Deck 13: Oligopoly and Strategic Behavior

Question 1

A monopolistically competitive market consists of __________ seller(s), an oligopoly consists of __________ seller(s), and a monopoly consists of one seller.

A) one; many
B) one; two
C) a few; many
D) many; one
E) many, a few

Answer 1

E

Question 2

Which of the following industries is most likely an oligopoly?

A) restaurant industry
B) airline industry
C) gold-mining industry
D) wheat-growing industry
E) potato-growing industry

Answer 2

B

Question 3

Which of the following industries is most likely an oligopoly?

A) wheat industry
B) construction industry
C) cellphone industry
D) computer repair industry
E) house-painting industry

Answer 3

C

Question 4

In the United States, __________ prohibit collusion between rivals.

A) competitive arbitration laws
B) immigration laws
C) anticompetition laws
D) union laws
E) antitrust laws

Question 5

Like a pure monopoly, an oligopoly is characterized by:

A) free entry and exit in the long run.
B) free entry and exit in the short run.
C) significant barriers to entry.
D) all firms in the market producing the socially efficient level of output in the long run.
E) a single firm selling a product with no close substitutes.

Question 6

The accompanying table shows the four-firm concentration ratios for five separate industries. Use this table to answer the questions. $\begin{array}{cc}\text { Industry }&\text { Four-Firm Concentration ratio }\\\text { Beerbrewing } & 91 \% \\\text { Brealfast cereals } & 78 \% \\\text { Chocolate confections } & 69 \% \\\text { Adhesive marufacturing } & 24.7 \% \\\text { Plastics prochuct mannfacturing } & 5.6 \%\end{array}$

-In which industry do the four largest firms collectively have the least market power?

A) beer brewing
B) breakfast cereals
C) chocolate confections
D) adhesive manufacturing
E) plastics product manufacturing

Question 7

A monopolistically competitive market consists of many sellers, an oligopoly consists of __________ seller(s), and a monopoly consists of __________ seller(s).

A) one; one
B) one; two
C) a few; many
D) a few; one
E) many; one

Question 8

The accompanying table shows the four-firm concentration ratios for five separate industries. Use this table to answer the questions. $\begin{array}{cc}\text { Industry }&\text { Four-Firm Concentration ratio }\\\text { Beerbrewing } & 91 \% \\\text { Brealfast cereals } & 78 \% \\\text { Chocolate confections } & 69 \% \\\text { Adhesive marufacturing } & 24.7 \% \\\text { Plastics prochuct mannfacturing } & 5.6 \%\end{array}$

-In which two industries is market power the most concentrated?

A) beer brewing and adhesive manufacturing
B) breakfast cereals and adhesive manufacturing
C) chocolate confections and adhesive manufacturing
D) adhesive manufacturing and plastics product manufacturing
E) beer brewing and breakfast cereals

Question 9

The accompanying table shows the four-firm concentration ratios for five separate industries. Use this table to answer the questions. $\begin{array}{cc}\text { Industry }&\text { Four-Firm Concentration ratio }\\\text { Beerbrewing } & 91 \% \\\text { Brealfast cereals } & 78 \% \\\text { Chocolate confections } & 69 \% \\\text { Adhesive marufacturing } & 24.7 \% \\\text { Plastics prochuct mannfacturing } & 5.6 \%\end{array}$

-In which industry do the four largest firms collectively have the most market power?

A) beer brewing
B) breakfast cereals
C) chocolate confections
D) adhesive manufacturing
E) plastics product manufacturing

Question 10

The accompanying table shows the total dollar amount of sales in 2012 for the four largest firms in the adhesive manufacturing industry. Total industry sales in 2012 were $782,000. Use this table to answer the questions. $\begin{array}{lr}\text { Firm Name }&\text { Dollar Amount of Sales in } 2012\\\text { Ghes R Us, Inc. } & \$ 362,000 \\\text { Ghe Down, Inc. } & \$ 105,000 \\\text { Sticky, Inc. } & \$ 85,000 \\\text { All Ghes, Inc. } & \$ 76,000 \\\text { All other firms in industry combined } & \$ 154,000\end{array}$

-If Glues R Us, Inc. split into two separate companies, the concentration ratio would __________ and the market price of adhesive would likely __________.

A) increase; fall
B) increase; rise
C) decrease; not change
D) decrease; fall
E) decrease; rise

Question 11

A __________ agreement among rival firms will most likely specify the price each firm will charge and the quantity each firm will produce/sell.

A) friendly
B) competitive
C) monopolistic
D) collusive
E) price-quantity

Question 12

__________ have a greater incentive to collude and to form cartels in an effort to achieve monopoly-like profits.

A) Monopolists
B) Workers in a competitive labor market
C) Monopolistic competitors
D) Firms in a perfectly competitive market
E) Oligopolists

Question 13

When two or more firms set prices or quantities in unison, economists refer to them as a:

A) cartel.
B) monopoly.
C) monopolistically competitive market.
D) perfectly competitive market.
E) predatory pricing unit.

Question 14

Oligopolistic markets are __________ because price is __________ marginal cost.

A) socially efficient; equal to
B) socially efficient; less than
C) socially efficient; greater than
D) socially inefficient; less than
E) socially inefficient; greater than

Question 15

The accompanying table shows the total dollar amount of sales in 2012 for the four largest firms in the adhesive manufacturing industry. Total industry sales in 2012 were $782,000. Use this table to answer the questions. $\begin{array}{lr}\text { Firm Name }&\text { Dollar Amount of Sales in } 2012\\\text { Ghes R Us, Inc. } & \$ 362,000 \\\text { Ghe Down, Inc. } & \$ 105,000 \\\text { Sticky, Inc. } & \$ 85,000 \\\text { All Ghes, Inc. } & \$ 76,000 \\\text { All other firms in industry combined } & \$ 154,000\end{array}$

-What is the four-firm concentration ratio in this industry?

A) 20%
B) 40%
C) 60%
D) 80%
E) 100%

Question 16

When two or more firms form a __________ agreement and set price and quantity in unison, economists refer to them as __________.

