Question 1

Most cartels end or cease to be effective because:
A) of enforcement of antitrust legislation.
B) of the incentive to cheat on the cartel agreement.
C) the dominant member firm buys out the other firms.
D) consumers discover the cartel agreement and buy instead from other firms.

Accepted Answer

Cartels are inherently unstable because each member has an incentive to cheat on the cartel agreement.

Question 2

Suppose Acme and Mega produce and sell identical product with zero marginal and average cost.Following is the market demand and marginal revenue curves for the product. 
Refer to the figure above.If Acme and Mega decide to collude and work as a pure monopolist such that each firm will produce half the quantity demanded by the market,what will be the economic profit for Mega?
A) $0
B) $50
C) $100
D) $150

Accepted Answer

Each firm produces 50 units and sells them for $2 each.Average cost is zero,so the profit is $100.

Question 3

OPEC is an example of a:
A) monopsony.
B) cartel.
C) monopoly.
D) duopoly.

Accepted Answer

OPEC is a cartel of oil producers formed in the 1970s.

Question 4

The table below shows the payoff matrix in the form of short term profits for two firms,A and B,for two different strategies,investing in new capital or not investing in new capital.Payoffs are in millions of dollars. $\begin{array}{c}
\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Firm B }\
\text { Firm A }
\begin{array}{|l|l|l|}
\hline & \text { Invest } & \text { Not Invest } \
\hline {\text { Invest }} & \$ 20 \text { for } \mathrm{A} & \$ 70 \text { for } \mathrm{A} \
& \$ 20 \text { for } \mathrm{B} & \$ 5 \text { for } \mathrm{B} \
\hline {\text { Not Invest }} & \$ 5 \text { for } \mathrm{A} & \$ 50 \text { for } \mathrm{A} \
& \$ 70 \text { for } \mathrm{B} & \$ 50 \text { for B } \
\hline
\end{array}\end{array}$
Refer to the figure above.An industrial spy comes to firm B and offers to pay B in exchange for B's certain and enforceable promise to not invest.How much must the spy pay B?
A) $0.
B) At least $15 million.
C) At least $35 million.
D) At least $50 million.

Accepted Answer

The answer of The table below shows the payoff matrix...

Question 5

Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost.Below is the market demand and marginal revenue curves for the product. 
Refer to the figure above.The profit-maximizing quantity for a monopolist with this demand curve is _____ units,which the monopolist would sell for ______.
A) 3,000;$1.00
B) 1,000;$1.50
C) 2,000;$1.50
D) 1,000;$2.50

Accepted Answer

When marginal cost is zero,MC = MR when quantity is 2000.The price on the demand curve that corresponds with this quantity is $1.50.

Question 6

Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost.Below is the market demand and marginal revenue curves for the product. 
Refer to the figure above.Quick Buck and Pushy Sales have agreed to each produce half the profit-maximizing monopolist quantity,set the monopoly price and split the profits evenly.Suppose Quick Buck cheats on Pushy Sales and reduces its price to $1.00 each while Pushy Sales continues to comply with the collusive agreement.What will be the economic profit for Quick Buck?
A) $6,000
B) $1,500
C) $2,000
D) $3,000

Accepted Answer

When price is $1.00,3,000 units are sold and profit is $3,000 because average cost is zero.

Question 7

Suppose Acme and Mega produce and sell identical product with zero marginal and average cost.Following is the market demand and marginal revenue curves for the product. 
Refer to the figure above.The profit-maximizing quantity and price for a monopolist with this demand curve are _____.
A) 50 units and $2
B) 100 units and $2
C) 50 units and $3
D) 100 units and $1

Accepted Answer

When marginal cost is zero,it equals marginal revenue at a quantity of 100.The price that corresponds with that quantity is $2.

Question 8

Suppose Acme and Mega produce and sell identical product with zero marginal and average cost.Following is the market demand and marginal revenue curves for the product. 
Refer to the figure above.Suppose Mega and Acme have colluded to work as a pure monopolist,but Mega cheats on Acme and reduces its price to $1.00 each.How much profit will Mega earn?
A) $75
B) $100
C) $150
D) $200

Accepted Answer

At $1.00 Mega sells 150 units.Average costs are zero,so Mega's profits are $150.

