Week 13 Quiz

An industry with two firms producing is generally called:

a duopoly.

What is a prisoner's dilemma?

a game in which players act in rational, self-interested ways that leave everyone worse off

Which of the following is most likely to be observed when firms engage mainly in non-price competition?

advertising and product differentiation

Which of the following does not describe OPEC?

OPEC is the name of the free-trade zone encompassing the Middle East and other oil-producing nations.

A well-known example of an international cartel is:

OPEC.

Given the large amount of interdependence among them, cooperation with one's competitors is the most profitable strategy for:

oligopolists.

Assume an industry is dominated by a few firms. Each of these firms acknowledges that its own choices affect the choices of its rivals. Each firm also recognizes that its rivals' choices affect the decisions it makes. This industry is an example of a(n):

oligopoly.

In the classic prisoners' dilemma with two accomplices in crime, the Nash equilibrium is for:

both individuals to confess.

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?

to signal to each other that they intend to charge the high price

Refer to the above figure. The figure gives the payoff matrix for two individuals who are being accused of robbing a bank together. Which of the following is the outcome with cooperation?

Both don't confess.

Refer to Figure 12.7. The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy. If both firms follow their individual dominant strategy:

Both will earn $150 daily profit.

In the game in Scenario 13.2, the equilibrium strategies

are for both firms to offer rebates.

Refer to Figure d. In the game described in the figure above, Travis's dominant strategy is

South

Suppose Intel and AMD can each charge either $300 or $200 for a CPU (the computing unit of a computer). The above table illustrates the payoffs, in millions of dollars, from each of the four possible outcomes that could occur in their duopoly setting. If Intel charges $200 and AMD charges $300, then Intel's profit will be ________ million and AMD's profit will be ________ million.

$500; $100

Refer to above figure, which represents a duopoly industry. What would be the likely total industry payoff or profit?

$8 million

Refer to Table 14.1. Firm Aʹs optimal strategy is

dependent on what Firm B does.

In a Nash equilibrium,

players may or may not have dominant strategies.

Oligopoly is a market structure that is characterized by a:

small number of interdependent firms producing identical or differentiated products.

Which of the following would make it difficult for oligopolists to collude?

There are few buyers in the market.

Which of the following factors increases the likelihood that oligopolists collude?

A firm and its rivals are currently operating at maximum productive capacity.

In a Nash equilibrium

All the alternatives are correct

Which of the following is true about the game in Scenario 13.2?

Both ABC and XYZ offer a rebate as a dominant strategy.

Refer to the above payoff matrix for the profits (in $ millions) of two firms (A and B) making a decision to advertise or not. Which of the following is the outcome of the dominant strategy without cooperation?

Both firm A and firm B choose to advertise.

Refer to the above figure. The figure gives the payoff matrix for two individuals who are being accused of robbing a bank together. If Bob confesses, what is the best strategy for Harry?

Confess.

Refer to the above figure. The figure gives the payoff matrix for two individuals who are being accused of robbing a bank together. What is dominant strategy for Bob?

Confess.

Refer to Figure c. What is the Nash equilibrium in table above (Figure c)?

Kate squeal, Alice squeal

Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the best strategy for Greenco if Ajax decides on charging a low price?

Low price.

Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the dominant strategy for Greenco?

Low price.

A ________ occurs if all players in a game play their best strategies given what their competitors do.

Nash equilibrium

Which of the following is true regarding the game in Scenario 13.5?

Neither company has a dominant strategy.

Refer to Figure a. What is the Nash equilibrium in the figure above?

There is not one

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?

Yes, the dominant strategy is to produce a high output.

Suppose that each of two firms has the independent choice of advertising its product or not advertising. If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million while the other gets profit of $2 million. According to game theory, the Nash equilibrium is:

both will advertise.

Suppose that each of two firms has the independent choice of advertising its product or not advertising. If neither advertises, each gets $20 million in profit; if both advertise, their profits will be $10 million each; and if one advertises while the other does not, the advertiser gets $25 million profit while the other gets $4 million profit. According to game theory, the likely strategy by the firms is:

both will advertise.

Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. The large barriers to entry in the Smalltown gas industry explain why Gary and Frank:

can earn an economic profit in the long run.

Quantity competition or Cournot behavior is most likely when oligopolistic firms:

cannot increase their level of output quickly due to limits on their productive capacity.

