Economics Quiz #9
Ann and Lynn have been arrested by the police, who have evidence that will convict them of robbing a bank. If convicted, each will receive a sentence of 6 years for the robbery. During questioning, the police suspect that Ann and Lynn are responsible for a series of bank robberies. If both confess to the series, each will receive 12 years in jail. If only one confesses, she will receive 4 years and the one who does not confess will receive 14 years. What is the equilibrium for this game?
both confess
Consider the prisoner's dilemma model where two criminals have two options (confess or deny), and each criminal must make their decision without speaking to the other criminal first. If they both confess they each get 3 years, if only one confesses then he gets 1 and his partner gets 10, and if neither confesses then they each get 0. They are in fact both guilty. In this game, the Nash equilibrium is where
both confess
The outcome of a prisoners' dilemma game with a Nash equilibrium is that ________.
both players confess
The prisoners' dilemma has an equilibrium in which
both players confess.
In a prisoners' dilemma game, in the Nash equilibrium
both players have another outcome that does not occur but is more favorable.
Player A Table The table above shows the payoff matrix for a prisoners' dilemma game. The Nash equilibrium is that
both prisoners confessed
Player A Table The table above shows the payoff matrix for a prisoners' dilemma. In the Nash equilibrium,
both prisoners get 3 years in jail.
Two duopoly firms that sell an identical good form a cartel. They decide to collude and fix the price of their good. In this prisoners' dilemma type situation, the likely outcome is
both will cheat.
Bob table The table above displays the possible outcomes for Bob and Joe, who have been arrested for armed robbery and car theft. Which of the following is true?
If Bob confesses, Joe should confess.
In a contestable market
potential entry holds down prices.
America Table There are two can companies, American and National, which have entered into a collusive agreement. The payoff matrix of economic profits is above. If both firms cheat on the collusive agreement, what amount of economic profit is earned by American?
$0
One difference between oligopoly and monopolistic competition is that
. fewer firms compete in oligopoly than in monopolistic competition.
In the figure, D is the demand curve for taxi rides in a town, and ATC is the average total cost curve of a taxi company. In the scenario, the market is:
A natural duopoly
In a sequential contestable market game:
A small number of firms can behave like firms in perfect competition.
Which of the following is a distinguishing characteristic of oligopoly?
A small number of firms compete.
The ABC Nail Company has entered into a collusive agreement with the other firm in the industry, the DC Nail Company. What occurs in the nail industry if ABC decides to cheat on the agreement?
All of the above answers are correct.
Firm 1 Table Two software firms have developed an identical new software application. They are debating whether to give the new application away free and then sell addminus−ons or sell the application at $30 a copy. The payoff matrix is above and the payoffs are profits in millions of dollars. What is the Nash equilibrium of the game?
Both Firm 1 and 2 will give the software application away free.
In a prisoners' dilemma game, which of the following strategies gives the best outcome for both prisoners?
Both deny (collusion).
Suppose two firms, FastNet and SmartCast are the only fast Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other's. The industry is a natural duopoly. Suppose that FastNet and SmartCast collude and agree to share the market equally. In the scenario above, which of the following actions will maximize the industry's economic profit?
Both firms comply with the agreement.`
Dr Smith Table Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given in the payoff matrix above. Which of the following statements correctly describes Dr. Jones' strategy given what Dr. Smith may do?
Dr. Jones should advertise no matter what Dr. Smith does.
Dr. Smith Table Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given in the payoff matrix above. Which of the following statements correctly describes Dr. Smith's strategy given what Dr. Jones may do?
Dr. Smith should advertise no matter what Dr. Jones does.
Which of the following is a distinguishing characteristic of oligopoly?
Each firm's actions influence the profits of all the other firms.
Firm 1 Table Two software firms have developed an identical new software application. They are debating whether to give the new application away free and then sell add−ons or sell the application at $30 a copy. The payoff matrix is above and the payoffs are profits in millions of dollars. What is Firm 1's best strategy?
Give away the application regardless of what Firm 2 does.
M&M Table M&M and Dove are both considering issuing themed holiday candy. The profits for each strategy, Regular Candy or Holiday Candy, are summarized in the payoff matrix above. The Nash Equilibrium in this game is that Dove produces ________ and M&M produces ________.
Holiday Candy; Holiday Candy
When a cartel maximizes its profit,
Industry marginal revenue equals industry marginal cost at the level of total output.