A) competitive; a cartel
B) collusive; social benefactors
C) collusive; a cartel
D) monopolistically competitive; social benefactors
E) monopolistically competitive; a cartel

Question 17

Economists measure oligopoly power present in an industry by using:

A) capital ratios.
B) concentration ratios.
C) reserve ratios.
D) inequality ratios.
E) competition ratios.

Question 18

The accompanying table shows the dollar amount of sales in 2012 for the four largest firms in the above-ground pool industry. Total industry sales in 2012 were $467,000. Use this table to answer the questions. $\begin{array}{lr}\text { Firm Name }&\text { Dollar Amount of Sales in } 2012\\\text { Bhre Water Island, Inc. } & \$ 112,000 \\\text { Backyard Paradise, Inc. } & \$ 47,000 \\\text { Tropical Waters, Inc. } & \$ 19,000 \\\text { Poolside Plastics, Inc. } & \$ 14,000 \\\text { All other firms in industry combined. } & \$ 275,000\end{array}$

-If Blue Water Island, Inc. acquired Backyard Paradise, Inc., the concentration ratio would __________ and the market price of pools would likely __________.

A) increase; fall
B) increase; rise
C) decrease; not change
D) decrease; fall
E) decrease; rise

Question 19

A firm operating in an oligopolistic market has __________ market power compared to a __________.

A) less; firm operating in a perfectly competitive market
B) the same amount of; firm operating in a perfectly competitive market
C) less; monopolist
D) the same amount of; monopolist
E) more; monopolist

Question 20

The accompanying table shows the dollar amount of sales in 2012 for the four largest firms in the above-ground pool industry. Total industry sales in 2012 were $467,000. Use this table to answer the questions. $\begin{array}{lr}\text { Firm Name }&\text { Dollar Amount of Sales in } 2012\\\text { Bhre Water Island, Inc. } & \$ 112,000 \\\text { Backyard Paradise, Inc. } & \$ 47,000 \\\text { Tropical Waters, Inc. } & \$ 19,000 \\\text { Poolside Plastics, Inc. } & \$ 14,000 \\\text { All other firms in industry combined. } & \$ 275,000\end{array}$

-What is the four-firm concentration ratio in this industry?

A) 24%
B) 41%
C) 68%
D) 78%
E) 94%

Question 21

If antitrust laws did not prohibit efforts to restrict competition in markets:

A) no firms would attempt to collude on price and/or quantity.
B) attempts at collusion with rival firms on price and or/quantity would succeed all the time.
C) attempts at collusion with rival firms would probably fail more often than not.
D) all firms in the economy would earn negative economic profit in the long run.
E) all firms in the market would earn zero economic profit in the long run.

Question 22

The accompanying table shows a small community's demand for monthly subscriptions to a streaming movie service. Assume that only two firms (Nextflix and Flixbuster) sell in this market, that each firm offers the same quality of service and movie selection, and that each firm's marginal cost is constant and equal to 0 (zero) due to excess capacity. Use this information to answer thequestions. $\begin{array}{lrr}\text { Price/Month(P) }&\text { Number of Customers (Q) }&\text { Total Revenus/Month (TR) }\\\$ 10 & 0 & \$ 0 \\\$ 9 & 100 & \$ 900 \\\$ 8 & 200 & \$ 1,600 \\\$ 7 & 300 & \$ 2,100 \\\$ 6 & 400 & \$ 2,400 \\\$ 5 & 500 & \$ 2,500 \\\$ 4 & 600 & \$ 2,400 \\\$ 3 & 700 & \$ 2,100 \\\$ 2 & 800 & \$ 1,600 \\\$ 1 & 900 & \$ 900 \\\$ 0 & 1000 & \$ 0\end{array}$

-An agreement between Nextflix and Flixbuster to each supply 250 subscriptions is an example of:

A) price discrimination.
B) Bertrand competition.
C) price leadership.
D) collusion.
E) increasing marginal costs.

Question 23

The accompanying table shows a small community's demand for monthly subscriptions to a streaming movie service. Assume that only two firms (Nextflix and Flixbuster) sell in this market, that each firm offers the same quality of service and movie selection, and that each firm's marginal cost is constant and equal to 0 (zero) due to excess capacity. Use this information to answer thequestions. $\begin{array}{lrr}\text { Price/Month(P) }&\text { Number of Customers (Q) }&\text { Total Revenus/Month (TR) }\\\$ 10 & 0 & \$ 0 \\\$ 9 & 100 & \$ 900 \\\$ 8 & 200 & \$ 1,600 \\\$ 7 & 300 & \$ 2,100 \\\$ 6 & 400 & \$ 2,400 \\\$ 5 & 500 & \$ 2,500 \\\$ 4 & 600 & \$ 2,400 \\\$ 3 & 700 & \$ 2,100 \\\$ 2 & 800 & \$ 1,600 \\\$ 1 & 900 & \$ 900 \\\$ 0 & 1000 & \$ 0\end{array}$

-If this market were a monopoly instead of a duopoly, the market price would be __________ and the quantity of streaming movie subscriptions purchased each month would be __________.

A) $0; 1,000
B) $3; 700
C) $5; 500
D) $7; 300
E) $9; 100

Question 24

Assume all markets are in long-run equilibrium. The market quantity supplied in an oligopoly would be _________ the market quantity supplied in a monopoly and _________ the market quantity supplied in a competitive market.

A) less than; less than
B) less than; greater than
C) less than; equal to
D) greater than; equal to
E) greater than; less than

Question 25

When a market is characterized by mutual interdependence:

A) one firm's pricing decision does not affect the market share of any other firm.
B) one firm's quantity decision does not affect the market share of any other firm.
C) all firms always act in unison to produce the monopoly quantity.
D) the actions of one firm have an impact on the price and output of its competitors.
E) the actions of one firm have no impact on the price and output decisions of its competitors.

Question 26

An agreement between Nike and Adidas to raise prices of the track shoes that each company produces by 50% is an example of a collusive agreement, and economists generally agree that:

A) this agreement is in the best interest of society because the price of track shoes is significantly above marginal cost.
B) this agreement is in the best interest of society because the quantity of track shoes bought and sold is significantly less than the quantity that would be bought and sold in a perfectly competitive market.
C) this agreement is not in the best interest of society because the price of track shoes is significantly below marginal cost.
D) this agreement is not in the best interest of society because the price of track shoes is significantly above marginal cost.
E) the price of track shoes does not affect societal welfare.

Question 27

Firm A and Firm B are duopolists. They are choosing the price for which they will sell their products and the quantity they will sell. Both firms make their decisions simultaneously. The _________ in this situation occurs when Firm B chooses a pricing strategy given the strategy that Firm A chooses, and Firm A chooses a pricing strategy given the strategy that Firm B chooses.

A) antitrust equilibrium
B) Nash equilibrium
C) Von Neumman equilibrium
D) Morgenstern equilibrium
E) cartel equilibrium

Question 28

Six firms are currently producing and selling in a market. When two of the six firms exit the market, economists expect that the equilibrium price:

A) will be lower and the equilibrium quantity will be lower.
B) will be higher and the equilibrium quantity will be lower.
C) will be lower and the equilibrium quantity will be higher.
D) will be higher and the equilibrium quantity will be higher.
E) and the equilibrium quantity will not change.

Question 29

The accompanying table shows a small community's demand for monthly subscriptions to a streaming movie service. Assume that only two firms (Nextflix and Flixbuster) sell in this market, that each firm offers the same quality of service and movie selection, and that each firm's marginal cost is constant and equal to 0 (zero) due to excess capacity. Use this information to answer thequestions. $\begin{array}{lrr}\text { Price/Month(P) }&\text { Number of Customers (Q) }&\text { Total Revenus/Month (TR) }\\\$ 10 & 0 & \$ 0 \\\$ 9 & 100 & \$ 900 \\\$ 8 & 200 & \$ 1,600 \\\$ 7 & 300 & \$ 2,100 \\\$ 6 & 400 & \$ 2,400 \\\$ 5 & 500 & \$ 2,500 \\\$ 4 & 600 & \$ 2,400 \\\$ 3 & 700 & \$ 2,100 \\\$ 2 & 800 & \$ 1,600 \\\$ 1 & 900 & \$ 900 \\\$ 0 & 1000 & \$ 0\end{array}$

-Listed below are four different collusive agreements that Nextflix and Flixbuster are considering. Assuming both firms will abide by the terms, which collusive agreement(s) would maximize total profit in the market? I. Nextflix supplies 400 subscriptions and Flixbuster supplies 500 subscriptions.
II) Nextflix supplies 500 subsciptions and Flixbuster supplies 300 subscriptions.
III) Nextflix supplies 250 subscriptions and Flixbuster supplies 250 subscriptions.
IV) Nextflix supplies 100 subscriptions and Flixbuster supplies 400 subscriptions.

A) agreement I
B) agreements I and II
C) agreement II and III
D) agreement IV
E) agreements III and IV

Question 30

When more firms enter into a market that was previously characterized as a duopoly, it will:

A) be easier for firms in the market to form a successful cartel.
B) be more difficult for firms in the market to form a successful cartel.
C) be just as difficult for firms in the market to form a successful cartel as it was before the new firms entered.
D) be impossible for firms in the market to form a successful cartel, whereas before the new firms entered, it would have been possible.
E) still be impossible for firms in the market to form a successful cartel.

Question 31

Airline A and Airline B are the two largest airlines in the country. The chief executive officer of Airline A calls the chief executive officer of Airline B and says, "Why don't we both raise prices 25% across the board next week?" This is an example of:

A) spirited competition.
B) attempted collusive behavior.
C) predatory pricing.
D) a corporate merger.
E) a tying arrangement.

Question 32

When a third firm enters a market that was previously categorized as a duopoly, the equilibrium price:

A) will be lower and the equilibrium quantity will be lower.
B) will be higher and the equilibrium quantity will be lower.
C) will be lower and the equilibrium quantity will be higher.
D) will be higher and the equilibrium quantity will be higher.
E) and the equilibrium quantity will not change.

Question 33

Assume all markets are in long-run equilibrium. Market price in an oligopoly would be _________ the market price in a monopoly, and _________ the market price in a competitive market.

A) less than; less than
B) less than; greater than
C) less than; equal to
D) greater than; equal to
E) greater than; less than

Question 34

In 2011, three firms were selling cellular phone service for a price of $40 per month in Pittsburgh, Pennsylvania. In 2012, five firms were selling cellular phone service for a price of $30 per month. Which effect best describes the likely decrease in profits experienced by each of the three original firms due only to the lower market price?

A) competitive effect
B) price effect
C) output effect
D) market effect
E) oligopoly effect

Question 35

The accompanying table shows a small community's demand for monthly subscriptions to a streaming movie service. Assume that only two firms (Nextflix and Flixbuster) sell in this market, that each firm offers the same quality of service and movie selection, and that each firm's marginal cost is constant and equal to 0 (zero) due to excess capacity. Use this information to answer thequestions. $\begin{array}{lrr}\text { Price/Month(P) }&\text { Number of Customers (Q) }&\text { Total Revenus/Month (TR) }\\\$ 10 & 0 & \$ 0 \\\$ 9 & 100 & \$ 900 \\\$ 8 & 200 & \$ 1,600 \\\$ 7 & 300 & \$ 2,100 \\\$ 6 & 400 & \$ 2,400 \\\$ 5 & 500 & \$ 2,500 \\\$ 4 & 600 & \$ 2,400 \\\$ 3 & 700 & \$ 2,100 \\\$ 2 & 800 & \$ 1,600 \\\$ 1 & 900 & \$ 900 \\\$ 0 & 1000 & \$ 0\end{array}$

-If this market were highly competitive instead of a duopoly, the market price would be __________ and the quantity of streaming movie subscriptions purchased each month would be __________.

A) $0; 1,000
B) $2; 800
C) $4; 600
D) $6; 400
E) $8; 800

Question 36

Five firms are currently producing and selling in a market. When two more firms enter the market, economists expect that the equilibrium price:

A) will be lower and the equilibrium quantity will be lower.
B) will be higher and the equilibrium quantity will be lower.
C) will be lower and the equilibrium quantity will be higher.
D) will be higher and the equilibrium quantity will be higher.
E) and the equilibrium quantity will not change.

