Question 1

In an oligopoly,firms can increase their market power by

Accepted Answer

The answer of In an oligopoly,firms can increase their market...

Question 2

Collusion

Accepted Answer

The answer of Collusion
...

Question 3

Table 11-8
  Suppose OPEC has only two producers, Saudi Arabia and Ecuador. Saudi Arabia has far more oil reserves and is the lower-cost producer compared to Ecuador. The payoff matrix in Table 11-8 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
-Refer to Table 11-8.Is there a dominant strategy for Saudi Arabia and,if so,what is it?

Accepted Answer

The answer of Table 11-8
  Suppose OPEC has only...

Question 4

In which of the following cartels is total cartel profit likely to be the highest?

Accepted Answer

The highest total cartel profit would be achieved in a cartel made up of identical firms each producing the same quantity of a homogeneous product because they can coordinate to produce the optimal quantity to maximize profits without having to worry about competition from within the cartel, nor differentiation that could lead to consumers substituting away from the cartel's product.

Question 5

If the painting firms in a city sign a contract outlining a pricing plan,they are involved in

Accepted Answer

The act of painting firms in a city signing a contract outlining a pricing plan is an example of collusion, which is an illegal practice of agreeing to limit competition and raise prices.

Question 6

Table 11-8
  Suppose OPEC has only two producers, Saudi Arabia and Ecuador. Saudi Arabia has far more oil reserves and is the lower-cost producer compared to Ecuador. The payoff matrix in Table 11-8 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
-Refer to Table 11-8.What is the Nash equilibrium in this game?

Accepted Answer

In this game, Saudi Arabia is the dominant player as it has more reserves and is the lower-cost producer. Therefore, it will always choose to produce a lower output to maximize its profit. Ecuador, on the other hand, has to consider the actions of Saudi Arabia and try to earn the maximum profit possible. The Nash equilibrium occurs when Saudi Arabia produces a low output and earns a profit of $80 million, while Ecuador produces a high output and earns a profit of $22 million. This is because if Ecuador also chooses a low output, then its profit will only be $15 million, which is less than the profit it would earn by choosing a high output. If both countries choose a high output, Saudi Arabia will earn less profit as compared to the case where it chooses a low output. Therefore, C is the correct answer.

Question 7

Each member of OPEC can increase its income by selling more oil than its output quota because

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The answer of Each member of OPEC can increase its...

Question 8

A member of a cartel like OPEC has an incentive to

Accepted Answer

Members of a cartel like OPEC have an incentive to agree to a low cartel production level and then produce more than their quota, as this allows them to increase their profits by selling more of their output at a higher price, while still benefiting from the higher overall price resulting from the cartel's actions. This behavior is known as cheating or free-riding, and is a common problem for cartels. Therefore, option B is the correct choice.

Question 9

Table 11-8
  Suppose OPEC has only two producers, Saudi Arabia and Ecuador. Saudi Arabia has far more oil reserves and is the lower-cost producer compared to Ecuador. The payoff matrix in Table 11-8 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
-Refer to Table 11-8.Which of the following statements is true?

Accepted Answer

In this game, Saudi Arabia has a dominant strategy to produce high output regardless of what Ecuador does, as its payoff is always higher. Similarly, Ecuador also has a dominant strategy to produce high output regardless of Saudi Arabia's choice. Therefore, the Nash equilibrium is a noncooperative, dominant strategy equilibrium where both countries produce high output and earn profits of $10 million and $2 million per day, respectively.

Question 10

OPEC periodically meets to agree to restrict the cartel's oil output,and yet almost every member of OPEC produces more than its own output quota.This suggests that OPEC has

Accepted Answer

The fact that almost every member of OPEC produces more than its own output quota suggests that there is a noncooperative equilibrium in place, where individual members prioritize their own self-interest over the collective goals of the cartel.

Question 11

Suppose two firms in a duopoly implicitly collude and charge a high price.How might each firm benefit from advertising that it will match the lowest price offered by its competitor?

Accepted Answer

The answer of Suppose two firms in a duopoly implicitly...

Question 12

When top managers of all four major airlines publicly stated that they intended to undertake only modest increases in capacity by buying additional planes or flying additional routes,the Department of Justice

Accepted Answer

The scenario does not suggest any evidence of price collusion among the airlines, and the managers publicly stating their intentions is not sufficient proof. Therefore, the Department of Justice decided there was not enough evidence to bring charges against the airlines for collusion.

Question 13

Table 11-7
  Table 11-7 shows the payoff matrix for Walmart and Target from every combination of pricing strategies for the popular PlayStation 4. At the start of the game each firm charges a low price and each earns a profit of $7,000.
-Refer to Table 11-7.Suppose Walmart and Target both advertise that they will match the lowest price offered by any competitor.What is the purpose of such a strategy?

Accepted Answer

The answer of Table 11-7
  Table 11-7 shows the...

Question 14

Table 11-7
  Table 11-7 shows the payoff matrix for Walmart and Target from every combination of pricing strategies for the popular PlayStation 4. At the start of the game each firm charges a low price and each earns a profit of $7,000.
-Refer to Table 11-7.For each firm,is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000?

Accepted Answer

From the payoff matrix, both firms have the potential to earn a higher profit if they both agree to charge a higher price instead of continuing with the low price strategy. The best outcome for both firms would be if they both charge a high price and each earn a profit of $10,000. This can be achieved through implicit collusion, where both firms agree to charge the high price without explicitly communicating or coordinating with each other.

Question 15

Game theory was developed in the 1940s by John von Neuman,a mathematician,and an economist named

Accepted Answer

Game theory was developed by John von Neuman and Oskar Morgenstern in their 1944 book "Theory of Games and Economic Behavior." John Nash, who developed the concept of Nash equilibrium, was a later contributor to the field. John Maynard Keynes was a prominent economist, but did not contribute to the development of game theory. Milton Friedman was also an economist, but his contributions were in the area of monetarism and macroeconomics, not game theory.

Question 16

What is the incentive for a firm to join a cartel?

Accepted Answer

The incentive for a firm to join a cartel is to be able to earn larger profits than if it was not part of the cartel, as the cartel members can collectively control the market price and restrict output to increase profits.

Question 17

A cartel is

Accepted Answer

A cartel is a group of firms that enter into a formal agreement to fix prices to maximize joint profits.

Question 18

Table 11-8
  Suppose OPEC has only two producers, Saudi Arabia and Ecuador. Saudi Arabia has far more oil reserves and is the lower-cost producer compared to Ecuador. The payoff matrix in Table 11-8 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
-Refer to Table 11-8.Is there a dominant strategy for Ecuador and,if so,what is it?

Accepted Answer

Ecuador's dominant strategy is to produce a high output regardless of what Saudi Arabia does. If Saudi Arabia produces a low output, then Ecuador's profit is higher by producing a high output. If Saudi Arabia produces a high output, then Ecuador's profit is still higher by producing a high output rather than a low output. Therefore, the best choice for Ecuador is to produce a high output as it maximizes its profits.

Question 19

Airlines often engage in last-minute price cutting to fill remaining empty seats on a flight because this practice will generally

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The answer of Airlines often engage in last-minute price cutting...

Question 20

In most business situations where firms compete,often they can escape the prisoner's dilemma and reach the most profitable outcome.Which of the following is a reason for this?

Accepted Answer

In repeated games, firms have the option to employ retaliation strategies against those who do not cooperate, which can lead to cooperation and the most profitable outcome for both firms.

Quiz 11: Monopolistic Competition and Oligopoly