Question 1

Which of the following are conditions for successful collusion? 1.There are few firms in the industry.
2)Secret price cutting by individual members is detectable and punishable.
3)There exists a Nash equilibrium prior to the formation of a cartel.
A) All of these conditions.
B) Conditions 1 and 2 only.
C) Conditions 2 and 3 only.
D) Conditions 1 and 3 only.
E) Condition 2 only.

Accepted Answer

Successful collusion is more likely when there are few firms (Condition 1) and when secret price cutting is detectable and punishable (Condition 2). A Nash equilibrium prior to cartel formation is not necessary for collusion.

Question 2

The payoff matrix below shows the extra profit firms X and Z will earn from two different strategies,A and B. 
-Refer to the payoff matrix above.How much would firm Z have to pay firm X to get it to choose strategy B?
A) $0.
B) $100.
C) $200.
D) $300.
E) $400.

Accepted Answer

The answer of The payoff matrix below shows the extra...

Question 3

The prisoner's dilemma refers to games where
A) neither player has a dominant strategy.
B) one player has a dominant strategy and the other does not.
C) both players have a dominant strategy.
D) both players have a dominant strategy that results in the largest possible payoff.
E) both players have a dominant strategy that results in a lower payoff than their dominated strategies.

Accepted Answer

The answer of The prisoner's dilemma refers to games where
A)...

Question 4

The payoff matrix below shows the extra profit firms X and Z will earn from two different strategies,A and B. 
-Refer to the payoff matrix above.Suppose all the payoffs to strategies A and B double for both firms.The outcome of the game
A) remains the same.
B) reverses itself.
C) is a prisoner's dilemma.
D) suffers from a commitment problem.
E) may or may not change.

Accepted Answer

Doubling the payoffs does not change the strategic structure of the game, so the outcome remains the same.

Question 5

-When an oligopolistic firm advertises its products,its demand curve shifts rightward because
A) its products are now cheaper.
B) other firms also advertise their products.
C) customers may switch brands in favour of the advertised products.
D) new customers who did not previously use the products may now purchase the advertised products.
E) customers may switch brands in favour of the advertised products,and new customers who did not previously use the products may now purchase the advertised products.

Accepted Answer

Advertising can attract both existing customers from competitors and new customers, leading to an increase in demand for the advertised product.

Question 6

For a game involving players A and B with strategies X and Z,which of the following is NOT a requirement for a prisoner's dilemma?
A) Player A must have a dominant strategy.
B) Player B must have a dominant strategy.
C) The payoff to playing their dominated strategies must be more than the payoff to their dominant strategies.
D) The payoff to playing their dominant strategies must be more than the payoff to their dominated strategies.
E) A Nash equilibrium must exist.

Accepted Answer

The answer of For a game involving players A and...

Question 7

One of the reasons why a wheat cartel would not be as successful as OPEC is that
A) there are many more wheat-producing countries than oil-producing countries.
B) there are more wheat substitutes than oil substitutes.
C) there is no competition legislation against wheat cartels.
D) there is stronger competition legislation against wheat cartels than against OPEC.
E) there are solid barriers against new entrants into a wheat cartel.

Accepted Answer

There are more wheat substitutes than oil substitutes, meaning that there would be more competition for a wheat cartel to contend with. OPEC has more control over the oil market because there are fewer substitutes for oil.

Question 8

The payoff matrix below shows the extra profit firms X and Z will earn from two different strategies,A and B. 
-Refer to the payoff matrix above.Strategy B is
A) dominated for firm Z.
B) dominant for firm X.
C) dominated for both firms.
D) dominant for both firms.
E) dominant for firm Z.

Accepted Answer

The answer of The payoff matrix below shows the extra...

Question 9

-The market demand shown in the diagram above represents the demand curve shared by two non-collusive and independent firms of equal size and efficiency,each with zero marginal cost.If neither of the existing firms wants to change the situation,to ensure a stable and profitable market for both firms,each firm will produce ___ bottles/day and each will charge a price of ____/bottle.
A) 1100;$0.90
B) 1000;$0.90
C) 1000;$1.00
D) 500;$1.00
E) 500;$1.50

Accepted Answer

The answer of 
-The market demand shown in the diagram...

