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Exam 17: Oligopoly

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Question 161

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As the number of firms in an oligopoly increases,

A) each seller becomes more concerned about its impact on the market price.
B) the output effect decreases.
C) the total quantity of output produced by firms in the market gets closer to the socially efficient quantity.
D) the oligopoly has more market power and firms earn a greater profit.

E) A) and C)
F) B) and C)

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Question 162

Multiple Choice

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Like monopolists, oligopolists are aware that an increase in the quantity of output always

A) reduces the price of their product.
B) reduces their profit.
C) reduces their revenue.
D) reduces productivity.

E) A) and B)
F) A) and C)

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Question 163

Multiple Choice

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An equilibrium in which each firm in an oligopoly maximizes profit, given the actions of its rivals, is called

Figure 17-1 -Refer to Figure 17-1. Suppose this market is served by a duopoly in which each firm faces the marginal cost curve shown in the diagram. The marginal revenue curve that a monopolist would face in this market is also shown. Which of the following statements is true?

Table 17-18 This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 10 units or 12 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B) . -Refer to Table 17-18. If these two firms play this game repeatedly, the likely outcome will be

Scenario 17-3. Consider two countries, Kinglandia and Rovinastan, that are engaged in an arms race. Each country must decide whether to build new weapons or to disarm existing weapons. Each country prefers to have more arms than the other because a large arsenal gives it more influence in world affairs. But each country also prefers to live in a world safe from the other country's weapons. The following table shows the possible outcomes for each decision combination. The numbers in each cell represent the country's ranking of the outcome (10 = best outcome, 1 = worst outcome) . -Refer to Scenario 17-3. Suppose the two countries agreed to disarm existing weapons. In reality these two countries may have a hard time keeping this agreement due to which of the following reasons? (i) Even though Kinglandia has no incentive to cheat on the agreement, Rovinastan has an incentive to cheat on the agreement. (ii) Much like the prisoners' dilemma, both countries are better off reneging on the Agreement and building new weapons. (iii) Both countries want to increase their world power by building new weapons.

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

Predatory pricing refers to

If the output effect is larger than the price effect, an individual firm will production.

A dominant strategy is one that

Table 17-31 Imagine a small town in a remote area where only two residents, Maria and Miguel, own dairies that produce milk that is safe to drink. Each week Maria and Miguel work together to decide how many gallons of milk to produce. They bring milk to town and sell it at whatever price the market will bear. To keep things simple, suppose that Maria and Miguel can produce as much milk as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for milk is shown in the table below: -Refer to Table 17-31. Discuss the difference between the monopoly outcome and the Nash equilibrium.

Table 17-28 Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits: Firm A Breaks agreement Maintains agreement and advertises and does not advertise -Refer to Table 17-28. Which of the following statement(s) correctly characterizes the outcome of this game?

Table 17-33 Suppose that Robert and Howard own the only two movie studios in California. Each producer must choose between a low budget and a high budget strategy for his next film. The economic profit from each strategy is indicated in the table below: Howard Low budget High budget -Refer to Table 17-33. Is there a Nash equilibrium? If so, describe it.

Oligopolies can end up looking like competitive markets if the number of firms is

The Sherman Antitrust Act states that if a person can prove that he was damaged by an illegal arrangement to restrain trade, he could sue and recover three times the damages he sustained.

Much of the research on game theory in recent decades was driven by attempts to analyze actions of players during

Table 17-18 This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 10 units or 12 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B) . -Refer to Table 17-18. The Nash equilibrium for this game is

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

Table 17-9 The table shows the demand schedule for a particular product. -Refer to Table 17-9. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $4?

In the U.S. government's 1998 suit against the Microsoft Corporation, a central issue was whether Microsoft should be allowed to integrate its Internet browser into its Windows operating system. Microsoft responded that