Q&A Hero

Q: The approach economists use to analyze competition among oligopolists is called A) marginal analysis. B) game theory. C) oligopoly theory. D) competition among the few.

Q: In economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms is called A) decision theory. B) game theory. C) market structure analysis. D) profit analysis.

Q: The study of how people make decisions in situations in which attaining their goals depends on their interactions with others is called A) game theory. B) oligopoly. C) competitive analysis. D) strategic analysis.

Q: An oligopoly between two firms is called A) a biopoly. B) an oligopoly; there are no special terms used for oligopolies with different numbers of firms. C) a dual-firm oligopoly. D) a duopoly.

Q: Game theory was developed in the 1940s by John von Neuman, a mathematician, and an economist named A) John Nash. B) John Maynard Keynes. C) Oskar Morgenstern. D) Milton Friedman.

Q: 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 A) a cooperative equilibrium. B) a noncooperative equilibrium. C) new potential entrants. D) a threat of substitute goods.

Q: Table 14-3 Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 14-3 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 14-3. Which of the following statements is true? A) The Nash equilibrium is a noncooperative, dominant strategy equilibrium. B) The Nash equilibrium is a cooperative equilibrium. C) The Nash equilibrium is a collusive equilibrium. D) There is no Nash equilibrium in this game because each party pursues its dominant strategy.

Q: Table 14-3 Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 14-3 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 14-3. What is the Nash equilibrium in this game? A) In the Nash equilibrium both Saudi Arabia and Nigeria produce a low output and earn a profit of $100 million and $20 million respectively. B) In the Nash equilibrium both Saudi Arabia and Nigeria produce a high output and earn a profit of $60 million and $20 million respectively. C) In the Nash equilibrium Saudi Arabia produces a low output and earns a profit of $80 million and Nigeria produces a high output and $30 million respectively. D) There is no Nash equilibrium.

Q: Table 14-3 Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 14-3 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 14-3. Is there a dominant strategy for Nigeria and, if so, what is it? A) Yes, it has a dominant strategy depending on what Saudi Arabia does. B) No, there is no dominant strategy. C) Yes, the dominant strategy is to produce a low output. D) Yes, the dominant strategy is to produce a high output.

Q: Table 14-3 Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 14-3 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 14-3. Is there a dominant strategy for Saudi Arabia and, if so, what is it? A) Yes, the dominant strategy is to produce a high output. B) Yes, the dominant strategy is to produce a low output. C) No, there is no dominant strategy. D) Yes, it has a dominant strategy depending on what Nigeria does.

Q: Each member of OPEC can increase its income by selling more oil than its output quota because A) by selling more at OPEC's cartel price, a member will automatically earn more income. B) each member's demand is more elastic than the total demand for oil. C) the demand for oil is inelastic so total revenue increases. D) the demand for oil is perfectly elastic.

Q: In which of the following cartels is total cartel profit likely to be the highest? A) a cartel made up of equal sized firms each producing different quantities of a differentiated product B) a cartel made up of firms of various sizes each producing different quantities of a homogeneous product C) a cartel made up of firms of various sizes each producing the same quantity of a differentiated product D) a cartel made up of identical firms each producing the same quantity of a homogeneous product

Q: A member of a cartel like OPEC has an incentive to A) argue for larger production quotas for each member of the cartel. B) agree to a low cartel production level and then produce more than its quota. C) abide by its individual production quota. D) support equal production quotas for each member.

Q: What is the incentive for a firm to join a cartel? A) to be able to earn profits in the long run but not in the short run B) to be able to earn larger profits than if it was not part of the cartel C) to completely insulate itself from competition D) to produce a larger amount of output than if it was not part of the cartel

Q: A cartel is A) a temporary storage facility for automobiles. B) a group of firms that enter into an informal agreement to fix prices to maximize joint profits. C) a group of firms that enter into a formal agreement to fix prices to maximize joint profits. D) an example of a group of firms that collectively regulate a competitive industry.