The prisoners' dilemma has an equilibrium that is
Nash equilibrium and both players confess.
Which of the following is characteristic of oligopoly, but NOT of monopolistic competition?
The choices made by one firm have a significant effect on other firms.
Dr. Smith Table Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given in the payoff matrix above. Which of the following statements correctly categorizes the Nash equilibrium for the game?
The game has a Nash equilibrium in which both optometrists advertise.
In the prisoners' dilemma game, when each player takes the best possible action given the action of the other player, ________.
a Nash equilibrium is reached
________ is a group of firms that have made a collusive agreement.
a cartek
A group of firms that has entered into a collusive agreement to restrict output and increase prices and profits is called
a cartel
When producers agree to restrict output, raise the price, and increase profits, the agreement is called ________.
a collusive agreement
In what type of market is a cartel possible?
a market in which there are only a few firms
In a small town the level of demand is capable of supporting only two gas stations. This market is
a natural duopoly
Suppose that all pizza companies have the same costs and the minimum average total cost is $12 per pizza. The pizza companies have an efficient scale of 100 pizzas per night. In the small town of Coatsville, at the price of $12 per pizza the quantity demanded is approximately 300 pizzas per night. This market, therefore, can best be characterized as
a natural oligopoly.
Which of the following games provides the best way to model price wars?
a repeated duopoly game
A trigger strategy can be used in
a repeated game but not a single−play game.
A cartel is a group of firms that
agree to restrict output to boost their profit.
If firms in a duopoly can successfully collude,
all of the above answers are true
If a duopolists' collusive priceminus−fixing game can be played repeatedly,
all of the above are correct
In ________ market structure, a firm's output depends ________.
an oligopoly; in part on its competitors' price and quantity decisions
If firms in an industry make output decisions that are partially based on the price and output decisions of their competitors, then these firms are in ________ market have ________ with the other firms in the market.
an oligopoly; interdependence
A contestable market is similar to a perfectly competitive market in that there
are no barriers to entry.
A single firm in a contestable market is limited in the amount of economic profit it can earn because there
are no barriers to entry.
The key feature of an oligopoly is that there
are only a few sellers
The distinguishing features of oligopoly are ________ and a ________ in the industry.
barriers to entry; few firms
For a Nash equilibrium to be possible, all players must ________.
be able to predict their outcomes associated with all possible actions of the other players
If there is a collusive agreement in a duopoly to maximize profit, then the price will
be the same as the price set by a monopoly.
Disney Table Disney and Fox must decide when to release their next films. The revenues received by each studio depends in part on when the other studio releases its film. Each studio can release its film at Thanksgiving or at Christmas. The revenues received by each studio, in millions of dollars, are depicted in the payoff matrix above. Which of the following statements correctly describes Fox's strategy given what Disney's release choice may be?
both a and b are correct
A monopolistically competitive firm is like an oligopolistic firm insofar as
both have MR curves that lie beneath their demand curves.
In the prisoners' dilemma game, each player
can choose from two strategies.
Of the following, the best example of oligopoly is
cellular telephone service.
Firm A Table Firms A and B can conduct research and development (R&D) or not conduct it. R&D is costly but can increase the quality of the product and increase sales. The payoff matrix is the economic profits of the two firms and is given above, where the numbers are millions of dollars. A's best strategy is to
conduct R&D regardless of what B does.
A trigger strategy is one in which a player
cooperates in the current period if the other player has always cooperated, but cheats forever if the other player ever cheats.
In a repeated game, punishments that result in heavy damages are an incentive for players to adopt the strategies that result in a ________ equilibrium.
cooperative
Limit pricing is a strategy used by a firm to
deter entry.
Adkins Air is the only seller offering service directly from Milwaukee to Greensboro. The market is contestable. Thus the Nash Equilibrium for a game between Adkins Air and a potential entrant is when the potential entrant
does not enter and Adkins earns a normal profit.
Two firms, Alpha and Beta, produce identical computer hard drives. They have identical costs, and the hard drives they produce are identical. The industry is a natural duopoly. Alpha and Beta enter into a collusive agreement, according to which they split the market equally. If both firms cheat on the agreement so the market is the same as a competitive market,
each firm will make zero economic profit.
If two duopolists can collude successfully, then both will
earn greater profits than if they did not collude.
In a collusive agreement between two duopolists in an oligopoly, each firm has an incentive to cheat on the agreement because the firm's price
exceeds its marginal cost.
