Ch 18 question reasonings

When the first automobiles were built in​ 1901, they were made by skilled workers using hand tools. ​Later, in​ 1913, Henry Ford introduced the moving assembly​ line, which lowered costs and speeded production. Over the​ years, the production line has become ever more​ mechanized, and today robots replace people in many tasks.

1: minimum of ATC (.5, 250) 2: minimum of ATC (200, 10,000)

When the first automobiles were built in​ 1901, they were manufactured by skilled workers using hand tools.​ Later, in​ 1913, Henry Ford introduced the moving assembly​ line, which lowered costs and speeded production. Over the​ years, the production line has become ever more​ mechanized, and today robots have replaced people in many operations. Describe the changing barriers to entry in the automobile industry and explain how the combination of market demand and economies of scale has changed the structure of the industry over the past 100 years. In the automobile industry 100 years ago​ _______. A. a small efficient scale and a small demand allowed for several firms to produce a small number of automobiles each Your answer is correct. B. a natural monopoly evolved C. minimum average total cost occurred at a greater quantity than in​ today's automobile industry D. a large efficient scale and a small demand allowed for a few firms to produce a large number of automobiles each ​Today's car market is​ _______. A. perfectly competitive with no barriers to entry B. an oligopoly with a natural barrier to entry C. an oligopoly with no barriers to entry D. a monopoly E. perfectly competitive with a natural barrier to entry

A B As costs rose with the introduction of greater​ mechanization, the industry became a natural oligopoly. The barrier to entry is the very high average total cost when only a few cars are produced. If a firm wants to enter the​ market, it must have a large scale of production. Next question

DOJ investigation prompts lawsuits alleging that airlines are fixing airfares It is alleged that Southwest​ Airlines, American​ Airlines, Delta Air​ Lines, and United Airlines have been colluding to limit the increases in their capacity with the intent of increasing airfares. The airlines say the allegations are without merit and that the airline industry is highly competitive with more people flying than ever before. ​Source: The Dallas Morning News​, July​ 8, 2015 Explain how limiting the increase in capacity could lead to higher airfares. Limiting the increase in capacity could lead to higher airfares because​ _______. A. with fewer seats​ available, airlines can practice price fixing B. airlines face a​ downward-sloping demand curve. The fewer seats they​ sell, the higher the price C. airlines face a horizontal demand curve. When capacity​ decreases, the demand curve shifts upward D. the market is perfectly​ competitive, and even in perfect competition a decrease in capacity raises air fares

B Airlines face a​ downward-sloping demand curve. When capacity is​ limited, they sell fewer seats and charge a higher price.

Read Eye on the Wireless Oligopoly in the eText or click on the icon LOADING... to open a copy . Now use the following information to work the exercise. ​AT&T and Verizon have two pricing​ strategies: Set a high​ (monopoly) price or set a low​ (competitive) price. If they both set a competitive​ price, economic profit for both is zero. If both set a monopoly​ price, AT&T makes an economic profit of​ $100 million and Verizon of​ $200 million. If​ AT&T sets a low price and Verizon a high​ price, AT&T makes an economic profit of​ $200 million and Verizon incurs an economic loss of​ $100 million. If​ AT&T sets a high price and Verizon sets a low​ price, AT&T incurs an economic loss of​ $50 million and Verizon makes an economic profit of​ $250 million. Create the payoff matrix for this game by entering the eight economic profit values below. ​AT&T ​(red squares) High price Low price Verizon ​(blue squares) High price 100100m 200200m 200200m negative 100−100m Low price negative 50−50m 00m 250250m 00m ​>>> Enter your answers in millions of dollars and do not include a dollar sign. ​>>> If your answer is an economic​ loss, include a minus sign. If your answer is an economic​ profit, do not include a plus sign. What is the equilibrium of this​ game? A. Verizon sets a high price and​ AT&T sets a low price. B. Both firms set a low price. Your answer is correct. C. ​AT&T sets a high price and Verizon sets a low price. D. Both firms set a high price. Is the equilibrium​ efficient? A. Yes because firms in an oligopoly market are always efficient. B. No because firms in an oligopoly market are never efficient. C. Yes because​ price, which equals marginal​ benefit, equals marginal cost. Your answer is correct. D. No because given the equilibrium both firms will want to develop new products. Is this game a​ prisoner's dilemma? A. ​Yes, because all games are​ prisoners' dilemmas. B. Yes. It would be beneficial for the firms to cooperate but they do not. Your answer is correct. C. ​No, because the two firms are of unequal size. D. ​Yes, because there is a dominant strategy equilibrium.

B The equilibrium is that both firms set a low price. Regardless of the choice that Verizon​ makes, AT&T makes a greater economic profit by choosing the lower price. And regardless of the choice that​ AT&T makes, Verizon makes a greater economic profit by choosing the lower price. C In​ equilibrium, the firms are setting a competitive price. And in the competitive​ market, price equals marginal​ benefit, which equals marginal cost. So the outcome is inefficient. B In a​ prisoners' dilemma, each player knows that the other player will take the action that damages the joint interest. This is a feature of this game between Verizon and​ AT&T. Next question