Q: There is much evidence to suggest that airlines are more likely to match price cuts than price increases. Which of the following best explains this evidence? A) The law of demand which states that an increase in price leads to a decrease in quantity demanded. B) No one airline wants to be the first to renege on a tacit collusive agreement in which all airlines implicitly agree to match price cuts but not price increases. C) An airline fears that if it does not match a price cut, its sales may fall considerably but if it does not match a price increase, it will be able to attract customers away from its rivals. D) Airlines have different costs of production and therefore it is more difficult to agree on a price increase than on a price decrease.

Q: Airlines often engage in last-minute price cutting to fill remaining empty seats on a flight because this practice will generally A) prevent rival airlines from competing in that market. B) increase marginal revenue more than marginal cost. C) maximize marginal revenue. D) discourage rivals from matching price cuts.

Q: Collusion A) is rampant in perfect competition as all firms charge the same price. B) reduces market concentration in an industry. C) among firms is difficult to maintain because it eliminates long run economic profit. D) is more difficult when there are many firms producing differentiated products in an industry.

Q: If the painting firms in a city sign a contract outlining a pricing plan, they are involved in A) price competition. B) a legal form of business contract in the United States. C) collusion. D) price regulation.

Q: In an oligopoly, firms can increase their market power by A) selling to buyers who have market power. B) pursuing dominant strategies. C) colluding to set prices. D) undertaking heavy advertising expenditure.

Q: 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? A) The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact. B) The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same. C) The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion. D) The advertisement is meant to suggest to consumers that the offered price is actually the lowest price available.

Q: 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? A) Firms engage in aggressive advertising to overcome the barriers to loyalty. B) Most games are one-shot games so firms learn from their mistakes. C) Most games are repeated games and firms can employ retaliation strategies against those who do not cooperate. D) Firms are constantly improving their products and anticipating changing consumer tastes.

Q: What is the dominant strategy in a second-price auction? A) bidding below one's true value B) bidding above one's true value C) bidding one's true value D) There is no dominant strategy.

Q: What is a second-price auction? A) An auction in which the bidder who submitted the highest bid is awarded the object being sold and pays a price equal to the second highest amount bid. B) An auction in which the bidder who submitted the second highest bid is awarded the object being sold. C) An auction in which the bidder who submitted the highest bid is awarded the object being sold and pays a price equal to the average of the highest and second highest amount bid. D) An auction in which the bidder who submitted the second highest bid is awarded the object being sold and pays a price equal to the average of the highest and second highest amount bid.

Q: Table 14-2 Table 14-2 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3. At the start of the game each firm charges a low price and each earns a profit of $7,000. Refer to Table 14-2. Suppose pricing PlayStations is a repeated game in which Wal-Mart and Target will be selling the game system in competition over a long period of time. In this case, what is the most likely outcome? A) a noncooperative equilibrium in which each firm charges the high price B) a cooperative equilibrium in which each firm charges the high price C) a noncooperative equilibrium in which each firm charges the low price D) a cooperative equilibrium in which each firm charges the low price

Q: Table 14-2 Table 14-2 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3. At the start of the game each firm charges a low price and each earns a profit of $7,000. Refer to Table 14-2. Suppose Wal-Mart and Target both advertise that they will match the lowest price offered by any competitor. What is the purpose of such a strategy? A) to signal to each other not to charge below the current low price B) to signal to each other that they will not hesitate to initiate a price war C) to signal to each other that they intend to charge the high price D) to signal to each other to share the market equally

Q: Table 14-2 Table 14-2 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3. At the start of the game each firm charges a low price and each earns a profit of $7,000. Refer to Table 14-2. 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? A) Yes, the firms can implicitly collude and agree to charge a higher price. B) No, there is no incentive for each firm to consider any other strategy. C) No, any other strategy hurts consumers. D) Yes, each firm can implicitly agree to increase output and not to deviate from a low price.

Q: Table 14-2 Table 14-2 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3. At the start of the game each firm charges a low price and each earns a profit of $7,000. Refer to Table 14-2. Is the current strategy in which each firm charges the low price and earns a profit of $7,000 a Nash equilibrium? If not, why and what is the Nash equilibrium? A) No, it is not a Nash equilibrium because each firm can do better by charging the high price. The Nash equilibrium occurs when each firm charges the high price and earns a profit of $10,000. B) No, the current situation is not a Nash equilibrium; it is a dominant strategy equilibrium. There is no Nash equilibrium in this game. C) No, the current situation is not a Nash equilibrium. The Nash equilibrium for each firm is to have the other charge a high price and for the firm in question charge a low price. D) Yes, the current situation is a Nash equilibrium.

Q: A game in which each player adopts its dominant strategy A) will not lead to an equilibrium. B) must be a cooperative game. C) could result in a Nash equilibrium. D) can never result in a Nash equilibrium.

Q: Consider two oligopolistic industries selling the same product in different locations. In the first industry, firms always match price changes by any other firm in the industry. In the second industry, firms always ignore price changes by any other firm. which of the following statements is true about these two industries, holding everything else constant? A) Market prices are likely to be higher in the first industry in which firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. B) Market prices are likely to be lower in the first industry where firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. C) Market prices are likely to be the same in both markets because they are both oligopolistic markets. D) No conclusions can be drawn about the pricing behavior under these very different firm behaviors.

Q: Which of the following is an example of a way in which a firm in oligopoly can escape the prisoner's dilemma? A) producing more of its product B) advertising that it will match its rival's price C) reneging on a previous tacit agreement with rival firms to charge identical high prices D) ignoring the pricing decisions of the other firms

Q: Which of the following statements about the prisoner's dilemma is false? A) The prisoner's dilemma in a one-shot game leads to a noncooperative, equilibrium outcome. B) The prisoner's dilemma in repeated games could lead to cooperation especially if there is some enforcement mechanism that punishes a player who does not cooperate. C) Players caught in a prisoner's dilemma act in selfish ways that lead to an equilibrium that is sub-optimal. D) The prisoner's dilemma game can never reach a Nash equilibrium as long as players do not cooperate.

Q: Table 14-1 Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. What is the Nash equilibrium in this game? A) There is no Nash equilibrium. B) Godrickporter increases its advertising budget, but Star Connections does not. C) Star Connections increases its advertising budget, but Godrickporter does not. D) Both Godrickporter and Star Connections increase their advertising budgets.

Q: Table 14-1 Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. Let's suppose the game starts with each firm adhering to its original budget so that Godrickporter earns a profit of $6,000 and Star Connections earns a profit of $12,000. Is there an incentive for any one firm to increase its advertising budget? A) No, neither firm has an incentive to raise its advertising spending. B) Yes, both firms have an incentive to raise their advertising budgets. C) Yes, Star Connections has an incentive to increase its advertising budget, but Godrickporter does not. D) Yes, Godrickporter has an incentive to increase its advertising budget, but Star Connections does not.

Q: Table 14-1 Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. Is there a dominant strategy for Star Connections and if so, what is it? A) No, its outcome depends on what Godrickporter does. B) Yes, Star Connections should increase its advertising spending. C) Yes, Star Connections should reduce its advertising spending. D) Yes, Star Connections' dominant strategy is to collude with Godrickporter.

Q: Table 14-1 Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. Is there a dominant strategy for Godrickporter and if so, what is it? A) No, its outcome depends on what Star Connections does. B) Yes, Godrickporter should increase its advertising spending. C) Yes, Godrickporter should reduce its advertising spending. D) Yes, Godrickporter's dominant strategy is to collude with Star Connections.

Q: What is the dominant strategy in the prisoner's dilemma? A) Each prisoner confesses because this is the rational action to pursue. B) Do nothing in the hope that the other prisoner will also do nothing. C) Do not confess because the other prisoner will most likely confess. D) There is no dominant strategy.

Q: The prisoner's dilemma illustrates A) how oligopolists engage in implicit collusion under strategic situations. B) why firms will not cooperate if they behave strategically. C) why firms have an incentive to cheat on agreements. D) how cooperation in strategic situations lead to the economically efficient market outcome.

