Question 1

Use the information below to answer the following questions.
Fact 15.2.1
Two firms, FastNet and SmartCast are the only Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other firm's service. The industry is a natural duopoly. FastNet and SmartCast decide to collude and agree to share the market equally.
-Refer to Fact 15.2.1. What is the Nash equilibrium?

Accepted Answer

In a collusion scenario, the Nash equilibrium often involves both firms cheating, as each firm has an incentive to undercut the other to increase its market share and profits.

Question 2

Which of the following quotes shows cheating on a cartel in the widget industry?

Accepted Answer

This quote shows that the speaker is not following the agreement made with Wally and producing more widgets than they agreed to, which is a form of cheating on the cartel. The other quotes do not show any cheating on the cartel.

Question 3

Two firms, Alpha and Beta, produce identical computer hard drives. They have identical costs, and the hard drives they produce are identical. The industry is a natural duopoly. Alpha and Beta enter into a collusive agreement, according to which they split the market equally. If both firms cheat on the agreement so the market is the same as a competitive market,

Accepted Answer

If both firms cheat on the collusive agreement and the market becomes competitive, the firms will have to lower their prices to compete with each other, resulting in zero economic profit in the long run. Neither firm will be able to earn a monopoly profit in a perfectly competitive market. The oligopoly will not necessarily produce fewer hard drives than a profit-maximizing monopoly would produce as it depends on the market demand and production costs.

Question 4

Table 15.2.10
 
-Refer to Table 15.2.10. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The equilibrium ________ a dominant strategy equilibrium because the strategy in this game is for a firm ________.

Accepted Answer

In a collusive agreement, both firms agree to restrict output and share the market. Since Firm A and Firm B have agreed to share the market equally, they would want to cheat on each other by secretly increasing their production to gain a larger market share. Therefore, cheating is the dominant strategy for both firms, making option C the correct answer.

Question 5

In a prisoners' dilemma game, which of the following strategies gives the best outcome for both prisoners?

Accepted Answer

In a prisoners' dilemma, if both players deny, they receive a lesser sentence compared to if both confess. This mutual cooperation leads to a better collective outcome.

Question 6

Which of the following quotes shows a contestable market in the widget industry?

Accepted Answer

The quote shows that there is competition in the widget industry and the producer is taking actions to prevent another company from expanding into their market, indicating a contestable market. The other quotes do not necessarily show a contestable market as they could be due to other reasons such as a breach of agreement or a desire for higher profits through collaboration.

Question 7

Table 15.2.10
 
-Refer to Table 15.2.10. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The payoff matrix shows the game they play. The equilibrium of the game is that Firm A ________ and Firm B ________.

Accepted Answer

In colluding and agreeing to share the market equally, Firm A and B have created a duopoly. The payoff matrix shows that the dominant strategy for both firms is to cheat and produce more, as this leads to a higher payoff for each firm. Therefore, the equilibrium of the game is that both Firm A and Firm B cheat.

Question 8

Use the table below to answer the following question.
Table 15.3.1
 
-Consider the game shown in Table 15.3.1 based on potential gas prices between two competitors. The game is played repeatedly and the result is a cooperative equilibrium. The payoffs in the table show the economic profit of the firms. The most likely outcome is

Accepted Answer

In a cooperative equilibrium, both firms would likely set their prices at $1.15/litre to maximize their joint profits, avoiding the lower profits associated with price competition.

Question 9

Consider a "prisoners' dilemma" game consisting of two firms in collusion to maximize profit. The game is repeated indefinitely and each player employs a tit-for-tat strategy. The equilibrium when the two firms share the monopoly profit is called a

Accepted Answer

The answer of Consider a "prisoners' dilemma" game consisting of...

Question 10

Two firms, Alpha and Beta, produce identical computer hard drives. They have identical costs, and the hard drives they produce are identical. The industry is a natural duopoly. Alpha and Beta enter into a collusive agreement, according to which they split the market equally. If both firms comply with the agreement,

Accepted Answer

In a collusive agreement where two firms split the market equally, they effectively act as a monopoly. This means they will produce the monopoly quantity and make the monopoly economic profit, as they can set prices above marginal cost to maximize profits.

