ECON 2302: CH. 13 QUIZ

Based on the data in the box, the Nash equilibrium between the two countries is where

both countries levy high tariffs . A Nash equilibrium occurs when the groups involved decide to keep the status quo. The dominant strategy for both countries is to levy high tariffs. When both countries do that, neither has an incentive to change. Bear in mind they can do better if they both levy low tariffs. With the low tariffs, each country will make $50 billion. However, if one country is willing to go high, it can make $100 billion, while the other makes $10 billion. Both countries will challenge each other until they reach a Nash equilibrium as all economic decision -makers opt to keep the status quo. This occurs when both countries offer high tariffs.

Network externalities are important for

AARP, an organization that advocates for seniors. Network externalities occur when the number of customers who purchase or use a good influences the quantity demanded. Increasing membership in an organization such as AARP makes the organization more powerful and therefore makes a membership more valuable. By contrast, if the number of customers who use a gas station increases, this is of no benefit to those already using it. The same analysis can be applied to slot machines and music concerts.

Given the data in the matrix, which of the following is correct? Firm B:Keep agreement | Firm B:Break agreement Firm A:Keep agreement | Firm A profit = $50,000 Firm B profit = $50,000 | Firm A profit = $5,000 Firm B profit = $100,000 Firm A:Break agreement | Firm A profit = $100,000 Firm B profit = $5,000 | Firm A profit = $10,000 Firm B profit = $10,000

Firm A's dominant strategy is to break the agreement, and Firm B's dominant strategy is to break the agreement. Each firm sees the chance to break the agreement and earn $100,000. Each firm will also realize that if it does not break the agreement and the other firm does, it will be in a worse situation. Since both firms want to pursue their dominant strategy, they will both break the agreement, and end up with $10,000 each.

With regard to social welfare, oligopolists forming a cooperative alliance is

bad because prices will then be too high and output will be too low. When oligopolists in an industry form a cooperative alliance, they function like a monopoly. Competition disappears, which is not good for society. This means that prices will be higher and output will be lower when compared to a competitive outcome. One way to improve the social welfare of society is to restore competition and limit monopoly practices through legislation.

Which of the following markets is oligopolistic?

passenger airlines The passenger airline market is a good examples of an oligopoly. Each firm has market power on the routes that it flies because the number of airlines flying any route is very limited. There are also high barriers to entry in this market. To establish a new airline would mean negotiating with airports, buying aircraft, and hiring pilots and flight attendants.

You are assigned a two-student project. Assume that you and your partner are both interested in maximizing your grade, but you are both very busy and get more happiness if you can get a good grade with less work. The Nash equilibrium is that

you both work less hard. You and your partner have the same dominant strategy: to work less hard. Therefore, the Nash equilibrium is for both of you to work less hard.

The following table shows your neighborhood's demand schedule for drinking water. Assume that only two firms (Waterland and Aquataste) produce and sell water in this market. Each firm offers the same quality, no fixed costs are incurred in the production of water, and each firm's marginal cost is constant and equal to $0 because either company can pump as much water as needed without cost. Because marginal cost is constant and equal to $0, total revenue is equal to total profit. Price (per gallon) | Quantity (gallons) | Total Revenue (TR) $0.25 1,000 $250.00 $0.50 900 $450.00 $0.75 800 $600.00 $1.00 700 $700.00 $1.25 600 $750.00 $1.50 500 $750.00 $1.75 400 $700.00 $2.00 300 $600.00 $2.25 200 $450.00 $2.50 100 $250.00 $2.75 0 $0.00 Assume that Waterland and Aquataste make a nonbinding, informal agreement that each will produce 250 gallons of water, charge $1.50 per gallon, and evenly split the profit of $750. If Aquataste sticks to the agreement, Waterland has an incentive to renege on the agreement by cutting its price to $1.25, because Waterland's profits would then increase from $375 to

$750.00. If Aquataste sticks to the agreement, Waterland has an incentive to renege on the agreement by cutting its price to $1.25, because the total available profit remains at $750 ($1.25 × 600 = $1.50 × 500) and Waterland now captures the entire market instead of just half of it, by being the low-price seller. If Aquataste is unaware that Waterland has reneged and continues trying to sell for $1.50, Aquataste will soon have to leave the market owing to nonzero fixed costs and zero revenue.

Wallmart is accused of predatory pricing by Doormart. Wallmart could defend itself against this accusation. Which of the following would NOT be one of its arguments?

Doormart signed an agreement with Wallmart allowing both firms to engage in predatory pricing. If there was proof that both firms signed an agreement to engage in certain illegal behavior, both firms could be prosecuted. Neither the court system nor economists have a simple rule that helps to determine when a firm steps over the line. Predatory pricing can look and feel like spirited competition. Moreover, the concern is not the competitive aspect or lower prices, but the effect on the market when all rivals fail. To prove that predatory pricing has occurred, the courts need evidence that the firm's prices increased significantly after its rivals failed.

Dirk and Lee are two college roommates who would both like to have a clean room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm room's common space. The payoff table for this situation is provided below, where the higher a player's payoff number, the better off that player is. Dirk: Clean | Dirk: Don't Clean Lee: Clean | (120, 120) | (28,200) Lee: Don't Clean | (200, 28) | (40, 40) What is Lee's dominant strategy?

Lee should always choose Don't Clean. Even though Lee likes a clean room, he doesn't like it enough to pitch in with the cleaning. He would be happier letting Dirk do the cleaning by himself, or else living with a mess if Dirk doesn't clean, either. That makes "Don't Clean" Lee's dominant strategy .

Liz and Darcy are texting each other about meeting for coffee someplace. They both like a café on Pemberly Street better than a pub off of Bingley Square, but meeting up at the pub would be preferable to not meeting at all. Which outcome or outcomes represent Nash equilibria?

Meeting at the Pemberly Street café and meeting at the Bingley Square pub are both Nash equilibria. A Nash equilibrium is an outcome where all parties--in this case, both parties--would rather keep that outcome than switch, unilaterally, to a different one. So long as Liz and Darcy are headed for the same place, neither one will want to change plans and head to the other place. So "meet at the café" and "meet at the pub" are both Nash equilibria. On the other hand, if it looks like they are going to miss each other, then each will be looking to change destinations. So, the two outcomes where they miss each other are not Nash equilibria.

Which of the following statements is true?

Output will be higher in an oligopoly market than in a monopoly. Oligopoly falls somewhere between the competitive market and monopoly outcomes. Output is likely to be higher than under monopoly and lower than within a competitive market. The higher output makes oligopoly prices generally LOWER than monopoly prices, but HIGHER than those found in competitive markets.

You are assigned a two-student project. Assume that you and your partner are both interested in maximizing your grade, but you are both very busy and get more happiness if you can get a good grade with less work. If you and your partner are required to work together on a number of projects throughout the semester, what other possible equilibrium might you be able to sustain?

You both work hard. The Nash equilibrium is for both of you to work less hard. If you are required to work together throughout the semester, however, then you might be able to sustain the situation where you both work hard. If you establish a relationship and hold each other accountable for working over the entire semester, then it is easier to be in the situation where each person works hard. This will give you more happiness over the semester than if you both work less hard. The cooperative outcome is like a binding agreement, or a tit-for-tat strategy that gets off on the right foot.