If both firms in a duopoly cheat on a collusive agreement, the price ________ and both firms are ________.
falls; worse off
In a contestable market the Herfindahl−Hirschman Index is ________ and the market behaves as if it is ________.
high; perfectly competitive
Cartels are typically subject to cheating by their members because
if the other firms stick to the agreement, a firm can increase its profits by cutting its price.
A natural oligopoly can form
if there are economies of scale
One of the reasons that concentration ratios are not a perfect measure of competitiveness is that they
ignore potential competition.
In the United States, a collusive agreement to restrict output and increases prices is
illegal
When two firms collude to maximize profit the total quantity produced by both firms taken together is determined at the quantity where ________.
industry marginal cost equals industry marginal revenue
Two duopoly firms form a cartel. They decide to collude and fix the price of their good. Each individual firm will earn the highest profit if
it cheats and the other sticks with the agreement
Oligopoly is
like a monopoly because there are barriers to entry.
The practice of the only seller in a market charging a price less than the monopoly price in order to scare away potential entrants is called
limit pricing.
In an oligopoly price−fixing game, each player tries to
maximize its own profit.
Price wars are ________ likely to occur when the industry is ________
more; an oligopoly.
In a prisoner's dilemma, the Nash equilibrium occurs where
neither person ends up with their best outcome
Jane Table The payoff matrix of economic profits above displays the possible outcomes for Bob and Jane who are involved in game of whether or not to advertise. After each player chooses his or her best strategy and sees the result,
neither player would be willing to change his or her decision unless the other player also changes his or her decision.
Price wars can be the result of
new firms entering an industry and all firms then finding themselves in a prisoners' dilemma.
Game theory is most useful for analyzing
oligopoly
A duopoly is a form of
oligopoly.
In the market for batteries, the three largest firms earn 90% of the total revenue and there are 35 firms in the industry. This industry is best described as
oligopoly.
An oligopoly is a market structure in which there are
only a few sellers selling either an identical or differentiated product.
A contestable market is one in which
only one firm operates, but faces competition from potential entrants.
Antitrust laws attempt to
prevent monopolies or collusion.
In the oligopoly price−fixing game, the payoffs are the
profits of the firms.
Antitrust law is law that
prohibits certain kinds of market behavior by firms.
A tit−for−tat strategy can be used in
repeated game but not a single−play game.
A cooperative equilibrium is most likely to arise in a
repeated game with a small number of players.
A cartel usually has a collusive agreement to
restrict output
Of the following, the best example of firm that might operate in a contestable market is a.
ship owner operating on a major waterway
Player A Table The problem for the prisoners in the prisoners' dilemma game in the above table is that
the Nash equilibrium is not the best outcome.
With barriers to the entry of new firms
the cartel will likely earn an economic profit greater than zero
An equilibrium in game theory in which the players make and share the monopoly profit is called
the cooperative equilibrium.
Natural oligopoly is a situation where
the level of demand can support only a few firms.
Gap Table Ann Taylor and Gap are two clothing companies that must decide on the leading color palette for next season. Their sales depend on the choice of color they make as well as the choice their competitor makes. Their sales are summarized in the payoff matrix above. Using the payoff matrix,
the only Nash Equilibrium is for both companies to choose pink.
In a prisoner's dilemma game, each person will pick
their best outcome given what the other person will do
Sarah's Soothing Diapers, Inc. and Orville's Odorless Diapers, Inc. are duopolists, who have agreed to collude. Orville has decided that he will comply with the collusive agreement as long as Sarah cooperated in the previous period. But if Sarah cheated in the previous period, Orville will punish Sarah by cheating in the current period. Orville's strategy is referred to as a
tit-for−tat strategy.
The prisoners' dilemma describes a single−play game that features
two players who are unable to communicate with each other.
The Herfindahl−Hirschman Index will indicate that a contestable market is ________.
uncompetitive
Game theory is applicable to oligopoly behavior because oligopolists
use strategic behavior.
Student 1 Table Two students are assigned a group project. Each has the option to work or not work to achieve a high grade. The payoffs are shown in the above table. Student 1 should
work regardless of the decision made by student 2.
Antitrust law is the law that regulates ________ and prevents them from becoming ________.
oligopolies; monopolies
Game theory is distinctive in that its elements are
rules, strategies, payoffs, and outcomes.