Q: What is a prisoner's dilemma? A) a game that involves no dominant strategies B) a game in which prisoners are stumped because they cannot communicate with each other C) a game in which players act in rational, self-interested ways that leave everyone worse off D) a game in which players collude to outfox authorities

Q: Collusion between two firms occurs when A) the firms independently pursue strategies that could hurt each other. B) firms explicitly or implicitly agree to adopt a uniform business strategy. C) announce that each will match its rival's market price. D) firms act altruistically to bring about the economically efficient outcome.

Q: A Nash equilibrium is A) reached when an oligopoly's market demand and supply intersect. B) reached when each player chooses the best strategy for himself and for the group. C) reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group. D) an equilibrium comprising non-dominant strategies only.

Q: A dominant strategy A) is one that is the best for a firm, no matter what strategies other firms use. B) is one that a firm is forced into following by government policy. C) involves colluding with rivals to maximize joint profits. D) involves deciding what to do after all rivals have chosen their own strategies.

Q: Suppose we want to use game theory to analyze how an oligopolist selects its optimal price. The cells of the payoff matrix show A) the profit that each producer can expect to earn by pursuing a single strategy. B) the profit that each producer can expect to earn from every combination of strategies by the firms in the market. C) the strategy that a firm must pursue to earn various levels of profit. D) the expected profits of rival firms.

Q: A market comprised of only two firms is called a A) competitive market. B) duopoly. C) monopoly. D) monopolistically competitive market.

Q: All of the following are characteristics of game theoryexcept A) rules that determine what actions are allowable. B) payoffs that are the results of the interaction among players' strategies. C) strategies that players employ to attain their objectives. D) independence among players

Q: A set of actions that a firm takes to achieve a goal, such as maximizing profits, is called A) a business strategy. B) a payoff matrix. C) the Porter's Competitive Forces plan. D) game theory.

Q: Which of the following economists did not help to develop game theory analysis? A) Adam Smith B) John Nash C) John von Neumann D) Oskar Morgenstern

Q: The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called A) Nash equilibrium. B) the prisoner's dilemma. C) game theory. D) dominant strategy equilibrium.

Q: Most economists are concerned about entry barriers. Why is this so important to them?

Q: Firms in an oligopoly are said to be interdependent. What does this mean?

Q: The breakfast cereal industry has a four-firm concentration ratio of 78 percent. Is this enough information to classify the industry as an oligopoly? Is a high concentration ratio evidence that an industry is not competitive?

Q: What is meant by the term "government-imposed barrier to entry"? Why would a government be willing to impose barriers to entering an industry?

Q: How does the demand curve for an oligopoly firm differ from the demand curves for firms in competitive market structures?

Q: What is an oligopoly? Give two examples of oligopolistic industries in the United States.

Q: In an oligopoly, minimum efficient scale is likely to occur at a level of output that is a large fraction of industry sales.

Q: Because of the flaws of the concentration ratio as a measure of the extent of competition in an industry, some economists prefer another measure of competition, the Herfindahl-Hirschman Index.

Q: The most important barrier to entry is economies of scale.

Q: The four-firm concentration ratio of the aircraft industry is over 80 percent. Most economists would consider this industry an oligopoly.

Q: If firms are protected by substantial barriers to entry, short-run profits can turn into long-run profits.

Q: The barrier to entry that allowed Alcoa to make persistent economic profits was ownership of an essential input.

Q: Occupational licensing is an example of an entry barrier that improves a country's standard of living.

Q: If economies of scale are significant, the typical firm will not reach the minimum point on its long-run average cost curve until it has produced a large fraction of industry sales.

Q: An entry barrier exists when firms in an industry charge the lowest price possible for their products.

Q: Monopolistic competition differs from oligopoly in that in monopolistic competition firms act independently while in oligopoly firms act interdependently.

Q: An oligopolistic industry is characterized by a few large firms acting independently.