Question 11

Consider the cartel of Trick and Gear. The game is repeated indefinitely and each firm employs a tit-for-tat strategy. The equilibrium is called

Accepted Answer

The answer of Consider the cartel of Trick and Gear....

Question 12

The equilibrium strategy for each firm in a duopolist's dilemma is to ________. Firms ________ succeed in raising price and profits because each firm ________.

Accepted Answer

In a duopolist's dilemma, the equilibrium strategy for each firm is to cheat, as each firm can make greater economic profit if it cheats on the agreement, regardless of how the other firm acts. This leads to a Nash equilibrium, where both firms choose to cheat and price and profits remain lower than they would be under a cooperative agreement.

Question 13

The maximum total economic profit that can be made by colluding duopolists

Accepted Answer

The maximum total economic profit that can be made by colluding duopolists equals the economic profit made by a monopoly because, through collusion, the duopolists effectively operate as a single monopoly, maximizing their combined profits by reducing output and increasing prices, similar to a monopolist's strategy.

Question 14

Caven and John have been arrested by the police, who have evidence that will convict them of robbing a bank. If convicted, each will receive a sentence of 6 years for the robbery. During questioning, the police suspect that Caven and John are responsible for a series of bank robberies. If both confess to the series, each will receive 12 years in jail. If only one confesses, he will receive 4 years and the one who does not confess will receive 14 years. What is the equilibrium for this game?

Accepted Answer

Both Caven and John will be better off confessing, regardless of what the other does. If one confesses, the other will receive a much harsher sentence than if they both confess. Therefore, the dominant strategy for both is to confess, leading to the equilibrium outcome of both confessing and serving 12 years in jail.

Question 15

In a duopoly game, we observe the following payouts. If the two firms collude they each make an economic profit of $50,000. If one firm cheats, then that firm makes an economic profit of $60,000 and the other incurs an economics loss of $10,000. If both firms cheat, then they both make zero economic profit. What is the Nash equilibrium?

Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the other player's strategy. Here, if one firm cheats while the other doesn't, the cheating firm gains more ($60,000) compared to colluding ($50,000). However, knowing this, both firms are incentivized to cheat to avoid the loss incurred when the other cheats, leading to both making zero economic profit. This outcome, where both firms cheat, is stable since neither can unilaterally improve their payoff by changing their strategy, making it the Nash equilibrium.

Question 16

Two firms are trying to decide how much to budget for research and development. Once a new discovery is made, each firm benefits regardless of which firm developed the innovation. In this R&D game of chicken, the Nash equilibrium is that

Accepted Answer

In a game of chicken regarding R&D investment, the Nash equilibrium typically involves only one firm conducting R&D because each firm benefits from the other's discovery without bearing the costs. However, without specific payoffs or strategies, it's impossible to determine which firm will take on the R&D effort, making option C correct.

Question 17

Limit pricing is the practice of

Accepted Answer

Limit pricing is a strategy in which an established firm sets the price at a level that inflicts a loss on a potential entrant, making it unprofitable for them to enter the market. This is done with the intention of deterring new firms from entering and creating competition. By setting a low limit price, the incumbent firm creates a barrier to entry that new firms cannot overcome without suffering losses. Hence, option D, setting the price at the highest level that inflicts a loss on the entrant, is the correct answer.

Question 18

Use the information below to answer the following questions.
Fact 15.2.1
Two firms, FastNet and SmartCast are the only Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other firm's service. The industry is a natural duopoly. FastNet and SmartCast decide to collude and agree to share the market equally.
-Refer to Fact 15.2.1. What is the result if both firms cheat on the agreement?

Accepted Answer

If both firms cheat on the agreement, they will both increase their output and reduce the price of their service in an attempt to capture a larger market share. This will lead to a price war and a reduction in economic profit for both firms. They will end up worse off than if they had both complied with the agreement to share the market equally.

Question 19

Use the information below to answer the following questions.
Fact 15.2.1
Two firms, FastNet and SmartCast are the only Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other firm's service. The industry is a natural duopoly. FastNet and SmartCast decide to collude and agree to share the market equally.
-Refer to Fact 15.2.1. Which of the following actions maximizes the industry's economic profit?

