Question 1

When the behaviour of other firms must be taken into account by another firm in the industry, economists often examine this using:

Accepted Answer

Game theory is the study of decision-making in situations where one person's decision depends on the decisions of others. In an industry where the behaviour of other firms affects a firm's profits, game theory can be used to model and analyze the strategic interactions between firms. Therefore, A is the best choice. The other models listed do not directly consider the strategic interactions between firms.

Question 2

The cartel is a group of firms:

Accepted Answer

A cartel is a group of firms that formally agree to control their price and output levels in order to maximize profits. This typically involves restricting output to raise prices above competitive levels. However, cartels are generally illegal in most countries due to their anti-competitive nature.

Question 3

In a price leadership oligopoly model:

Accepted Answer

In a price leadership oligopoly model, one firm is the price leader and all other firms are followers. The price leader sets the price and the other firms follow suit, although they may choose to differentiate by offering slightly different products or services. This allows the price leader to still have some market power and maintain a level of differentiation, while the other firms benefit from the stability of a set price.

Question 4

A cartel:

Accepted Answer

A cartel is a group of firms that formally agree to control their price and output levels, which is illegal in many countries. The purpose of a cartel is to gain market power and increase profits by reducing competition. Examples of famous cartels include OPEC (oil-producing countries) and the diamond cartel.

Question 5

In order to make oil profits as large as possible, OPEC meets to set oil production quotas for its members. OPEC is best classified as a:

Accepted Answer

OPEC is a cartel, which is a group of firms in an industry that agrees to collaborate in order to increase their profits by collectively setting output levels and prices. OPEC's member countries work together to control the supply of oil in order to influence prices and maximize their profits.

Question 6

Suppose that a firm raises the price of its product by 10 per cent. Although it has no requirement or agreement to do so, the other firms decide to raise their prices accordingly. This situation is best described as:

Accepted Answer

Price leadership occurs when one leading company in an industry raises or lowers prices and other companies in the industry follow suit, even without formal agreements or obligations to do so. This scenario describes price leadership, where other firms decide to raise their prices in response to the action of one firm.

Question 7

Game theory includes which of the following rules?

Accepted Answer

Game theory must have a clear set of players, strategies, and payoffs where each player is rational and chooses the strategy that increases their chances of winning. It does not always have negative payoffs, and it does not have to follow the rules of a competitive market. In fact, game theory can be applied to any situation where there are multiple players making decisions.

Question 8

An increase in marginal cost that remains within the gap of the marginal revenue curve of a kinked demand oligopolist will:

Accepted Answer

The kinked demand curve assumption in oligopoly suggests that firms will only increase prices if their marginal cost rises above a certain threshold as competitors will not follow the price increase if it is not based on cost increases. Therefore, if the marginal cost increases but remains within the gap of the marginal revenue curve, the firm will likely maintain the same price and output level as before. This is because increasing price could lead to losing market share to competitors who can undercut the price, while decreasing output would not lead to a significant increase in price as competitors would simply increase their own output to fill the gap. Thus, the best choice is A, keep price and output the same.

Question 9

Which of the following market structures describes an industry in which a group of firms formally agree to control prices and output of a product?

Accepted Answer

A cartel is a type of market structure where a group of firms agree to coordinate their production levels or prices in order to increase their profits. This is often done by formal agreements, such as contracts or mergers, between the firms. This type of market structure is often seen in industries with high barriers to entry, such as the oil industry or the diamond trade.

Question 10

Suppose an oil cartel has an agreement to restrict members' production in order to maintain a price of $40 per barrel. A single cartel member may want to cheat and exceed its quota so that it can:

Accepted Answer

By exceeding its quota and producing more oil, the cartel member can increase its profit by selling more oil at the $40 per barrel price. This allows the member to earn a bigger profit by increasing the quantity sold without decreasing the price.

Question 11

Cartel pricing refers to the output and price choice of a cartel. This choice most closely resembles:

Accepted Answer

Cartels are formed by a group of producers who aim to collude to maximize their profits by restricting output and fixing prices, which is essentially what monopolies do. Hence, the output and price choices of a cartel resemble those of a monopoly.

Question 12

The various strategies a firm can follow in an oligopolistic industry can be expressed in terms of:

Accepted Answer

The pay-off matrix is a tool used in game theory to analyze the strategic choices made by firms in an oligopolistic industry. It helps firms anticipate the actions of their rivals and make decisions that maximize their profits. The pay-off matrix considers the actions of each firm and the resulting payoffs based on the choices of all firms involved. Therefore, it is the best choice for analyzing strategic options in an oligopolistic industry.

Question 13

The purpose of a cartel is to:

Accepted Answer

The purpose of a cartel is to act like a monopoly by colluding with other producers to restrict output and raise prices. This allows the members of the cartel to have greater control over the market and reap higher profits. Cartels are illegal in many countries because they are anti-competitive and can harm consumers by driving up prices.

Question 14

Game theory explains:

Accepted Answer

Game theory is commonly used to study and analyze the strategic decisions made by firms in various market situations, such as pricing, advertising, and product differentiation. It can help firms make informed decisions based on the potential reactions of their competitors.

Question 15

Game theory provides a framework for studying:

Accepted Answer

Game theory is particularly useful in analyzing strategic behavior in oligopolistic markets, where a few firms compete against each other and have the ability to affect market outcomes. It helps to understand how these firms interact, make decisions, and anticipate the reactions of their rivals. Therefore, option D is the correct choice as it refers specifically to the application of game theory in analyzing oligopoly markets.

Question 16

Cartel members have an incentive to cheat on the cartel because:

Accepted Answer

Cartel members have an incentive to cheat on the cartel if their marginal revenue (MR) is not equal to the cartel's marginal cost (MC). If a member's MR is higher than the cartel's MC, they can increase their profits by producing more than their assigned output quota and selling it on the market. This will reduce the overall price of the cartel and cause the other members to lose out on profits. Therefore, there is an incentive for members to cheat when their MR is higher than the cartel's MC.

Question 17

A group of firms that collude to limit competition is called a/an:

Accepted Answer

An oligopoly is a market structure in which few large firms dominate the market, while a duopoly is a specific type of oligopoly where only two firms control the market. The kinked demand theory explains the behavior of firms in an oligopoly, but it is not a group of colluding firms. A cartel is a group of firms that collude to limit competition, often by fixing prices or output levels. Therefore, the best answer is C) cartel.

Question 18

The oligopoly market can be examined by using:

Accepted Answer

Game theory is the ideal tool for analyzing the oligopoly market structure, as it takes into account the interdependence and strategic behavior of firms in this market form. Moreover, game theory is useful in determining the possible outcomes and strategies that firms may adopt in response to competitors' actions. Hence, A) is the correct choice.

Question 19

A cartel maximises industry profit by:

Accepted Answer

Cartels aim to maximize industry profits by producing where marginal revenue (MR) equals marginal cost (MC). This is the point of allocative efficiency, where the market produces the optimal quantity of output at the lowest possible cost. Eliminating quotas and giving secret price concessions may increase profits, but they do not necessarily maximize them. Producing at the kink in the demand curve may result in excess capacity or deadweight loss, reducing overall profits.

Question 20

A pay-off matrix used in game theory shows:

Accepted Answer

A pay-off matrix in game theory is used to show how different strategies in an imperfect competitive market can result in firms earning or losing profits. It helps in analyzing the interdependence and cooperation of firms in a market. The matrix shows the possible outcomes for each firm based on the decisions they make, and it helps in understanding the best course of action.

Quiz 10: Monopolistic Competition and Oligopoly