Question 37

The accompanying table shows a small community's demand for monthly subscriptions to a streaming movie service. Assume that only two firms (Nextflix and Flixbuster) sell in this market, that each firm offers the same quality of service and movie selection, and that each firm's marginal cost is constant and equal to 0 (zero) due to excess capacity. Use this information to answer thequestions. $\begin{array}{lrr}\text { Price/Month(P) }&\text { Number of Customers (Q) }&\text { Total Revenus/Month (TR) }\\\$ 10 & 0 & \$ 0 \\\$ 9 & 100 & \$ 900 \\\$ 8 & 200 & \$ 1,600 \\\$ 7 & 300 & \$ 2,100 \\\$ 6 & 400 & \$ 2,400 \\\$ 5 & 500 & \$ 2,500 \\\$ 4 & 600 & \$ 2,400 \\\$ 3 & 700 & \$ 2,100 \\\$ 2 & 800 & \$ 1,600 \\\$ 1 & 900 & \$ 900 \\\$ 0 & 1000 & \$ 0\end{array}$

-Listed below are four different collusive agreements that Nextflix and Flixbuster are considering. Assuming both firms will abide by the terms, which collusive agreement(s) would maximize total profit in the market? I. Nextflix supplies 50 subscriptions and Flixbuster supplies 450 subscriptions.
II) Nextflix supplies 450 subscriptions and Flixbuster supplies 50 subscriptions.
III) Nextflix supplies 300 subscriptions and Flixbuster supplies 100 subscriptions.
IV) Nextflix supplies 100 subscriptions and Flixbuster supplies 100 subscriptions.

A) agreement I
B) agreements I and II
C) agreements II and III
D) agreement III
E) agreements III and IV

Question 38

Three firms are currently producing and selling in a market. When one of the three firms exits the market, economists expect that the equilibrium price:

A) be lower and the equilibrium quantity will be lower.
B) will be higher and the equilibrium quantity will be lower.
C) will be lower and the equilibrium quantity will be higher.
D) will be higher and the equilibrium quantity will be higher.
E) and the equilibrium quantity will not change.

Question 39

The _________ effect occurs when the market price either decreases or increases by the respective entrance or exit of a rival firm in the market.

A) competitive
B) price
C) output
D) market
E) oligopoly

Question 40

The accompanying table shows a small community's demand for monthly subscriptions to a streaming movie service. Assume that only two firms (Nextflix and Flixbuster) sell in this market, that each firm offers the same quality of service and movie selection, and that each firm's marginal cost is constant and equal to 0 (zero) due to excess capacity. Use this information to answer thequestions. $\begin{array}{lrr}\text { Price/Month(P) }&\text { Number of Customers (Q) }&\text { Total Revenus/Month (TR) }\\\$ 10 & 0 & \$ 0 \\\$ 9 & 100 & \$ 900 \\\$ 8 & 200 & \$ 1,600 \\\$ 7 & 300 & \$ 2,100 \\\$ 6 & 400 & \$ 2,400 \\\$ 5 & 500 & \$ 2,500 \\\$ 4 & 600 & \$ 2,400 \\\$ 3 & 700 & \$ 2,100 \\\$ 2 & 800 & \$ 1,600 \\\$ 1 & 900 & \$ 900 \\\$ 0 & 1000 & \$ 0\end{array}$

-If the two firms operating in this market agreed to each supply one-half of the quantity a monopolist would supply, the contract would specify that:

A) Nextflix supplies 400 subscriptions and Flixbuster supplies 100 subscriptions.
B) Flixbuster supplies 400 subscriptions and Nextflix supplies 100 subscriptions.
C) Nextflix supplies 0 (zero) subscriptions and Flixbuster supplies 500 subscriptions.
D) Flixbuster supplies 0 (zero) subscriptions and Nextflix supplies 500 subscriptions.
E) Nextflix supplies 250 subscriptions and Nextflix supplies 250 subscriptions.

Question 41

In 2011, three firms (Firm A, Firm B, and Firm C) were selling cellular phone service for a price of $40 per month in Hershey, Pennsylvania. Each firm serviced 100 cellphone customers; thus, all firms together serviced a total of 300 customers. Assume marginal cost is 0 (zero) for all firms and thus total revenue is equal to total profit. In 2012, Firms A and B continued to service 100 customers, but Firm C now serviced 150 customers; thus, all firms together serviced a total of 350 customers. All firms now charge $30 per month. Due only to the price effect, profits for each firm decline by $1,000. Due only to the output effect, profits for both Firm A and Firm B did not change, and profits for Firm C increased by $1,500. It was in Firm C's interest to increase output because:

A) Firm C realized only $1,000 of the total $3,000 price effect, but it realized the full $1,500 of the total quantity effect.
B) Firm C realized only $2,500 of the total $3,000 price effect, but it realized the full $1,500 of the total quantity effect.
C) Firm C realized only $2,250 of the total $3,000 price effect, but it realized the full $1,500 of the total quantity effect.
D) Firm C realized only $1,750 of the total $3,000 price effect, but it realized the full $1,250 of the total quantity effect.
E) Firm C realized only $2,000 of the total $3,000 price effect, but it realized the full $1,250 of the total quantity effect.

Question 42

Assume that there is an oligopoly consisting of firms of different sizes. If a small firm increases output by 25%, the price effect realized by the small firm will be only _________. If a large firm increases output by 25%, the price effect realized by the large firm will be _________.

A) non-existent; negligible
B) negligible; non-existent
C) non-existent; substantial
D) substantial; non-existent
E) negligible; substantial

Question 43

In 2011, three firms were selling cellular phone service for a price of $40 per month in Erie, Pennsylvania. Each firm serviced 100 cellphone customers; thus, all firms together serviced a total of 300 customers. In 2012, five firms were selling cellular phone service for a price of $30 per month. Each firm serviced 70 cellphone customers; thus, all firms together serviced a total of 350 customers. Assume marginal cost is 0 (zero) for all firms and thus total revenue is equal to total profit. Due to the entrance of two firms in 2012, total monthly profits for all firms in the market decreased by $3,000 due to the _________ effect and increased by $1,500 due to the _________ effect.

A) price; output
B) output; price
C) price; price
D) output; output
E) competitive; noncompetitive

Question 44

Refer to the accompanying table. In the Nash equilibrium of this game, Derrick will go to jail for ___________ years and Brandy will go to jail for _________ years. $\begin{array} { l }&\text { derrick }\\\text {brandy }&\begin{array} { l }\quad\quad\quad\quad\quad\quad\quad\text { Confess }\quad\quad\quad\quad \text { Keep quiet }\\\begin{array} { l }\text { Confess }\\\\\text { Keep quiet }\end{array}\begin{array}{|l|l|}\hline 18 \text { years in jail } &{25 \text { years in jail }} \\18 \text { years in jail } &{\text { Goes free }} \\\hline {\text { Goes free }}&0.5 \text { year in jail }\\25 \text { years in jail } & 0.5 \text { year in jail } \\\hline\end{array}\end{array}\end{array}$

A) 0.5; 0.5
B) 25; 25
C) 0.5; 18
D) 0.5; 25
E) 18; 18

Question 45

Refer to the accompanying table. If Jeff confesses, Gerry will spend _________ years in jail if he also confesses and _________ years in jail if he keeps quiet. $\begin{array} { l }&\text {GERRY }\\\text { JEFF }&\begin{array} { l }\quad\quad\quad\quad\quad\quad\quad\text { Confess }\quad\quad\quad\quad \text { Keep quiet }\\\begin{array} { l }\text { Confess }\\\\\text { Keep quiet }\end{array}\begin{array}{|l|l|}\hline 15 \text { years in jail } &{35 \text { years in jail }} \\15 \text { years in jail } &{\text { Goes free }} \\\hline {\text { Goes free }}&2 \text { year in jail }\\ 25 \text { years in jail } & 2 \text { year in jail } \\\hline\end{array}\end{array}\end{array}$

A) 15; 15
B) 35; 35
C) 0; 35
D) 35; 0
E) 15; 35

Question 46

Refer to the accompanying table. If Keisha keeps quiet, Larry will spend ________ years in jail if he confesses and __________ years in jail if he also keeps quiet. $\begin{array} { l }&\text { LARRY }\\\text { KEISHA }&\begin{array} { l }\quad\quad\quad\quad\quad\quad\quad\text { Confess }\quad\quad\quad\quad \text { Keep quiet }\\\begin{array} { l }\text { Confess }\\\\\text { Keep quiet }\end{array}\begin{array}{|l|l|}\hline 12 \text { years in jail } &{32 \text { years in jail }} \\12\text { years in jail } &{\text { Goes free }} \\\hline {\text { Goes free }}&1.5 \text { year in jail }\\32 \text { years in jail } & 1.5 \text { year in jail } \\\hline\end{array}\end{array}\end{array}$

A) 12; 1.5
B) 1.5; 12
C) 0; 12
D) 12; 12
E) 0; 1.5

Question 47

Economists are more likely to use game theory to analyze a(n):

A) competitive market.
B) monopoly.
C) monopolistically competitive market.
D) oligopoly.
E) monopsony.

Question 48

The branch of economics that studies strategic decision making is called:

A) interdependence theory.
B) game theory.
C) competitive theory.
D) noncompetitive theory.
E) strategic theory.

Question 49

Which of the following is an example of collusion?

A) Nike and Reebok compete on price.
B) Dell and Gateway compete on quantity.
C) American Airlines and United Airlines agree to raise prices.
D) Coca-Cola and Pepsi do not attempt to fix prices.
E) Verizon builds more cellphone towers.

Question 50

The accompanying table shows two firms in a duopoly. Each firm makes its decision without knowledge of the other firm's decision. The payoffs for each firm represent economic profits, and each firm strictly prefers more economic profit than less. If both firms were able to collude and make their supply decisions collectively, Flixbuster would sell ___________ subscriptions per month and Nextflix would sell ___________ subscriptions per month. $\begin{array} { l }&\text { Flixbuster }\\\text {netflix }&\begin{array} { l }\quad\quad\text { Sell } 200 \text { subscriptions per}\quad\quad\text { Sell } 200 \text { subscriptions per }\\\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { month }\quad\quad\quad\quad\text { month }\\\begin{array} { l } \text { Sell 200} \\ \text { subscriptions} \\ \text {per month } \\\\ \text { Sell 400} \\ \text { subscriptions} \\ \text {per month } \\\end{array}\begin{array}{|l|l|}\hline \$750,000\quad\quad\quad&\$950,000\quad\quad\quad \\\\\$750,000&\$400,000\\\hline \$400,000&\$600,000\\\\\$950,000&\$600,000 \\\\\hline\end{array}\end{array}\end{array}$

A) 200; 200
B) 400; 400
C) 400; 200
D) 200; 400
E) 600; 600

Question 51

The Nash equilibrium in an oligopolistic market is generally __________ for society than the outcome under collusion because the price is __________ marginal cost.

A) better; closer to
B) better; further above
C) worse; closer to
D) worse; further above
E) worse; equal to

Question 52

In 2011, three firms (Firm A, Firm B, and Firm C) were selling cellular phone service for a price of $40 per month in Playa del Carmen, Mexico. Each firm serviced 100 cellphone customers; thus, all firms together serviced a total of 300 customers. Assume marginal cost is 0 (zero) for all firms and thus total revenue is equal to total profit. In 2012, Firms A and B each continued to service 100 customers, but Firm C now serviced 150 customers; thus, all firms together serviced a total of 350 customers. All firms now charge $30 per month. Firm C's monthly profit increased by _________ due only to the output effect and decreased by _________ due only to the price effect, for a net increase of $500.

A) $2,500; $2,000
B) $3,000; $2,500
C) $500; $0.00
D) $1,500; $1,000
E) $3,500; $3,000

Question 53

Economists use _________ to better understand what might happen in situations where strategic interactions are involved.

A) complexity theory
B) strategic theory
C) competitive theory
D) noncompetitive theory
E) game theory

Question 54

A _________ consists of a set of players, a set of strategies available to those players, and a specification of the payoffs to each player for each possible combination of strategies.

