Microeconomics Chapter 10

what are the components of a game?

- players - strategies - payoffs - information - outcomes

dominant strategy

Occurs when a player chooses the same strategy regardless of what his or her opponent chooses.

Interdependence is a key characteristic of

an oligopoly.

The word "monopolistic" in the label "monopolistic competition" refers to the fact that:

each firm produces a unique version of the product

Prisoner's Dilemma

happens when the nash equilibrium outcome is lesser to another outcome that can be achieved with cooperation

Monopolistic competition is like perfect competition in that they both

have numerous competitors.

Compared with a competitive market, a cartel as a whole will produce:

less output in order to increase prices.

With a kinked demand curve model, the discontinuity of the marginal revenue curve suggests that:

prices will be stable

Trembling hand trigger strategy

retaliation is delayed

Which is NOT a part of a basic setup to a "game"?

a judge

chicken games

Players hold out for the optimal outcome; however, if neither side gives in, the worst outcome occurs.

If a player chooses not to forgive another player who cheats on an agreement, which trigger strategy is MOST likely to be used?

grim strategy

If a player chooses not to forgive another player who cheats on an agreement, which trigger strategy is more likely to be used?

grim trigger strategy

What is a cartel?

an agreement between firms to control prices and output then agree on the distribution of production

All of these are characteristic of monopolistic competition, EXCEPT:

barriers to entry.

The "dilemma" in a Prisoner's Dilemma refers to the fact that:

both players would be better off by cooperating, but not cooperating is a dominant strategy

If the cast members on a major television sit-com threaten to walk off the set if they do not receive a large pay increase, and the television network in response threatens to replace the cast with new members, this situation is most likely to resemble a:

chicken game.

tit-for-tat strategy

cooperate in the first round, then reciprocate whatever the other person does

Under monopolistic competition, entry typically causes price to _____ and profits to _____.

decrease; decrease

Which characteristic does NOT describe an oligopoly?

economic profits being zero in the long run

If Nintendo lowers the price of its product by $10, Sony responds by lowering the price of its own product by $10. The following month, Nintendo raises the price of its product by $15 and Sony responds by raising the price of its own product by $15. This is an example of what type of game strategy?

tit-for-tat strategy

In which situation can a Prisoner's Dilemma outcome most likely be avoided?

if the game is repeated over and over under the same conditions

what can make a cartel more stable?

- if they have fewer members - they are maintained with legal provision - they are unable to differentiate their products - each firm has a similar cost structure - there are significant barriers to entry

Which statement is NOT true about a Nash equilibrium?

A Nash equilibrium gives each player the highest possible payoff in the game.

Which statement is an example of mutual interdependence?

Coca-Cola introduces a new tea and monitors how Pepsi will react

leadership games

Competitive games in which one player is dominant

persuasive advertising

Influences consumers' emotions and tends to drive up costs of products

For a monopolistically competitive firm, profit is maximized when:

MC = MR.

In the long run, which of the following is true for a monopolistic competitive firm?

Price equals average total cost and MR = MC.

Rice-to-Riches and Rice Pudding Palace are two shops of similar size that sell rice pudding desserts. Both shops frequently offer "Buy One, Get One Free" specials in an attempt to steal the other store's customers. But because both shops offer the same deal, they both end up losing money. This type of situation is BEST described as a _____ game.

Prisoner's Dilemma

What are the two types of advertising?

informational and persuasive

Informational Advertising

informs consumers about aspects of product and reduces search costs

Assume that economic profits are earned by monopolistic competitive firms. What will happen in the long run?

new firms enter and demand for each firm's product falls until economic profits are zero

Nash Equilibrium

occurs when all players in a game use an optimal strategy in response to all other players strategies

Compared with firms in competition, firms in monopolistic competition in the long run:

produce less and sell at a higher price.

The stability of a cartel is improved if:

the participating members have similar cost structures.

what are some characteristics of monopolistic competition?

many buyers and sellers. differentiated products. no barriers to market entry or exit. no long-run economic profit. some control over price.

what are some characteristics of oligopoly?

relatively few firms. interdependent decision making. substantial barriers to market entry. potential for long-run economic profit. shared market power and considerable control over price

grim trigger strategy

Cooperate until opponent defect, then defect forever

what are the results of a cartel?

cartels reduce overall supply to raise prices and profits

A Nash equilibrium occurs when

players choose their best strategy given the strategies chosen by others

A firm will have a "kinked" demand curve if its decision to raise prices is _____ matched by competitors, whereas its decision to lower prices is _____ matched by competitors.

rarely; always