Question 1

In oligopoly outcomes, the dominant firm's profitability depends on how the fringe, consisting of small competing sellers, responds to its choices.

Accepted Answer

In oligopoly, the dominant firm's profitability is affected by the behavior of its competitors in the fringe. The dominant firm's strategic decisions, such as pricing and advertising, can influence how the fringe responds and affects the overall market outcomes. Therefore, the dominant firm's profitability depends on the reactions of its competitors.

Question 2

Post deregulation, airlines attempted to maintain their earlier profit levels by instituting price discrimination in such forms as advance purchase ticket restrictions and frequent-flyer mileage programs.These methods generally did not succeed in maintaining those profit levels.

Accepted Answer

This statement is true as research has found that airline profits decreased significantly after deregulation despite attempts at price discrimination.

Question 3

After the deregulation of the airline industry, the new airlines had a competitive cost advantage over the older ones as:
A)they could practice price discrimination.
B)they did not bear any legacy cost.
C)they enjoyed economies of scale.
D)they had to pay lower fuel surcharge.

Accepted Answer

The older airlines had to bear the legacy cost of their operations which included higher salaries, pensions, and other benefits for their employees. On the other hand, the new airlines did not have these legacy costs and were able to operate at a lower cost. This gave them a competitive advantage over the older airlines. The other options, price discrimination, economies of scale, and lower fuel surcharge, may or may not have contributed to the cost advantage of the new airlines.

Question 4

If the supply curve of the fringe in the oligopoly market is highly elastic:
A)the dominant firm will command a higher share of market output.
B)the price chosen by the dominant firm will be high.
C)the dominant firm's profit will be lower.
D)the market price for the commodity will be low.

Accepted Answer

The answer of If the supply curve of the fringe...

Question 5

In the long run, even if new fringe firms enter the oligopoly market, the dominant firm's profit will remain unaltered.

Accepted Answer

In the long run, the entry of new fringe firms into an oligopoly market can increase competition, potentially reducing the market share and profits of the dominant firm as consumers may have more alternatives.

Question 6

In a mixed strategy situation, a player does best by unpredictably mixing his strategies in accordance with probabilities that depend on the strategies of the others.

Accepted Answer

In a mixed strategy situation, a player's best strategy is to mix their own strategies unpredictably based on probabilities that are determined by the strategies of their opponents. This is because an opponent could exploit a predictable strategy by always choosing a counter-strategy. Therefore, a mixed strategy that is unpredictable makes it harder for opponents to exploit the player's strategy.

Question 7

In an ascending value auction, a bidder attempts to win a certain object by bidding a price below his valuation but higher than anyone else's bid.

Accepted Answer

In an ascending value auction, bidders progressively offer higher bids as they attempt to secure the object for a price below their personal valuation but above the competing bids, aiming to win the auction at the best possible price.

Question 8

The smaller U.S.mainframe computer and peripheral equipment manufacturers of the 1960s (the "Bunch") were perfect competitors, since they produced homogenous products and had little control over the market price.

Accepted Answer

The "Bunch" (Burroughs, Univac, NCR, Control Data, Honeywell, and General Electric) were not perfect competitors because their products were not homogeneous and they did have some control over their pricing and product differentiation, unlike in a perfectly competitive market where products are identical and no single firm can influence the market price.

Question 9

In a price-fixing agreement amongst two oligopolists, each seller's best strategy would be to maintain the agreement, as it would leave both of them better off.

Accepted Answer

In a price-fixing agreement amongst oligopolists, each seller has an incentive to cheat on the agreement by slightly undercutting the fixed price to increase their market share, even though maintaining the agreement would theoretically make both better off. This temptation to cheat can make such agreements unstable.

Question 10

Which of the following is a characteristic of the oligopoly model?
A)The oligopoly market consists of only a small number of sellers.
B)The sellers in an oligopoly market are price takers.
C)The output decisions taken by sellers are uniform and steady.
D)There are barriers to the exit of firms in an oligopoly market.

