PrQ14: Practice Quiz - Ch. 14: Oligopoly

James is one of two producers of doodads in the city of Hooville. Because the industry consists of two firms, he is operating in:

a duopoly.

(Table: GoGo Gas and Fanny's Fantastic Fuel) Use Table: GoGo Gas and Fanny's Fantastic Fuel. The table shows a payoff matrix for GoGo Gas and Fanny's Fantastic Fuel in a small town. Each firm can set either a high price or a low price, and customers view both gas stations as nearly perfect substitutes. Profits in each cell of the payoff matrix are given as (GoGo's profit, Fanny's profit). The dominant strategy for Fanny is to: Table: GoGo Gas and Fanny's Fantastic Fuel Fanny's Fantastic Fuel High Price Low Price GoGo Gas High Price $100, $100 $25, $150 Low Price $150, $25 $50, $50

always set a low price.

(Table: Oil Production and Demand) Use Table: Oil Production and Demand. Assume that the oil industry is a duopoly and that the marginal cost and fixed cost of producing oil are both zero. Suppose that the two firms are maximizing industry profit and splitting the profit evenly. If both firms engage in noncooperative behavior, the industry output will be _____ barrels, and the price of oil will be _____. Table: Oil Production and DemandQuantityPrice ($/barrel)Total Revenue ($)0$160$0101501,500201402,800401303,900501204,800601105,500701006,00080906,30090806,400100706,300110605,500120504,800130403,900140302,800150201,500160100

100; $60

In which situation does overt collusion occur?

Coke and Pepsi openly agree on production and price in an effort to achieve monopoly profits.

In the classic Prisoners' Dilemma featuring two accomplices in crime, the equilibrium of the game is for both accomplices to confess. In game theory, this is what would be called a:

Nash equilibrium.

(Scenario: Payoff Matrix for Steve's Skateboards and Savannah's Highflyers) The following payoff matrix depicts the profits for the only two firms in this oligopolistic industry. Savannah's Highflyers Low Price High Price Steve's Low Price Steve's profit: $1,600 Savannah's profit: $2,500 Steve's profit: $1,800 Savannah's profit: $2,800 Skateboards High Price Steve's profit: $1,800 Savannah's profit: $2,200 Steve's profit: $2,000 Savannah's profit: $2,400 If Steve and Savannah wish to maximize their joint profits:

Savannah should choose a dominant strategy, and Steve should choose a nondominant strategy.

In industries characterized by a few firms that dominate the market, product differentiation is MOST likely to occur when firms:

have tacit agreements not to engage in price wars.

(Figure: Payoff Matrix for the United States and Canada) Use Figure: Payoff Matrix for the United States and Canada. Suppose that the United States and Canada both produce quinoa, and each country can earn more profit if output is limited and the price of quinoa is high. The dominant strategy for Canada is:

high output.

(Figure: Payoff Matrix for Alex and Sybil) Use Figure: Payoff Matrix for Alex and Sybil. Alex and Sybil are the only producers of frozen yogurt in their town. Every week, each decides how much frozen yogurt to produce for the week. The figure shows the profit per week earned by their two firms. In the game's Nash equilibrium, Alex produces a _____ level of output, and Sybil produces a _____level of output.

high; high

(Figure: Oligopoly Pricing Strategy in Wireless TV Market II) Use Figure: Oligopoly Pricing Strategy in Wireless TV Market II. The dominant strategy for Supreme Wireless:

is to charge a low price.

OPEC is a(n) _____ cartel that includes _____ national governments.

legal; 17

The effect of product differentiation is to:

reduce the intensity of competition among firms in an oligopoly.

(Figure: Nike and Reebok Sales) Use Figure: Nike and Reebok Sales. Reebok and Nike must decide whether to have a sale or not, based on the potential economic profits shown in the table. The dominant strategy for Nike is: Table: Nike and Reebok Sales Reebok Sale No Sale Nike Sale Reebok: $5M Nike: $5M Reebok: $1M Nike: $30M No Sale Reebok: $30M Nike: $1M Reebok: $20M Nike: $20M

sale.

When firms in a particular industry informally agree to charge the same price as the largest firm in that industry, it is called:

tacit collusion.

Tacit collusion is relatively easy for oligopolists if:

there are only a few firms in the industry.

(Table: Demand for Wind Powered Turbines) Use Table: Demand for Wind Powered Turbines. The marginal cost of producing turbines is zero, and only two firms, Rudra and Vayu, produce them. If Rudra and Vayu get into a price war, the equilibrium price in the market will be: Table: Demand for Wind Powered TurbinesPriceQuantity$1,400301,300351,200401,100451,00050900558006070065

$0.

(Scenario: Duopoly for Identical Firms in the Market for Surfboards) Use Scenario: Duopoly for Identical Firms in the Market for Surfboards. When the firms collude and produce the profit-maximizing output, what is the profit earned by each firm if they split production equally? Scenario: Duopoly for Identical Firms in the Market for Surfboards Two identical firms compose the surfboard industry. The market demand curve is Q = 5,000 - 4P, where Q is quantity demanded, and P is price per unit. Marginal cost is constant at $650, and fixed cost is zero.

$180,000

(Table: Demand Schedule of Whatchamacallits) Use Table: Demand Schedule of Whatchamacallits. The market for whatchamacallits consists of two producers, Emma and Joshua. Each firm can produce whatchamacallits with no marginal cost or fixed cost. If industry output is 350 whatchamacallits produced by Emma and 250 whatchamacallits produced by Joshua and if Joshua decides to increase output by an additional 100 whatchamacallits, industry price will be: Table: Demand Schedule for WhatchamacallitsPrice of a WhatchamacallitQuantity of Whatchamacallits Demanded$10091008200730064005500460037002800190001,000

$3.

(Table: Oil Production and Demand) Use Table: Oil Production and Demand. Assume that the oil industry is a duopoly and that the marginal cost of producing oil is zero. Suppose that the two firms are maximizing industry profit and splitting the profit evenly. If firm 1 decides to cheat and increase production by 10 more barrels, the price of oil will be: Table: Oil Production and DemandQuantityPrice ($/barrel)Total Revenue ($)0$160$0101501,500201402,800401303,900501204,800601105,500701006,00080906,30090806,400100706,300110605,500120504,800130403,900140302,800150201,500160100

$70.

Market II. Suppose that, after one month, the cable providers follow a tit-for-tat strategy. Eventually, they will achieve a tacit collusive equilibrium at which:

both firms set a high price, and each earns $100,000.