, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm W
Breaks agreement Maintains agreement
and advertises and does not advertise
 
-Refer to Table 17-29. Which of the following statements does not correctly characterize the outcome of this game?

Accepted Answer

Both firms have the same payoff for either breaking or maintaining the agreement, so neither has a dominant strategy. It is a classic example of the Prisoners' Dilemma, where the Nash equilibrium is for both firms to break the agreement and advertise, resulting in lower overall profits. Therefore, D is the correct statement, as both firms could earn higher profits by maintaining the agreement, but this outcome is not reached in the Nash equilibrium.

Question 15

From society's standpoint, cooperation among oligopolists is

Accepted Answer

Cooperation among oligopolists, often achieved through price fixing or output quotas, leads to a reduction in competition and an increase in market power for the firms involved. This can result in higher prices for consumers and lower output levels than would be observed in a more competitive market. Therefore, from society's standpoint, cooperation among oligopolists is generally considered undesirable.

Question 16

Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. 
-Refer to Figure 17-5. The dominant strategy for ABC is to

Accepted Answer

The answer of Figure 17-5. Two companies, ABC and QRS,...

Question 17

Table 17-28
Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm A
Breaks agreement Maintains agreement
and advertises and does not advertise
 
-Refer to Table 17-28. Does either Firm A or Firm B have a dominant strategy?

Accepted Answer

Both firms have a dominant strategy of not advertising. Regardless of the other firm's decision, each firm is better off not advertising as their profits are higher when they maintain the agreement and do not advertise (8 > 6 and 7 > 5). Therefore, both firms have a dominant strategy of not advertising.

Question 18

Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. 
-Refer to Figure 17-5. In what sense is the game involving ABC and QRS similar to the prisoners' dilemma game involving Bonnie and Clyde?

Accepted Answer

In both games, a dominant strategy can be identified for each player. In the prisoners' dilemma, the dominant strategy is to confess, and in the game involving ABC and QRS, the dominant strategy for both companies is to charge a low price. Unlike in the prisoners' dilemma, pursuing one's own interest in the game involving ABC and QRS does not result in the best possible outcome for each player, as both companies would be better off if they both charged a high price. Cooperation is also difficult to maintain in the game involving ABC and QRS, as there is an incentive for each company to cheat and charge a low price while the other company still charges a high price.

Question 19

Table 17-28
Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:
Firm A
Breaks agreement Maintains agreement
and advertises and does not advertise
 
-Refer to Table 17-28. Which of the following statements does not correctly characterize the outcome of this game?

Accepted Answer

Both firms have a dominant strategy of not advertising, as it results in higher profits regardless of the other firm's choice. Therefore, statement C is incorrect as both firms have a dominant strategy. The game is indeed an example of the Prisoners' Dilemma as both firms would collectively earn higher profits by maintaining the agreement, but each firm has a selfish incentive to break the agreement and advertise. There is a Nash equilibrium in which both firms choose not to advertise, as neither has an incentive to deviate from this strategy given the other's choice.

Question 20

Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. 
-Refer to Figure 17-5. Suppose we observe that the outcome of the game is one in which each company earns a profit of $10 million. This outcome

Accepted Answer

The answer of Figure 17-5. Two companies, ABC and QRS,...

Quiz 17: Oligopoly

A cooperative agreement among oligopolists is less likely to be maintained,

The primary purpose of antitrust legislation is to

Suppose that antitrust laws were successful in moving the allocation of resources in the computer software industry closer to the social optimum. This situation would illustrate which of the following Ten Principles of Economics?

A cooperative agreement among oligopolists is more likely to be maintained,

A law that encourages market competition by prohibiting firms from gaining or exercising excessive market power is

From society's standpoint, cooperation among oligopolists is