Question 1

The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members.

Accepted Answer

The prisoners' dilemma is a theoretical game used to illustrate the challenges of cooperation in group settings. The lesson learned from this game can be applied to any group trying to maintain cooperation among its members.

Question 2

Suppose three firms form a cartel and agree to charge a specific price for their output.Each individual firm has an incentive to maintain the agreement because the firm's individual profits will be the greatest under the cartel arrangement.

Accepted Answer

Although a firm may initially benefit from a cartel agreement, each individual firm has an incentive to cheat on the agreement and produce more to earn higher profits. This creates a prisoner’s dilemma where if one firm cheats, the others will suffer lower profits. Therefore, it is difficult to maintain a cartel agreement in the long term.

Question 3

A dominant strategy is a strategy that is best for a player in a game regardless of the strategies chosen by the other players.

Accepted Answer

A dominant strategy is always optimal for a player to play, regardless of what the other players do.

Question 4

If two players engaged in a prisoner's dilemma game are likely to repeat the game,they are more likely to cooperate than if they play the game only once.

Accepted Answer

In a repeated prisoner's dilemma game, the players have the opportunity to punish defection or reward cooperation in future rounds. This creates incentives for players to cooperate in order to avoid the negative consequences of defection in the long run. Therefore, players are more likely to cooperate in a repeated prisoner's dilemma game compared to a one-time game.

Question 5

In a duopoly if the firms have agreed to jointly maximize profits,then each firm can increase its current profits by producing more.

Accepted Answer

If the firms have agreed to jointly maximize profits, then they will consider the effects of their production decisions on the other firm's profits. If one firm produces more and the other firm does not adjust accordingly, the overall market output will increase which will lower the market price and decrease both firms' profits. However, if both firms increase their production in a coordinated fashion, the market price will not decrease as much, and both firms can increase their profits. Therefore, each firm can increase its current profits by producing more as long as the other firm also agrees to increase its production.

Question 6

Oligopolies produce more when they collude then when they do not.

Accepted Answer

When oligopolies collude, they tend to restrict output to increase prices and maximize their combined profits, producing less than if they were competing more aggressively with each other.

Question 7

Whether an oligopoly consists of 3 firms or 10 firms,the level of output likely will be the same.

Accepted Answer

The level of output in an oligopoly can vary depending on factors such as the number of firms, the level of competition, and the degree of market power held by each firm. Therefore, whether an oligopoly consists of 3 firms or 10 firms, the level of output is not necessarily the same.

Question 8

A group of firms that collude is called a cartel.

Accepted Answer

A cartel is a group of firms that collude to limit competition, typically by controlling prices or output levels.

Question 9

In the prisoners' dilemma game,one prisoner is always better off confessing,no matter what the other prisoner does.

Accepted Answer

In the prisoners' dilemma game, if one prisoner confesses, they receive a reduced sentence or no sentence at all, while the other prisoner receives a harsher sentence. Therefore, regardless of what the other prisoner chooses to do, the one who confesses is always better off.

Question 10

The problems faced by oligopolies with three or more members are entirely different from the problems faced by duopolies.

Accepted Answer

Oligopolies, whether duopolies (with two firms) or with three or more firms, face similar problems such as setting prices, output levels, and making strategic decisions considering the actions of competitors. The complexity and dynamics might vary with the number of firms, but the fundamental economic issues and competitive interactions remain consistent across oligopolies.

Question 11

In the prisoners' dilemma game,confessing is a dominant strategy for each of the two prisoners.

Accepted Answer

Confessing is a dominant strategy for each prisoner in the prisoners' dilemma game, as it guarantees a better outcome regardless of the other player's decision.

Question 12

All examples of the prisoner's dilemma game are characterized by one and only one Nash equilibrium.

Accepted Answer

The prisoner's dilemma game can have multiple Nash equilibria depending on the iteration and structure of the game, especially in repeated or iterated versions where strategies evolve over time.

Question 13

If the output effect from increased production is larger than the price effect,then an oligopolist would increase production.

Accepted Answer

If the output effect (increased revenue from selling more units) is greater than the price effect (decreased revenue from lowering prices due to increased competition), an oligopolist would benefit from increasing production as it would result in increased profits.

Question 14

Any market that is served by an oligopoly is in effect served by a monopoly.

Accepted Answer

An oligopoly consists of a few firms dominating the market, whereas a monopoly is characterized by a single firm controlling the entire market. They are distinct market structures with different competitive dynamics.

Question 15

As the number of firms in an oligopoly increases,the magnitude of the price effect increases.

Accepted Answer

As the number of firms in an oligopoly increases, the level of competition increases, reducing the magnitude of the price effect.

Question 16

Cartels with a small number of firms have a greater probability of reaching the monopoly outcome than do cartels with a larger number of firms.

Accepted Answer

The more firms there are in a cartel, the more difficult it is for them to coordinate and reach a consensus on output levels and pricing strategies. Therefore, smaller cartels with fewer firms are more likely to successfully reach and maintain a monopoly outcome.

Question 17

If all of the firms in an oligopoly successfully collude and form a cartel,then total profit for the cartel is equal to what it would be if the market were a monopoly.

Accepted Answer

When firms in an oligopoly collude and form a cartel, they work together to restrict output and raise prices, similar to a monopolist. This leads to higher profits for the cartel as a whole. In fact, if the firms successfully collude and enforce the agreement, the market will behave as a monopoly and the total profit for the cartel will be equal to what the profit would be for a monopoly.

Question 18

As the number of firms in an oligopoly becomes very large,the price effect disappears.

Accepted Answer

As the number of firms in an oligopoly becomes very large, the firms' individual shares of the market become very small, making it difficult for any one firm to affect the market price. As a result, the price effect disappears, and the market resembles a perfectly competitive market where no single firm has significant market power.

Question 19

If firms in an oligopoly agree to produce according to the monopoly outcome,they will produce the same level of output as they would produce in a Nash equilibrium.

Accepted Answer

In a Nash equilibrium, each firm in an oligopoly chooses its best strategy given the strategies chosen by other firms, often leading to a higher total output compared to the monopoly outcome, where firms agree to produce a lower total output to maximize joint profits.

Question 20

When all firms choose their best strategy given the strategies that all the other firms have chosen,the result is a Nash equilibrium.

Accepted Answer

This is the definition of a Nash equilibrium.

Quiz 17: Oligopoly