Question 9

The numbers in each cell are each firm's profits. $\begin{array}{c}
\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Column Cafe }\
\text { Row Restaurant }
\begin{array}{|l|l|l|}
\hline  & \begin{array}{l}
\text { Publish Coupons in } \
\text { Student Paper }
\end{array} & \text { No Coupons } \
\hline \text { Publish Coupons in } & \text { Row: 25, } & \text { Row: 200, } \
\text { Student Paper } & \text { Column: 25 } & \text { Column: 10 } \
\hline \text { No Coupons } & \text { Row: 10, } & \text { Row: 120, } \
& \text { Column: 200 } & \text { Column: 120 } \
\hline
\end{array}\end{array}$
Refer to the figure above.If Row Restaurant decides to publish coupons,Column Cafe would make the most profit if it:
A) did not offer coupons.
B) also offered coupons.
C) it doesn't matter which strategy is chosen because Column Cafe will have the same payoff in either case.
D) offered coupons half of the time and did not offer coupons the rest of the time.

Accepted Answer

The answer of The numbers in each cell are each...

Question 10

Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost.Below is the market demand and marginal revenue curves for the product. 
Refer to the figure above.Quick Buck and Pushy Sales have agreed to each produce half the profit-maximizing monopolist quantity,set the monopoly price and split the profits evenly.Suppose Quick Buck cheats on Pushy Sales and reduces its price to $1.00 and Pushy Sales matches the price cut.Consumers are evenly split between the two firms.What will be the economic profit for Quick Buck?
A) $1,000
B) $1,500
C) $2,000
D) $3,000

Accepted Answer

When price is $1.00,3,000 units are sold,and each firm sells 1,500 units.

Question 11

An agreement among firms to restrict production with the goal of earning economic profits is a:
A) pure monopoly.
B) oligopoly.
C) cartel.
D) duopoly.

Accepted Answer

A cartel is a coalition of firms that agree to restrict output in order to earn profit.

Question 12

Suppose market demand for bottled water in the U.S.is low enough that one firm could supply all of the demand.Two firms enter the market and agree to charge a price above the marginal cost of production.We can expect that:
A) they will make a considerably large profit.
B) they will work better than a cartel.
C) this agreement will collapse.
D) if one firm does not honor the agreement the other firm will sue for breach of contract.

Accepted Answer

Each firm will have an incentive to cut prices in order to capture a larger market share.

Question 13

Suppose Acme and Mega produce and sell identical product with zero marginal and average cost.Following is the market demand and marginal revenue curves for the product. 
Refer to the figure above.Suppose Mega and Acme have colluded to work as a pure monopolist,but Mega cheats on Acme and reduces its price to $1.00 each.If Acme matches the price cut and customers are evenly split between the two firms,what will Acme's economic profit be?
A) $75
B) $100
C) $150
D) $200

Accepted Answer

At $1.00 total demand is 150 units.Average costs are zero,so each firm's profits are $75.

Question 14

Suppose Acme and Mega produce and sell identical product with zero marginal and average cost.Following is the market demand and marginal revenue curves for the product. 
Refer to the figure above.Suppose Mega and Acme have colluded to work as a pure monopolist,but Mega cheats on Acme and reduces its price to $1.00 each.Mega would then sell ____ units and Acme would sell _____ units.
A) 150;50
B) 100;50
C) 150;0
D) 100;0

Accepted Answer

At $1.00 Mega sells 150 units.No consumers are willing to pay Acme's price of $2.00.

Question 15

Cartels would be more stable if:
A) firms that cheat on the agreement could be legally punished.
B) firms that cheat on the agreement were better informed about the value of agreement.
C) demand for the output was more variable.
D) the cartel profit were higher than the profit each individual firm could earn without the cartel.

Accepted Answer

Cartels cannot legally enforce their agreements and economic incentives operate to encourage defection from the cartel.

Question 16

The table below shows the payoff matrix in the form of short term profits for two firms,A and B,for two different strategies,investing in new capital or not investing in new capital.Payoffs are in millions of dollars. $\begin{array}{c}
\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Firm B }\
\text { Firm A }
\begin{array}{|l|l|l|}
\hline & \text { Invest } & \text { Not Invest } \
\hline {\text { Invest }} & \$ 20 \text { for } \mathrm{A} & \$ 70 \text { for } \mathrm{A} \
& \$ 20 \text { for } \mathrm{B} & \$ 5 \text { for } \mathrm{B} \
\hline {\text { Not Invest }} & \$ 5 \text { for } \mathrm{A} & \$ 50 \text { for } \mathrm{A} \
& \$ 70 \text { for } \mathrm{B} & \$ 50 \text { for B } \
\hline
\end{array}\end{array}$
Refer to the figure above.An industrial spy from firm A comes to firm B and offers to pay B in exchange for B's certain and enforceable promise to not invest.What is the most that firm A will be willing to pay B to not invest?
A) $0.
B) $20 million.
C) $35 million.
D) $50 million.