A) tournament
B) competitive market
C) game
D) firm
E) monopolistically competitive market

Question 55

Refer to the accompanying table. If Jane confesses, John will spend _________ years in jail if he also confesses and _________ years in jail if he keeps quiet. $\begin{array} { l }&\text { Jane }\\\text { John }&\begin{array} { l }\quad\quad\quad\quad\quad\quad\quad\text { Confess }\quad\quad\quad\quad \text { Keep quiet }\\\begin{array} { l }\text { Confess }\\\\\text { Keep quiet }\end{array}\begin{array}{|l|l|}\hline 10 \text { years in jail } &{25 \text { years in jail }} \\10 \text { years in jail } &{\text { Goes free }} \\\hline {\text { Goes free }}&1 \text { year in jail }\\ 25 \text { years in jail } & 1 \text { year in jail } \\\hline\end{array}\end{array}\end{array}$

A) 10; 10
B) 10; 25
C) 10; 0
D) 0; 10
E) 25; 25

Question 56

When modeling economic situations using game theory, the economic participants are generally referred to as:

A) gamers.
B) non-movers.
C) dominators.
D) players.
E) managers.

Question 57

When decision-makers face incentives that make it difficult to achieve mutually beneficial outcomes, we say they are in a(n):

A) oligopoly dilemma.
B) prisoner's dilemma.
C) prison-guard's dilemma.
D) monopoly dilemma.
E) competitive dilemma.

Question 58

Refer to the accompanying table. Confessing is Eddie's dominant strategy because: $\begin{array} { l }&\text { sharon }\\\text {eddie }&\begin{array} { l }\quad\quad\quad\quad\quad\quad\quad\text { Confess }\quad\quad\quad\quad \text { Keep quiet }\\\begin{array} { l }\text { Confess }\\\\\text { Keep quiet }\end{array}\begin{array}{|l|l|}\hline 25 \text { years in jail } &{40 \text { years in jail }} \\25 \text { years in jail } &{\text { Goes free }} \\\hline {\text { Goes free }}&2 \text { year in jail }\\40 \text { years in jail } & 2 \text { year in jail } \\\hline\end{array}\end{array}\end{array}$

A) Sharon's dominant strategy is to keep quiet.
B) he spends more time in jail if he confesses, regardless of whether Sharon confesses or keeps quiet.
C) he spends less time in jail if he confesses, regardless of whether Sharon confesses or keeps quiet.
D) he spends the same time in jail by confessing than he would by not confessing.
E) his decision does not depend on Sharon's decision.

Question 59

When a particular strategy produces a better outcome for a person regardless of the strategies others choose, we say it is a(n):

A) dominated strategy.
B) dominant strategy.
C) equilibrated strategy.
D) efficient strategy.
E) surplus maximization strategy.

Question 60

The accompanying table shows two firms in a duopoly. Each firm makes its decision without knowledge of the other firm's decision. The payoffs for each firm represent economic profits, and each firm strictly prefers more economic profit than less. In this game, selling __________ subscriptions a month is a dominant strategy for Flixbuster and selling __________ subscriptions a month is a dominant strategy for Nextflix. $\begin{array} { l }&\text { Flixbuster }\\\text {netflix }&\begin{array} { l }\quad\quad\text { Sell } 200 \text { subscriptions per}\quad\quad\text { Sell } 200 \text { subscriptions per }\\\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { month }\quad\quad\quad\quad\text { month }\\\begin{array} { l } \text { Sell 200} \\ \text { subscriptions} \\ \text {per month } \\\\ \text { Sell 400} \\ \text { subscriptions} \\ \text {per month } \\\end{array}\begin{array}{|l|l|}\hline \$40,000\quad\quad\quad&\$60,000\quad\quad\quad \\\\\$40,000&\$20,000\\\hline \$20,000&\$25,000\\\\\$60,000&\$25,000 \\\\\hline\end{array}\end{array}\end{array}$

A) 200; 200
B) 200; 400
C) 400; 200
D) 400; 400
E) 100; 100

Question 61

The accompanying table shows two firms in a single-stage duopoly game. Each firm makes its decision without knowledge of the other firm's decision. The payoffs for each firm represent economic profits, and each firm strictly prefers more economic profit than less. This game would be considered a prisoner's dilemma if X is between ________. $\begin{array} { l }&\text { Tempurpedic }\\\text { Sealy }&\begin{array} { l }\quad\quad\text { Produce } 3,000 \text {mattresses }\quad\text { Produce } 4,000 \text { mattresses}\\\begin{array} { l } \text { Produce} \\ \text {3,000} \\ \text {mattresses } \\\\ \text { Produce} \\ \text { 4,000} \\ \text {mattresses } \\\end{array}\begin{array}{|l|l|}\hline \$25,000\quad\quad\quad&\$35,000\quad\quad\quad \\\\\$25,000&\$10,000\\\hline \$10,000&X\\\\\$35,000&X \\\\\hline\end{array}\end{array}\end{array}$

A) $10,000 and $25,000
B) $25,000 and $35,000
C) $10,000 and $35,000
D) $35,000 and $70,000
E) $45,000 and $70,000

Question 62

The accompanying table shows two firms in a single-stage duopoly game. Each firm makes its decision without knowledge of the other firm's decision. The payoffs for each firm represent economic profits, and each firm strictly prefers more economic profit than less. If both firms were able to write a binding contract, this contract would specify that Bobbles.com agrees to produce _________ bobbleheads and Bobbles R' Us agrees to produce _________ bobbleheads. $\begin{array} { l }&\text { Bobbles } R^{\prime} \text { Us }\\\text {Bobbles.com }&\begin{array} { l }\quad\quad\text { Produce } 5,000 \text { bobbleheads }\quad\quad\text { Produce } 5,000 \text { bobbleheads }\\\begin{array} { l } \text { Produce} \\ \text { 5,000} \\ \text {bobbleheads } \\\\ \text { Produce} \\ \text { 7,000} \\ \text {bobbleheads } \\\end{array}\begin{array}{|l|l|}\hline \$76,000\quad\quad\quad&\$109,000\quad\quad\quad \\\\\$84,000&\$22,000\\\hline \$18,000&\$34,000\\\\\$105,000&\$24,000 \\\\\hline\end{array}\end{array}\end{array}$

A) 5,000; 7,000
B) 7,000; 5,000
C) 7,000; 7,000
D) 5,000; 5,000
E) 12,000; 0

Question 63

In January, Home Depot offered a 10% off coupon and Lowe's did not. In February, Lowe's offered a 10% off coupon and Home Depot did not. In March, Home Depot offered a 10% off coupon and Lowe's did not. It is likely that Home Depot and Lowe's are both playing the _________ strategy.