Q: A consequence of the quota that has been imposed on the importation of sugar into the United States is A) consumers are protected from eating unsafe products made from cheap imported sugar. B) competition in the U.S. sugar market is reduced. C) the cost of producing cereal, chocolate and candy products in the United States is reduced. D) the market for sugar in the United States has become monopolistically competitive rather than oligopolistic.

Q: The justification for occupational licensing laws is that they protect the public from incompetent practitioners (for example, lawyers and medical doctors), but the laws also result in A) higher prices and restrictions on the number of people who can enter the professions affected by the laws. B) economies of scale. C) ownership of a key input. D) an increase in the amount of output required to achieve minimum efficient scale.

Q: Doctors and lawyers in every state need a license to practice. This is an example of A) consumer protection laws. B) consumer advocacy. C) occupational licensing. D) ownership of a key input.

Q: The people firms hire to attempt to convince state legislators and members of Congress to pass laws that are favorable to the economic interests of the firms are called A) economic advisors. B) legislative assistants. C) government bureaucrats. D) lobbyists.

Q: Ocean Spray is considered to be an oligopoly firm because, until the 1990s, it faced little competition in the market for fresh and frozen cranberries. Why? A) Ocean Spray had a patent on the production of cranberries that gave the company the exclusive right to market its product for 20 years. The 20-year period ended in the 1990s. B) Until the 1990s, Ocean Spray controlled almost the entire supply of cranberries. C) Ocean Spray was able to achieve significant economies of scale in the production of cranberries. Beginning in the 1990s, other firms finally achieved economies of scale as well, but Ocean Spray still controls about 80 percent of the cranberry market. D) The federal government imposed a high tariff on cranberry imports. During the 1990s the tariff was eliminated, but Ocean Spray still controls about 80 percent of the cranberry market.

Q: Because of the shortcomings of concentration ratios, some economists prefer another measure of competition called A) the Competition Index. B) the Marginal Revenue-Marginal Cost Index. C) the Economic Profit Index. D) the Herfindahl-Hirschman Index.

Q: The profit-maximizing level of output and the profit-maximizing price for an oligopolist cannot be calculated when we don't know A) what the concentration ratio for the oligopolist's industry is. B) what the minimum efficient scale in the oligopolist's industry is. C) the demand curve and the marginal revenue curve of the oligopolist. D) the type of barrier to entry that exists in the oligopolist's industry.

Q: Which government agency publishes four-firm concentration ratios? A) the Economic Council B) the Federal Reserve System C) the U.S. Bureau of the Census D) the Treasury Department

Q: Which industry has the highest four-firm concentration ratio? A) discount department stores B) college bookstores C) retail gasoline stations D) cigarettes

Q: Of all barriers to entry, the most important are those that are due to A) ownership of a key input. B) economies of scale. C) government-imposed barriers. D) the Herfindahl-Hirschman Index.

Q: The De Beers Company blocked competition A) in the diamond market by controlling the output of most of the world's diamond mines. B) by controlling the supply of most of the world's high-quality bauxite, the mineral used to produce aluminum. C) in the market for fresh and frozen cranberries because it controls about 80 percent of the cranberry crop. D) because it has lower costs of producing than other department stores due to economies of scale.

Q: An example of a government-imposed barrier to entry gives a firm the exclusive right to a new product for a period of 20 years from the date the product is invented. This entry barrier is known as A) a copyright. B) a patent. C) an exclusive marketing agreement. D) a tariff.

Q: A patent is a government-imposed entry barrier because A) it allows a firm to achieve economies of scale. B) it is a key input owned by the firm that is granted the patent. C) it limits the quantity of a good that can be imported into a country. D) it gives a firm the exclusive right to a new product for a period of 20 years from the date the product is invented.

Q: If economies of scale are relatively unimportant in an industry, the typical firm's long-run average total cost curve will reach a minimum at a level of output that is a ________ fraction of total industry sales. The industry will be ________. A) large; competitive B) large; an oligopoly C) small; competitive D) small; an oligopoly

Q: Hewlett-Packard will not raise the prices of its personal computers without first considering how Dell might respond. This is evidence of A) interdependence. B) collusion. C) cutthroat competition. D) price fixing.