Accepted Answer

The answer of The table below shows the payoff matrix...

Question 17

The numbers in each cell are each firm's profits. $\begin{array}{c}
\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Column Cafe }\
\text { Row Restaurant }
\begin{array}{|l|l|l|}
\hline  & \begin{array}{l}
\text { Publish Coupons in } \
\text { Student Paper }
\end{array} & \text { No Coupons } \
\hline \text { Publish Coupons in } & \text { Row: 25, } & \text { Row: 200, } \
\text { Student Paper } & \text { Column: 25 } & \text { Column: 10 } \
\hline \text { No Coupons } & \text { Row: 10, } & \text { Row: 120, } \
& \text { Column: 200 } & \text { Column: 120 } \
\hline
\end{array}\end{array}$
Refer to the figure above.If Column Cafe offers coupons,and Row Restaurants does not publish coupons:
A) Row Restaurant will earn 10 in profits,and Column Cafe will earn 200 in profits.
B) both Row Restaurant and Column Cafe will earn 25 in profits.
C) Row Restaurant will earn profits of 200 and Column Cafe will earn profits of 10.
D) both Row Restaurant and Column Cafe will earn profits of 120.

Accepted Answer

If Column Cafe offers coupons and Row Restaurant does not, Row Restaurant earns 10 and Column Cafe earns 200.

Question 18

Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost.Below is the market demand and marginal revenue curves for the product. 
Refer to the figure above.Quick Buck and Pushy Sales have agreed to each produce half the profit-maximizing monopolist quantity,set the monopoly price and split the profits evenly.Suppose Quick Buck cheats on Pushy Sales and reduces its price to $1.00 each while Pushy Sales continues to comply with the collusive agreement.Quick Buck would then sell _____ units and Pushy Sales would sell ______ units.
A) 0;3,000
B) 1,500;1,500
C) 2,000;1,000
D) 3,000;0

Accepted Answer

When price is $1.00,3,000 units are sold.There are no consumers left willing to pay $1.50.

Question 19

Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost.Below is the market demand and marginal revenue curves for the product. 
Refer to the figure above.If Quick Buck and Pushy Sales decide to collude and work as a pure monopolist so that each firm will produce half the quantity demanded by the market,what will be the economic profit for Quick Buck?
A) $1,000
B) $1,500
C) $2,000
D) $3,000

Accepted Answer

Each firm produces 1,000 and earns $1.50 profit on each unit because average cost is zero.

Question 20

The numbers in each cell are each firm's profits. $\begin{array}{c}
\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Column Cafe }\
\text { Row Restaurant }
\begin{array}{|l|l|l|}
\hline  & \begin{array}{l}
\text { Publish Coupons in } \
\text { Student Paper }
\end{array} & \text { No Coupons } \
\hline \text { Publish Coupons in } & \text { Row: 25, } & \text { Row: 200, } \
\text { Student Paper } & \text { Column: 25 } & \text { Column: 10 } \
\hline \text { No Coupons } & \text { Row: 10, } & \text { Row: 120, } \
& \text { Column: 200 } & \text { Column: 120 } \
\hline
\end{array}\end{array}$
Refer to the figure above.The payoffs of this game are such that:
A) if Row Restaurant expects that Column Cafe will choose its dominant strategy,Row should choose to not follow its own dominant strategy.
B) profits at both firms would be highest if both firms follow their dominant strategies.
C) both firms would benefit from a law that made publishing coupons illegal.
D) an agreement to not publish coupons would be stable because with these profits neither firm has an incentive to defect.

Accepted Answer

Both firms would benefit from a law that made publishing coupons illegal because it would lead to the outcome where both choose "No Coupons," resulting in higher profits for both (120 each) compared to when both publish coupons (25 each).

Quiz 9: Games and Strategic Behavior

Most cartels end or cease to be effective because:

OPEC is an example of a:

Suppose Acme and Mega produce and sell identical product with zero marginal and average cost.Following is the market demand and marginal revenue curves for the product. Refer to the figure above.The profit-maximizing quantity and price for a monopolist with this demand curve are _____.

An agreement among firms to restrict production with the goal of earning economic profits is a:

Suppose market demand for bottled water in the U.S.is low enough that one firm could supply all of the demand.Two firms enter the market and agree to charge a price above the marginal cost of production.We can expect that:

Cartels would be more stable if: