Question 1

A contestable market is similar to a perfectly competitive market in that there

Accepted Answer

In a contestable market, like in a perfectly competitive market, there are no barriers to entry, allowing for the free entry and exit of firms, which contrasts with markets that have high entry barriers preventing competition.

Question 2

A market structure in which a small number of producers compete against each other is

Accepted Answer

An oligopoly is a market structure characterized by a small number of firms that dominate the market, leading to limited competition. Unlike perfect competition, where there are many sellers and buyers, or a monopoly, where there is only one seller, oligopolies involve a few firms that may collaborate or compete on various levels, influencing prices and market outcomes.

Question 3

A market with one or a small number of firms but no barriers to entry is known as

Accepted Answer

A contestable market is characterized by the absence of barriers to entry and exit, even if the market is currently dominated by one or a small number of firms. This means new competitors can easily enter the market if they perceive an opportunity, keeping the incumbent firms' behavior in check.

Question 4

An equilibrium in game theory in which the players make and share the monopoly profit is called

Accepted Answer

The cooperative equilibrium is where players collaborate to maximize and share monopoly profits, unlike the Nash equilibrium where players make decisions independently.

Question 5

If firms in an industry differentiated their products and made economic profits in the short- run, what other characteristic would be important to determine if this is an oligopoly or a monopolistically competitive market?

Accepted Answer

The key characteristic to determine if a market is an oligopoly or monopolistically competitive is the number of firms in the market. Oligopolies have a few large firms dominating the market, while monopolistically competitive markets have many firms.

Question 6

If a duopolists' collusive price- fixing game can be played repeatedly,

Accepted Answer

In a repeated duopolists' collusive price-fixing game, players can indeed punish cheaters in subsequent games, signal their willingness to cooperate, and potentially reach an equilibrium where both firms cheat, making all the options correct.

Question 7

A single firm in a contestable market is limited in the amount of economic profit it can earn because there

Accepted Answer

In a contestable market, the absence of barriers to entry means that new competitors can easily enter the market if they see an existing firm earning high profits. This potential competition limits the economic profits that a single firm can earn, as it must keep prices and profits at a level that does not attract new entrants.

Question 8

A cartel is an arrangement

Accepted Answer

Cartels are agreements among competing firms to control prices or limit production in order to increase profits by reducing competition. This often involves firms agreeing to set prices at a certain level or to limit the amount of goods they produce, thereby artificially inflating prices.

Question 9

Adkins Air is the only seller offering service directly from Melbourne to Bendigo. The market is contestable. Thus the Nash Equilibrium for a game between Adkins Air and a potential entrant is when the potential entrant

Accepted Answer

In a contestable market, the threat of entry by potential competitors ensures that the incumbent firm, Adkins Air in this case, sets prices at a level where it earns only a normal profit. If Adkins were to earn an economic profit, it would attract entry by competitors. Therefore, the Nash Equilibrium is when the potential entrant does not enter the market because Adkins Air is only earning a normal profit, making entry unattractive.

Question 10

Disney
 
-Disney and Fox must decide when to release their next films. The revenues received by each studio depend in part on when the other studio releases its film. Each studio can release its film at New Year or at Christmas. The revenues received by each studio, in millions of dollars, are depicted in the payoff matrix above. Which of the following statements correctly describes Disney's strategy given what Fox's release choice may be?

Accepted Answer

Given the scenario, Disney's optimal strategy changes based on Fox's choice. If Fox releases at New Year, Disney benefits more from a Christmas release. Conversely, if Fox releases at Christmas, Disney should opt for a New Year release to maximize its revenue.

Question 11

In game theory, strategies include _______.

Accepted Answer

In game theory, strategies refer to all possible actions that each player can take, not just the winning actions or payoffs.

Question 12

One of the reasons that concentration ratios are not a perfect measure of competitiveness is that they

Accepted Answer

Concentration ratios, which measure the market share of the largest firms in an industry, do not account for potential competition from new entrants or from firms outside the market that could easily enter if they saw an opportunity. This limitation means they might not fully capture the competitive dynamics of an industry.

Question 13

Game theory is a tool for studying _______.

Accepted Answer

Game theory is primarily used to study strategic behavior among rational decision-makers.

Question 14

Oscar
 
-Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a cartel. The payoff matrix above shows the economic profit that each firm can make. If the game is played only once, then _______.

Accepted Answer

In a one-time game, both firms have an incentive to cheat to maximize their own profit, leading to the Nash equilibrium where both cheat and earn $1 million each.

Question 15

-The above payoff matrix shows the economic profits (in millions of dollars) of two firms in a duopoly that have agreed to a cartel agreement to restrict their output and set their prices equal to the monopoly price. Assuming the game is played once, the equilibrium outcome is where

Accepted Answer

In a one-time game, both firms have an incentive to cheat on the cartel agreement to maximize their own profit, leading them to choose the competitive price.

Question 16

In what type of market is a cartel possible?

Accepted Answer

Cartels are more likely to form in markets with a few firms and high barriers to entry because it's easier for these firms to collaborate on setting prices or output levels.

Question 17

Jane
 
-The payoff matrix of economic profits above displays the possible outcomes for Bob and Jane who are involved in a game of whether or not to advertise. After each player chooses his or her best strategy and sees the result,

Accepted Answer

This scenario describes a Nash Equilibrium, where neither player would benefit by changing their strategy given the other player's strategy remains unchanged.

Question 18

Game theory is used to explain firms' decisions in

Accepted Answer

Game theory is primarily used to analyze strategic interactions where the actions of one firm affect the outcomes of others, which is characteristic of an oligopoly.

Question 19

If firms in an industry make output decisions that are partially based on the price and output decisions of their competitors, then these firms are in _______ market and have _______ with the other firms in the market.

Accepted Answer

In an oligopoly market, a few firms dominate and have significant control over the market price and output. These firms are interdependent because the actions of one firm can significantly impact the profits and strategies of the other firms in the industry. This interdependence is a key characteristic of oligopolies, where firms must consider the potential reactions of their competitors when making decisions.

Question 20

Player A
 
-The table above shows the payoff matrix for a prisoners' dilemma. In the Nash equilibrium,

Accepted Answer

In a prisoners' dilemma, the Nash equilibrium occurs when both prisoners choose to betray each other, leading to both getting 3 years in jail.

Quiz 16: Oligopoly Games and Strategy