Question 1

Suppose that Makemoney Movies produces two new films - The Hulk and The Piano. Makemoney offers theaters the two films together at a single price but will not supply the movies separately. What do economists call this business practice?

Accepted Answer

This business practice is called tying. Tying is the practice of selling two or more products together as a package rather than separately. In this case, Makemoney Movies is forcing theaters to purchase both movies together as a package deal, rather than giving them the option to choose only one of the movies.

Question 2

Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same.

Accepted Answer

The level of output in an oligopoly will depend on various factors including the number of firms, their market power, their degree of interdependence, and the potential for collusion or competition. Therefore, the level of output can vary depending on the specific characteristics of the oligopoly.

Question 3

In a competitive market, strategic interactions among the firms are not important.

Accepted Answer

The answer of In a competitive market, strategic interactions among...

Question 4

The story of the prisoners' dilemma shows why

Accepted Answer

The prisoners' dilemma is a game theory scenario in which two individuals are faced with the decision to cooperate or defect, with both having an incentive to defect, even though mutual cooperation would lead to a better outcome for both. This scenario can be applied to oligopolies, where firms have an incentive to compete, even though cooperation would lead to a better outcome for all. Therefore, the story of the prisoners' dilemma shows why oligopolies can fail to cooperate, even when cooperation is in their best interest.

Question 5

Any market that is served by an oligopoly is in effect served by a monopoly.

Accepted Answer

An oligopoly consists of a few firms dominating the market, whereas a monopoly is characterized by a single firm controlling the entire market. They are distinct market structures with different competitive dynamics.

Question 6

The problems faced by oligopolies with three or more members are entirely different from the problems faced by duopolies.

Accepted Answer

Oligopolies, whether duopolies (with two firms) or with three or more firms, face similar problems such as setting prices, output levels, and making strategic decisions considering the actions of competitors. The complexity and dynamics might vary with the number of firms, but the fundamental economic issues and competitive interactions remain consistent across oligopolies.

Question 7

Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding oligopolistic markets.

Accepted Answer

The answer of Game theory is just as necessary for...

Question 8

A group of firms that collude is called a cartel.

Accepted Answer

This statement is true. A cartel is a group of businesses that cooperate to control prices, production, and distribution of a product or service in order to maximize profits. Collusion is often part of the cartel's strategy.

Question 9

For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.

Accepted Answer

Strategic interactions become more important in markets with fewer firms because each firm's actions have a more significant impact on the market and on the other firms. In markets with many firms, individual actions have less impact, reducing the importance of strategic interactions.

Question 10

In a duopoly if the firms have agreed to jointly maximize profits, then each firm can increase its current profits by producing more.

Accepted Answer

If the firms have agreed to jointly maximize profits, then producing more can lead to increased profits for both firms as long as it does not drive down the market price. The firms would need to coordinate their production levels to ensure that they both benefit, otherwise they risk a price war and a decrease in profits for both firms.

Question 11

Suppose three firms form a cartel and agree to charge a specific price for their output. Each individual firm has an incentive to maintain the agreement because the firm's individual profits will be the greatest under the cartel arrangement.

Accepted Answer

While a cartel agreement aims to maximize collective profits by setting high prices, each individual firm has an incentive to cheat on the agreement by slightly undercutting the agreed price to increase its market share and individual profits, thus undermining the cartel's stability.

Question 12

When all firms choose their best strategy given the strategies that all the other firms have chosen, the result is a Nash equilibrium.

Accepted Answer

This is the definition of a Nash equilibrium, where no player can gain by changing their strategy if all other players' strategies remain the same.

Question 13

As the number of firms in an oligopoly increases, the magnitude of the price effect increases.

Accepted Answer

As the number of firms in an oligopoly increases, the market becomes more competitive and the price effect decreases.

Question 14

As the number of firms in an oligopoly becomes very large, the price effect disappears.

Accepted Answer

As the number of firms becomes very large in an oligopoly, the market structure starts to resemble that of perfect competition, where firms have no pricing power and the price effect disappears.

Question 15

The essence of an oligopolistic market is that there are only a few sellers.

Accepted Answer

An oligopolistic market is characterized by a small number of sellers who dominate the market.

Question 16

If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the same level of output as they would produce in a Nash equilibrium.

Accepted Answer

In a Nash equilibrium, each firm in an oligopoly chooses its best strategy given the strategies chosen by other firms, often leading to a higher total output compared to the monopoly outcome, where firms agree to produce a lower total output to maximize joint profits.

Question 17

A particular cable TV company requires a household to subscribe to its high-speed Internet service if it subscribes to cable TV, and vice versa. This practice

Accepted Answer

The answer of A particular cable TV company requires a...

Question 18

Oligopolies produce more when they collude then when they do not.

Accepted Answer

When oligopolies collude, they tend to restrict output to increase prices and maximize their combined profits, producing less than if they were competing more aggressively with each other.

Question 19

Cartels with a small number of firms have a greater probability of reaching the monopoly outcome than do cartels with a larger number of firms.

Accepted Answer

This is true because in smaller cartels, each member may have a larger market share and therefore have more incentive to collude and maintain high prices, whereas in larger cartels, there may be more free-riding behavior and a greater likelihood of cheating.

Question 20

If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the cartel is equal to what it would be if the market were a monopoly.

Accepted Answer

If all firms in an oligopoly successfully collude and form a cartel, they act as a monopoly and collectively set the quantity and price in order to maximize profits. This results in the same total profit outcome as a monopoly.

Quiz 17: Oligopoly