Question 10

Two competitive firms are located side by side.If firm A advertises,firm B will get new customers too,even though it does not have to pay for the advertising cost.The same scenario is true for A if B advertises.If both advertise,the amount of extra revenue generated would just offset the advertising costs.In such case,game theory suggests
A) that only A will advertise.
B) that only B will advertise.
C) that both A and B will advertise.
D) that neither A nor B will advertise.
E) nothing in terms of predicting the outcome of the game.

Accepted Answer

In this scenario, both firms have a dominant strategy of not advertising. This is because even if one firm advertises, the other firm will benefit without having to pay the cost. If both firms advertise, they will only incur the cost without any additional revenue, which is not in their best interest. Therefore, the best option is for neither firm to advertise. This is an example of a "Prisoner's Dilemma" game in which both firms have a dominant strategy of not advertising even though it may not result in the best overall outcome.

Question 11

-Suppose the demand curve shown in the diagram above represents the demand curve for a profit-maximizing cartel with two rival firms of equal size and efficiency,each with zero marginal cost.If the market price is currently set at $1.00 and it is difficult to detect price-altering activities,the dominant strategy for each firm is to
A) raise price to gain market share.
B) lower price in order to increase society's surplus.
C) lower price in order to increase its profit.
D) lower price in order to capture the entire market.
E) lower price both in order to increase its profit and to capture the entire market.

Accepted Answer

The answer of 
-Suppose the demand curve shown in the...

Question 12

In the cola industry,all existing firms spend a large amount on advertising just to discourage their customers from switching to other brands.When each firm chooses the dominant strategy to advertise,the resulting payoffs are
A) smaller than if each had cut its advertising budget.
B) larger than if each had cut its advertising budget.
C) the same whether each had cut its advertising budget or not.
D) larger for larger firms only if these large firms cut their advertising budgets.
E) larger for smaller firms only if these smaller firms cut their advertising budgets.

Accepted Answer

When each firm chooses the dominant strategy to advertise, the resulting payoffs are smaller than if each had cut its advertising budget because the costs of advertising reduce the overall profits, even though they maintain market share.

Question 13

A cartel's profit-maximizing price and output will be identical to the decision of
A) a monopolist.
B) a perfectly competitive firm.
C) a perfectly competitive industry.
D) the largest firm within the perfectly competitive market.
E) the largest firm before the cartel was formed.

Accepted Answer

A cartel, by definition, is a group of firms that collude to restrict output and increase prices, much like a monopolist. Therefore, the profit-maximizing price and output of a cartel will be identical to that of a monopolist.

Question 14

Three firms join forces and form a cartel.The market price set by the cartel will be equivalent to the price set by a
A) monopolist.
B) monopolistically-competitive firm.
C) perfectly-competitive firm.
D) duopolist.
E) perfect price-discriminating monopolist.

Accepted Answer

When three firms join forces and form a cartel, they act as a single monopolist and collectively control the market supply. Therefore, the market price set by the cartel will be equivalent to the price set by a monopolist.

Question 15

-Suppose the diagram shown above represents the demand curve and the marginal revenue curve for a profit-maximizing cartel with two rival firms of equal size and efficiency,each with zero marginal cost.The market price is currently set at $1.00,and each firm is given a quota to sell 500 bottles/day.Suppose that price-cutting activities are difficult to detect and that each firm believes that it can out-perform the other firm.Why does each firm have an incentive to lower its price? 1.Each firm has marginal revenue higher than marginal cost.
2)Each firm is trying to get out of the diminishing marginal returns situation.
3)Each firm can earn extra profit by lowering its price.
A) All of these are true.
B) Only 1 is true.
C) Only 2 is true.
D) Only 3 is true.
E) Only 1 and 3 are true.

Accepted Answer

Each firm has marginal revenue higher than marginal cost, and each firm can earn extra profit by lowering its price.