A) grim trigger
B) tit-for-two-tats
C) deterrence
D) tit-for-tat
E) mutually assured destruction

Question 64

The accompanying matrix depicts two firms in a single-stage duopoly game. Each firm makes its decision without knowledge of the other firm's decision. The payoffs for each firm represent economic profits, and each firm strictly prefers more economic profit than less. If X is greater than $3,500, then: $\begin{array} { l }&\text { Tasha's Flower Shop }\\\text { JOUSHUA'S Flower Shop }&\begin{array} { l }\quad\quad\text { Produce } 3,000 \text {mattresses }\quad\text { Produce } 4,000 \text { mattresses}\\\begin{array} { l } \text { Produce} \\ \text {200} \\ \text {flowers } \\\\ \text { Produce} \\ \text { 300} \\ \text {flowers } \\\end{array}\begin{array}{|l|l|}\hline \$2,500\quad\quad\quad&\$3,500\quad\quad\quad \\\\\$2,500&\$10,000\\\hline \$1,000&X\\\\\$3,500&X \\\\\hline\end{array}\end{array}\end{array}$

A) there is only one Nash equilibrium, and this game would be considered a prisoner's dilemma.
B) there are two Nash equilibria, and this game would be considered a prisoner's dilemma.
C) there are three Nash equilibria, and this game would be considered a prisoner's dilemma.
D) there is only one Nash equilibrium, and this game would not be considered a prisoner's dilemma.
E) there are two Nash equilibria, and this game would not be considered a prisoner's dilemma.

Question 65

The accompanying table shows two firms in a single stage game. Each firm makes its decision without knowledge of the other firm's decision. The payoffs for each firm represent economic profits, and each firm strictly prefers more economic profit than less. In the Nash equilibrium of this game, Pepsi earns a profit of _________ and Coca-Cola earns a profit of __________. $\begin{array} { l }&\text { pepsi }\\\text { coca-cola }&\begin{array} { l }\quad\quad\quad\quad\quad\quad\quad\text { Advertise }\quad\quad\quad\quad \text { Does Not Advertise }\\\begin{array} { l }\text { Advertise }\\\\\text { Does Not Advertise}\end{array}\begin{array}{|l|l|}\hline \$ 50 \text { million }&\$ 37.5 \text { million } \\\$ 50 \text { million }&\$ 75 \text { million } \\\hline \$ 75 \text { million }&\$ 67.5 \text { million }\\\$ 37.5 \text { million }&\$ 67.5 \text { million } \\\hline\end{array}\end{array}\end{array}$

A) $67.5 million; $67.5 million
B) $30 million; $30 million
C) $37.5 million; $75 million
D) $75 million; $37.5 million
E) $50 million; $50 million

Question 66

In January 2011, Coca-Cola and Pepsi agreed to reduce their yearly advertising budgets by $1 million each, and neither firm reneged on the agreement throughout the year. In January 2012, Coca-Cola and Pepsi each announced that their company 2011 profits had increased by $1 million. Which of the following is a likely explanation for this increase?

A) A new entrant in the market caused Coca-Cola and Pepsi to lose substantial market share.
B) The government imposed a punitive tax on both firms for producing a beverage that is a danger to public health.
C) The firms had previously been in a prisoner's dilemma situation where one firm's advertisements were effectively canceling the other firm's advertisements.
D) Coca-Cola drastically reduced the price of its soda relative to the price of Pepsi's soda.
E) Pepsi drastically reduced the price of its soda relative to the price of Coca-Cola's soda.

Question 67

The accompanying payoff matrix depicts the possible outcomes for two players involved in a game of Rock, Paper, Scissors. If a player receives a payoff of 1, the player wins; if the player receives a payoff of ?1, the player loses; if both players receive 0 (zero), the players tie. If Sideshow Bob chooses scissors and Crusty the Clown chooses paper, Sideshow Bob's payoff is __________ and Crusty the Clown's payoff is _________. $\begin{array}{lccc} &&&\text { side show bob}\\&& \text { Rock } & \text { Paper } & \text { Scissors } \\\text { Crusty the Clown }&\text { Rock } & 0,0 & -1,1 & 1,-1 \\&\text { Paper } & 1,-1 & 0,0 & -1,1 \\&\text { Scissors } & -1.1 & 1 .-1 & 0.0\end{array}$

A) 0; 0
B) 1; 0
C) 2; 0
D) ?1; 1
E) 1; ?1

Question 68

Together, Coca-Cola and Pepsi account for approximately __________ % of the soft-drink market.

A) 35
B) 45
C) 55
D) 65
E) 75

Question 69

Wal-Mart and Target are the only stores in a remote town that currently stock and sell the PlayStation 5 video game console. Managers at both stores are simultaneously deciding whether to charge a price of $1,000 or $1,500 for each console. If both stores charge $1,000, they earn a profit of $100,000 each. If both stores charge $1,500, they earn a profit of $200,000 each. If one store charges $1,000 and the other store charges $1,500, the store that charges $1,000 earns a profit of $250,000 and the firm that charges $1,500 earns a profit of $50,000. If Wal-Mart and Target _________, they can both charge $1,500 and earn the highest combined profit available.

A) collude with each other
B) privately undercut each other after making an agreement
C) engage in spirited price competition
D) compete with each other only with regard to quantity and not price
E) compete with each other only with regard to price and not quantity

Question 70

In a repeated prisoner's dilemma, a player that is playing tit-for-tat will:

A) defect in the first round and defect in all subsequent rounds.
B) defect in the first round and, in any subsequent round, do what their opponent did last round.
C) cooperate in the first round and defect in all subsequent rounds.
D) cooperate in the first round and cooperate in all subsequent rounds.
E) cooperate in the first round and, in any subsequent round, do what their opponent did last round.