Accepted Answer

Colluding and complying with the agreement to share the market equally allows both firms to earn a higher economic profit than if they were to compete aggressively. If both firms cheat, they risk triggering a price war that will drive down profits for both. If one firm cheats, the other firm will likely retaliate, causing the same outcome. If new firms enter the market, the industry will become less of a natural duopoly, which may lead to lower profits. Setting prices as if in a perfectly competitive market is not a realistic option for a natural duopoly. Compliance with the agreement to share the market equally maximizes the industry's profit.

Question 20

Consider the cartel of Trick and Gear. The game is repeated indefinitely and each firm employs a tit-for-tat strategy. The equilibrium is

Accepted Answer

In a repeated game with tit-for-tat strategy, both firms comply with the agreement in order to avoid retaliation. If one firm cheats, the other firm responds by cheating in the next round, and vice versa. Therefore, the best strategy for both firms is to comply with the agreement in order to maintain cooperation and avoid a downward spiral of retaliation.

Quiz 15: Oligopoly

Which of the following quotes shows cheating on a cartel in the widget industry?

Table 15.2.10 -Refer to Table 15.2.10. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The equilibrium a dominant strategy equilibrium because the strategy in this game is for a firm .

In a prisoners' dilemma game, which of the following strategies gives the best outcome for both prisoners?

Which of the following quotes shows a contestable market in the widget industry?

Table 15.2.10 -Refer to Table 15.2.10. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The payoff matrix shows the game they play. The equilibrium of the game is that Firm A and Firm B .

Consider a "prisoners' dilemma" game consisting of two firms in collusion to maximize profit. The game is repeated indefinitely and each player employs a tit-for-tat strategy. The equilibrium when the two firms share the monopoly profit is called a

Consider the cartel of Trick and Gear. The game is repeated indefinitely and each firm employs a tit-for-tat strategy. The equilibrium is called

The equilibrium strategy for each firm in a duopolist's dilemma is to . Firms succeed in raising price and profits because each firm .

The maximum total economic profit that can be made by colluding duopolists

Two firms are trying to decide how much to budget for research and development. Once a new discovery is made, each firm benefits regardless of which firm developed the innovation. In this R&D game of chicken, the Nash equilibrium is that

Limit pricing is the practice of

Consider the cartel of Trick and Gear. The game is repeated indefinitely and each firm employs a tit-for-tat strategy. The equilibrium is

Quiz 15: Oligopoly

Which of the following quotes shows cheating on a cartel in the widget industry?

Table 15.2.10 -Refer to Table 15.2.10. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The equilibrium ________ a dominant strategy equilibrium because the strategy in this game is for a firm ________.

In a prisoners' dilemma game, which of the following strategies gives the best outcome for both prisoners?

Which of the following quotes shows a contestable market in the widget industry?

Table 15.2.10 -Refer to Table 15.2.10. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The payoff matrix shows the game they play. The equilibrium of the game is that Firm A ________ and Firm B ________.

Consider a "prisoners' dilemma" game consisting of two firms in collusion to maximize profit. The game is repeated indefinitely and each player employs a tit-for-tat strategy. The equilibrium when the two firms share the monopoly profit is called a

Consider the cartel of Trick and Gear. The game is repeated indefinitely and each firm employs a tit-for-tat strategy. The equilibrium is called

The equilibrium strategy for each firm in a duopolist's dilemma is to ________. Firms ________ succeed in raising price and profits because each firm ________.

The maximum total economic profit that can be made by colluding duopolists

Two firms are trying to decide how much to budget for research and development. Once a new discovery is made, each firm benefits regardless of which firm developed the innovation. In this R&D game of chicken, the Nash equilibrium is that

Limit pricing is the practice of

Consider the cartel of Trick and Gear. The game is repeated indefinitely and each firm employs a tit-for-tat strategy. The equilibrium is

Table 15.2.10 -Refer to Table 15.2.10. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The equilibrium a dominant strategy equilibrium because the strategy in this game is for a firm .

Table 15.2.10 -Refer to Table 15.2.10. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The payoff matrix shows the game they play. The equilibrium of the game is that Firm A and Firm B .

The equilibrium strategy for each firm in a duopolist's dilemma is to . Firms succeed in raising price and profits because each firm .