Question 16

-Suppose the market demand curve shown in the diagram above represents a cartel's demand curve.Given zero marginal cost,we expect the market price to be ___,with ____ bottles of water sold per day.
A) $2.00;2,000
B) $2.00;1,000
C) $1.50;500
D) $1.00;1,000
E) $1.00;500

Accepted Answer

The answer of 
-Suppose the market demand curve shown in...

Question 17

In a duopoly,if one firm increases its price,then the other firm can
A) keep its price constant and thus increase its market share.
B) keep its price constant and thus decrease its market share.
C) increase its price and thus increase its market share.
D) decrease its price and thus decrease its market share.
E) keep its price constant and thus maintain a constant market share.

Accepted Answer

In a duopoly, if one firm increases its price, the other firm can keep its price constant to attract customers from the first firm, thereby increasing its market share.

Question 18

Games in which players find that playing their dominant strategies results in a lower payoff than playing their dominated strategies is called
A) a Nash equilibrium.
B) disequilibrium.
C) a prisoner's dilemma.
D) an ultimatum equilibrium.
E) an unfair game.

Accepted Answer

This situation is known as a prisoner's dilemma. It occurs when both players have dominant strategies that result in a worse overall outcome than if they both played their dominated strategies. This is because the players are incentivized to act in their own self-interest, leading to a suboptimal outcome for both.

Question 19

Two competitive firms are located side by side.If firm A advertises,firm B will get new customers too,even though it does not have to pay for the advertising cost.The same scenario is true for A if B advertises.If both advertise,the amount of extra revenue generated would just offset the advertising costs.This is a situation where there exists a
A) dominant strategy.
B) Nash equilibrium.
C) prisoner's dilemma.
D) collusive tendency.
E) dominant decision tree.

Accepted Answer

The answer of Two competitive firms are located side by...

Question 20

The payoff matrix below shows the extra profit firms X and Z will earn from two different strategies,A and B. 
-Refer to the payoff matrix above.Suppose all the payoffs to strategies A and B double for only firm X.The outcome of the game
A) remains the same.
B) reverses itself.
C) is a prisoner's dilemma.
D) suffers from a commitment problem.
E) may or may not change.

Accepted Answer

Doubling the payoffs for firm X does not change the strategic structure of the game, so the outcome remains the same.

Quiz 9: Thinking Strategically

Which of the following are conditions for successful collusion? 1.There are few firms in the industry. 2) Secret price cutting by individual members is detectable and punishable. 3) There exists a Nash equilibrium prior to the formation of a cartel.

The payoff matrix below shows the extra profit firms X and Z will earn from two different strategies,A and B. -Refer to the payoff matrix above.How much would firm Z have to pay firm X to get it to choose strategy B?

The prisoner's dilemma refers to games where

The payoff matrix below shows the extra profit firms X and Z will earn from two different strategies,A and B. -Refer to the payoff matrix above.Suppose all the payoffs to strategies A and B double for both firms.The outcome of the game

-When an oligopolistic firm advertises its products,its demand curve shifts rightward because

For a game involving players A and B with strategies X and Z,which of the following is NOT a requirement for a prisoner's dilemma?

One of the reasons why a wheat cartel would not be as successful as OPEC is that

The payoff matrix below shows the extra profit firms X and Z will earn from two different strategies,A and B. -Refer to the payoff matrix above.Strategy B is

In the cola industry,all existing firms spend a large amount on advertising just to discourage their customers from switching to other brands.When each firm chooses the dominant strategy to advertise,the resulting payoffs are

A cartel's profit-maximizing price and output will be identical to the decision of

Three firms join forces and form a cartel.The market price set by the cartel will be equivalent to the price set by a

-Suppose the market demand curve shown in the diagram above represents a cartel's demand curve.Given zero marginal cost,we expect the market price to be _,with __ bottles of water sold per day.

In a duopoly,if one firm increases its price,then the other firm can

Games in which players find that playing their dominant strategies results in a lower payoff than playing their dominated strategies is called

The payoff matrix below shows the extra profit firms X and Z will earn from two different strategies,A and B. -Refer to the payoff matrix above.Suppose all the payoffs to strategies A and B double for only firm X.The outcome of the game