Question 71

Player A and Player B are playing a game involving several rounds of a prisoner's dilemma where their choices are to "cooperate" or "defect." After each round ends, one player roles a six-sided die. If the die lands on 6, the game ends; however, if the die lands on any other number, the game continues and players play another round. Prior to the game starting, the players formulate a strategy that specifies what they will do in every possible round they might find themselves in. If Player A is playing the tit-for-tat strategy, in the:

A) first round, Player A will definitely choose defect.
B) second round, Player A will definitely choose defect.
C) first round, Player A will definitely choose cooperate.
D) second round, Player A will definitely choose cooperate.
E) third round, Player A will definitely choose cooperate.

Question 72

The accompanying payoff matrix depicts the possible outcomes for two players involved in a game of Rock, Paper, Scissors. If a player receives a payoff of 1, the player wins; if the player receives a payoff of ?1, the player loses; if both players receive 0 (zero), the players tie. If Madonna chooses rock and Kid Cudi chooses paper, Madonna's payoff is __________ and Kid Cudi's payoff is ___________. $\begin{array}{lccc} &&&\text { Kid Cudi }\\&& \text { Rock } & \text { Paper } & \text { Scissor } \\\text { Madonna }&\text { Rock } & 0,0 & -1,1 & 1,-1 \\&\text { Paper } & 1,-1 & 0,0 & -1,1 \\&\text { Scissors } & -1,1 & 1,-1 & 0,0\end{array}$

A) 0; 0
B) 1; 0
C) 2; 0
D) ?1; 1
E) 1; 1

Question 73

In January, Wal-Mart offered a 10% off coupon and Target did not. In February, Target offered a 10% off coupon and Wal-Mart did not. In March, Wal-Mart offered a 10% off coupon and Target did not. It is likely that Wal-Mart and Target are both playing the ___________ strategy.

A) grim trigger
B) tit-for-two-tats
C) retail retaliation
D) tit-for-tat
E) mutually assured destruction

Question 74

If two duopolists arrive at the Nash equilibrium output level, the total quantity of the good on the market will be _________ the total quantity on the market if the market were perfectly competitive and _________ the total quantity on the market if the market were controlled by a monopoly.

A) less than; less than
B) less than; greater than
C) greater than; greater than
D) greater than; less than
E) greater than; equal to

Question 75

The accompanying table shows two firms in a single-stage duopoly game. Each firm makes its decision without knowledge of the other firm's decision. The payoffs for each firm represent economic profits, and each firm strictly prefers more economic profit than less. Assume firms are not able to collude. The Nash equilibrium total quantity of potatoes on the market is: $\begin{array} { l }&\text { Country Potato Farm }\\\text { City Potato Farm }&\begin{array} { l }\quad\quad\text { Produce } 5,000 \text {Potatoes }\quad\quad\text { Produce } 5,000 \text { Potatoes}\\\begin{array} { l } \text { Produce} \\ \text { 5,000} \\ \text {Potatoes } \\\\ \text { Produce} \\ \text { 7,000} \\ \text {Potatoes } \\\end{array}\begin{array}{|l|l|}\hline \$25,000\quad\quad\quad&\$35,000\quad\quad\quad \\\\\$25,000&\$10,000\\\hline \$10,000&\$12,000\\\\\$35,000&\$12,000 \\\\\hline\end{array}\end{array}\end{array}$

A) 12,000
B) 4,000
C) 10,000
D) 14,000
E) 24,000

Question 76

Player A and Player B are playing a game involving several rounds of a prisoner's dilemma where their choices are to "cooperate" or "defect." After each round ends, one player roles a six-sided die. If the die lands on 6, the game ends; however, if the die lands on any other number, the game continues and players play another round. Prior to the game starting, the players formulate a strategy that specifies what they will do in every possible round they might find themselves in. If Player A is playing the tit-for-tat strategy, in the:

A) first round, Player A will definitely choose defect.
B) second round, Player A will definitely choose defect.
C) second round, Player A will choose whatever Player B chose in the first round.
D) second round, Player A will definitely choose cooperate.
E) third round, Player A will definitely choose cooperate.

Question 77

The accompanying payoff matrix depicts the possible outcomes for two players involved in a game of Rock, Paper, Scissors. If a player receives a payoff of 1, the player wins; if the player receives a payoff of ?1, the player loses; if both players receive 0 (zero), the players tie. If Stan chooses scissors and Kyle chooses rock, Stan's payoff is __________ and Kyle's payoff is __________. $\begin{array}{llll} &&&\text { Kyle }\\&& \text { Rock } & \text { Paper } & \text { Scissors } \\\text { Stan }&\text { Rock } & 0,0 & -1,1 & 1,-1 \\&\text { Paper } & 1,-1 & 0,0 & -1,1 \\&\text { Scissors } & -1,1 & 1,-1 & 0.0\end{array}$

A) 0; 0
B) 1; 0
C) ?1; 1
D) 0; 1
E) 1; 1

Question 78

Jarrod and Katie are playing a game involving repeated iterations of a simultaneous move prisoner's dilemma. In each round, both Jarrod and Katie choose either "cooperate" or "defect." Neither Jarrod nor Katie knows when the game will end. If Jarrod believes that Katie will be playing tit-for-tat:

A) he will maximize his payoffs by defecting in every round.
B) cooperation will be impossible to maintain regardless of the strategy he plays.
C) cooperation might be possible if he also plays tit-for-tat.
D) cooperation might be possible if he plays a strategy where he defects in every round.
E) cooperation might be possible if he plays a strategy where he defects in the first round, cooperates in the second round, and defects in every other round.

Question 79

Game theorist Robert Axelrod decided to examine the choices that participants make in a long-run setting. He ran a sophisticated computer simulation in which he invited scholars to submit strategies for securing points in a prisoner's dilemma tournament over many rounds. All the submissions were collected and paired, and the results were scored. After each simulation, he eliminated the weakest strategy and re-ran the tournament with the remaining strategies. This evolutionary approach continued until the best strategy remained. Among all strategies submitted, which strategy dominated?

A) tit-for-tat strategy
B) tit-for-two-tats strategy
C) Axelrod equivalency strategy
D) profit-maximization strategy
E) grim trigger

Question 80

__________ have dominant strategies that make player decisions easy to predict.

A) All games
B) Only prisoner's dilemma games
C) Only two types of games
D) Only games involving firms
E) Not all games