An extreme case of oligopoly in which firms collude to raise joint profits is known as a:

cartel.

If the only two firms in an industry agree to fix the price at a given level, this is an example of:

collusion.

Refer to Table 12.2. Jeri and Tom are arrested for having committed a crime. They are being interrogated individually and need to decide if they should confess or not confess. The police have enough information to put them in jail for 5 years. They also know the pair have committed a more egregious crime but without the help of one of the suspects they will not be able to convict them on this charge. The first number in each cell refers to the number of years of prison time Jeri will receive if she confesses or does not confess and the second number in each cell refers to the number of years of prison time Tom will receive if he confesses or does not confess. The dominant strategy for Jeri is to ________ and the dominant strategy for Tom is to ________.

confess; confess

OPEC is:

described by all of these answer choices. (an international cartel made up of oil-producing countries, the cartel that was responsible for the large increases in crude oil prices in the 1970s, the Organization or Petroleum Exporting Countries)

In the game in Scenario 13.4, the equilibrium outcome:

does not exist.

A market comprised of only two firms is called a

duopoly.

A Nash equilibrium occurs when

each firm is doing the best it can given its opponents' actions.

Cartels made up of a large number of firms are unstable because each firm in the cartel:

has a great incentive to cheat.

Game theory is commonly used to explain behavior in oligopolies, because oligopolies are characterized by:

interdependence.

In the game in Scenario 13.3, the equilibrium outcome:

is for Moto to offer a CD changer and Zport to offer low-profile tires.

In oligopoly, a firm must realize that:

it is in an industry in which another major firm may dominate, and the firm will need to judge its actions accordingly.

Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. Gary believes he faces a kinked demand curve. This means Gary thinks if he lowers his price, then Frank will ________, and if he raises his price, Frank will ________.

lower his price; not raise his price

The prisoner's dilemma shows that

players would be better off if they cooperated.

Collusive agreements are typically difficult for cartels to maintain because each firm can increase profits by:

producing more output than the quantity that maximizes joint cartel profits.

A Nash equilibrium is

reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group.

An action is a dominant strategy when it is a player's best action:

regardless of the actions by other players.

To calculate the Herfindahl-Hirschman Index (HHI), one must:

sum the squared market shares of all firms in the industry.

In the game in Scenario 13.5,

there are two equilibria: either can expand in the West, and the other expands in the South.

What is the incentive for a firm to join a cartel?

to be able to earn larger profits than if it was not part of the cartel

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?

Godrickporter increases its advertising budget, but Star Connections does not.

The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. Which of the following statements is correct?

If the firms cooperate, both could make $55,000 in economic profit.

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?

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.

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?

Yes, the dominant strategy is to produce a low output.

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?

Yes, the firms can implicitly collude and agree to charge a higher price.

Which of the following is true for the game in Scenario 13.3?

Zport's dominant strategy is the low-profile tires.

If both players in a game have dominant strategies, we say that the game has:

an equilibrium in dominant strategies.

Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. Gary believes he faces a kinked demand curve. This means Gary thinks the demand curve above the kink is:

more elastic than the demand curve below the kink.

Suppose that each of two firms has the independent choice of advertising its product or not advertising. If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million while the other gets profit of $2 million. According to game theory, if the firms could collude to maximize profit:

neither will advertise.

Refer to Table 12.2. Jeri and Tom are arrested for having committed a crime. They are being interrogated individually and need to decide if they should confess or not confess. The police have enough information to put them in jail for 5 years. They also know the pair have committed a more egregious crime but without the help of one of the suspects they will not be able to convict them on this charge. The first number in each cell refers to the number of years of prison time Jeri will receive if she takes that action and the second number in each cell refers to the number of years of prison time Tom will receive if he takes that action. If Jeri and Tom can decide jointly then the best strategy is for Jeri to ________ and Tom to ________.

not confess; not confess

If there are two gas stations in the town of Smalltown, then the gasoline industry in Smalltown is probably best characterized as:

oligopolistic.

Microsoft sets prices for their new line of computers and Dell and HP follow. This practice is known as________.

price leadership.

According to the kinked demand model of oligopolies, oligopolistic firms often choose not to compete much on:

price.

An oligopoly may result from:

the existence of increasing returns to scale in the industry.