Question 1

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 2

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

This is because the more firms there are in a cartel, the more difficult it is to maintain coordination and prevent cheating, making it harder to reach the monopoly outcome. Smaller cartels may find it easier to maintain coordination and enforce compliance with the agreed-upon production levels, thereby increasing their likelihood of achieving monopoly power.

Question 3

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 4

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

Accepted Answer

In a joint profit-maximizing agreement between two firms in a duopoly, they will increase production levels together in order to increase total profits. By producing more, each firm can increase its individual profits as long as it does not lead to a reduction in the overall profit of the duopoly.

Question 5

The essence of an oligopolistic market is that there are only a few sellers.

Accepted Answer

An oligopolistic market is characterized by a small number of sellers who dominate the market. This can lead to limited competition and pricing power among these sellers.

Question 6

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

While a cartel agreement aims to maximize collective profits by setting high prices, each individual firm has an incentive to cheat on the agreement by slightly undercutting the agreed price to increase its market share and individual profits, thus undermining the cartel's stability.

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 the market power each firm possesses, the nature of the product, and the degree of competition among the firms. Therefore, the number of firms in the oligopoly does not necessarily determine the level of output.

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 and control market prices.

Question 9

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 act as a single entity and set prices at a monopolistic level. This results in higher profits for the cartel, similar to that of a monopolistic market. However, sustaining a cartel is difficult because firms have a strong incentive to cheat and produce more than their agreed upon quota, which can lead to the collapse of the cartel and reduced profits for all participating firms.

Question 10

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, where no firm has an incentive to change their strategy given the strategies of the other firms.

Question 11

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 12

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 13

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

When the game is repeated, players have the opportunity to retaliate against each other's defections, which can lead to a cooperative outcome in the long run. This is known as the iterated prisoner's dilemma and has been studied extensively in game theory.

Question 14

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 magnitude of the price effect actually decreases. This is because each firm has less market power and the market becomes more competitive, leading to lower prices.

Question 15

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

Accepted Answer

This decision would depend on the specific circumstances and strategic considerations of the oligopolist, but generally if the output effect (increased revenue from producing and selling more goods) outweighs the price effect (lower price due to increased competition), the oligopolist would have an incentive to increase production.

Question 16

Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding oligopolistic markets.

Accepted Answer

The answer of Game theory is just as necessary for...

Question 17

For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.

Accepted Answer

Strategic interactions become more important in markets with fewer firms because each firm's actions have a more significant impact on the market and on the other firms. In markets with many firms, individual actions have less impact, reducing the importance of strategic interactions.

Question 18

In a competitive market, strategic interactions among the firms are not important.

Accepted Answer

The answer of In a competitive market, strategic interactions among...

Question 19

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 20

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

Accepted Answer

In a perfectly competitive market, the price effect disappears as the number of firms becomes very large. However, in an oligopoly, even with a large number of firms, the price effect may still exist due to strategic interdependence and the potential for collusion.

Quiz 17: Oligopoly