Accepted Answer

The oligopoly model is characterized by a small number of sellers in the market.

Question 11

If two players in an oligopoly game enter into an agreement whereby one player makes a grim trigger, the other player will honor the agreement only if its (i.e.the other's) annual discount rate is high.

Accepted Answer

A high annual discount rate would make future profits less valuable to the player, making them less likely to honor a grim trigger agreement, which relies on the value of future cooperation outweighing the short-term gains from defection.

Question 12

Games with a finite number of strategies do not always have a Nash equilibrium.

Accepted Answer

Games with a finite number of strategies always have at least one Nash equilibrium, which is a set of strategies where no player can unilaterally improve their payoff. This is a fundamental result in game theory known as the Nash existence theorem. Therefore, option B is the correct answer.

Question 13

In an oligopoly market with a dominant firm and a competitive fringe, if market demand is _____, the market price will be low and the _____ profit will be small.
A)less elastic; fringe's
B)less elastic; dominant firm's
C)more elastic; fringe's
D)more elastic; dominant firm's

Accepted Answer

In an oligopoly with a dominant firm, if market demand is more elastic, consumers are more sensitive to price changes. This leads to lower market prices, reducing the dominant firm's ability to set high prices and thus decreasing its profit.

Question 14

One of the possible reasons for high sales and steady profit margins of General Motors, Ford, and Chrysler during 1950s and 1960s were aggressive pricing and design innovations.

Accepted Answer

The answer of One of the possible reasons for high...

Question 15

The Stackelberg model of oligopoly assumes that each of the two producers will choose prices instead of quantities and neither will change price in response to the other's decision.

Accepted Answer

The Stackelberg model of oligopoly assumes that firms choose quantities, not prices, and it involves a leader-follower dynamic where the follower may adjust its output based on the leader's output decision, not prices that remain fixed regardless of the competitor's actions.

Question 16

The smaller the share of the fringe firms in an oligopoly market, the smaller will be the profit earned by the dominant firm.

Accepted Answer

In an oligopoly, the dominant firm's profit is not necessarily smaller when the fringe firms have a smaller share of the market. Often, a smaller share for fringe firms means less competition for the dominant firm, potentially allowing it to earn more profit through higher prices or greater market share.

Question 17

The demand curve faced by a dominant firm in an oligopoly model is the difference between the market demand and the supply that the fringe will produce at each price.

Accepted Answer

In an oligopoly model with a dominant firm, the firm's demand curve is derived from the market demand curve and the supply curve of the fringe firms. The dominant firm's demand curve is downward sloping and reflects the inverse relationship between price and quantity demanded by consumers in the market. The supply curve of the fringe firms represents the quantity that will be produced at each given price, and is assumed to be perfectly elastic. Therefore, the demand faced by the dominant firm is the difference between the market demand and the quantity supplied by the fringe at each price level.

Question 18

In finitely repeated price-fixing game, the dominant strategy of each player is to break the agreement on every play.

Accepted Answer

In finitely repeated games, players anticipate the end and have an incentive to deviate from the agreement in the last round, leading to a breakdown of cooperation in earlier rounds as well.

Question 19

An oligopoly market is characterized by limited number of sellers, each having complete control over the market price level as in case of monopoly.

Accepted Answer

In an oligopoly, while there are few sellers, each does not have complete control over the market price due to interdependence among firms; their actions can influence but not control the market price entirely.

Question 20

In the long run, if new fringe firms with same cost structures as existing fringe firms enter the oligopoly market:
A)the dominant firm's ability to extract profit from the market decreases.
B)the fringe's ability to extract profit from the market decreases.
C)the fringe supply curve rotates leftward and downward.
D)the dominant firm's residual demand curve rotates rightward.

Accepted Answer

As new fringe firms enter the market, the increased competition reduces the dominant firm's market power, thereby decreasing its ability to extract profit.

Quiz 7: Between the Extremes: Interaction and Strategy