DOJ investigation prompts lawsuits alleging that airlines are fixing airfares It is alleged that Southwest​ Airlines, American​ Airlines, Delta Air​ Lines, and United Airlines have been colluding to limit the increases in their capacity with the intent of increasing airfares. The airlines say the allegations are without merit and that the airline industry is highly competitive with more people flying than ever before. ​Source: The Dallas Morning News​, July​ 8, 2015 Describe the​ fare-fixing scheme as the equilibrium outcome of an oligopoly cartel game played by the airlines. Explain why the cartel survived. If the​ fare-fixing scheme is an oligopoly cartel​ game, _______. A. the equilibrium for this game is a competitive equilibrium outcome B. each airline is forced to comply with the​ fare-fixing scheme C. each airline knows that if the game is played​ once, it can increase its profit by lowering its price and cheating on the agreement Your answer is correct. D. any airline that cheats on the agreement will eventually be driven out of business The cartel survived because it​ _______. A. contained a relatively large number of airlines B. played the game once C. stayed under the radar of the Justice Department D. played a repeated game

C D It is true that the cartel survived because it was playing a repeated game. If all airlines cheat on the​ agreement, then the profit of each airline decreases. And if one airline cheats on the​ agreement, the other airlines can punish it. So each airline has an incentive to keep the agreement.

Read Eye on the Wireless Oligopoly in the eText or click on the icon to open a copy. Now work the following exercise. Explain the effects of economies of scale and market demand for smartphone plans and illustrate your explanation with a graph. Economies of scale and the market demand for smartphone plans determine ​ _______. A. the maximum number of firms in the market B. whether new firms have an incentive to enter the market C. how many firms can satisfy the market demand and make a profit D. how firms can create a monopoly and share the profit equally

C The number of firms in oligopoly depends on the presence of economies of scale and the market demand. Because of economies of scale and the market demand in​ 2019, four firms could satisfy the market demand for wireless​ plans, and each firm made a profit. minimum at (.5, 250) .5=500,000 phones according to scale

The cola wars between​ Coca-Cola and PepsiCo may become even tougher as consumers seek out healthier alternatives to sugary soft drinks. But both Coke and Pepsi are getting higher prices for​ soda, thanks to new​ 8-ounce cans replacing the standard​ 12-ounce size. ​Source: CBC​ News, February​ 12, 2015 Describe the cola wars that​ Coca-Cola and PepsiCo play as a game. What type of game is​ it? What are some of the strategies in the​ game? The game that​ Coca-Cola and PepsiCo played was​ _______. A. a game with no rules or strategies B. a​ prisoners' dilemma game with no equilibrium C. a marketing game D. an advertising game Some strategies in the game are​ _______. A. raise prices or lower prices B. advertise more or advertise less C. sell soda in​ 8-ounce cans or sell soda in​ 12-ounce cans D. sell soda or sell healthier alternatives

C ​Coca-Cola and PepsiCo are playing a marketing game. They are deciding if they should sell soda in small cans or in large cans. C ​Coca-Cola and PepsiCo have the strategies of selling soda in​ 8-ounce cans and in​ 12-ounce cans.

Distant Shores has two dance studios​, one owned by Cheri and the other owned by Danny. Suppose that Cheri and Danny have two​ strategies: to​ collude, fix the monopoly​ price, and limit the number of dance lessons​, or to break the​ collusion, cut the​ price, and produce more dance lessons. The table gives the payoff matrix of economic profit​ (in dollars) for the game that Cheri and Danny play. What is the Nash equilibrium if the game is played​ once? Do the people of Distant Shores get the efficient quantity of dance lessons​? Cheri​'s strategies ​(red squares) Danny​'s strategies ​(blue squares) Collude ​ Don't collude Collude 3.50 5.60 3.50 −1.75 ​Don't collude −1.75 0 5.60 0 If this game is played just​ once, the Nash equilibrium is that ​ _______. A. both Cheri and Danny collude B. Cheri colludes and Danny breaks the collusion C. Cheri and Danny either collude or break the collusion but we​ don't know for sure D. both Cheri and Danny break the collusion E. Cheri breaks the collusion and Danny colludes The people of Distant Shores ​_______ the efficient quantity of dance lessons from Cheri and Danny because they produce the same quantity as would be produced​ _______. A. ​receive; in perfect competition Your answer is correct. B. do not​ receive; by a monopoly

D A Nash equilibrium is an equilibrium in which each player takes the best possible action given the action of the other player. You are correct that the Nash equilibrium occurs when Cheri breaks the collusion and Danny breaks the collusion. in all the scenarios, it is in each person's interest to break the collusion given the other person's actions. A The Nash equilibrium occurs when Cheri breaks the collusion and Danny breaks the collusion. And when Cheri and Danny break the​ collusion, they produce the same quantity as would be produced in perfect competition. A perfectly competitive market produces the efficient quantity.

The United States claims that Canada subsidizes the production of softwood lumber and that imports of Canadian softwood lumber damage the interests of U.S. producers. The United States has imposed a high tariff on Canadian imports to counter the subsidy. Canada is thinking of retaliating by refusing to export water to California. The table shows a payoff matrix for the game that the United States and Canada are playing. Is this game like a​ prisoners' dilemma or different in some crucial​ way? Which country would benefit more from a free trade​ agreement? This game​ _______ identical to the​ prisoners' dilemma because​ _______. A. is​ not; the game is dealing with​ countries, not individuals B. ​is; neither country knows what the other country is going to do C. ​is; the outcome is a bad outcome for both players D. is​ not; the outcome is not a bad outcome for both players Your answer is correct. ​_______ from a free trade agreement. A. Neither Canada nor the United States would benefit B. Canada would benefit more Your answer is correct. C. Canada and the United States would benefit equally D. The United States would benefit more

D The outcome of this game is that Canada exports and the United States imposes a tariff. The equilibrium differs from the Nash equilibrium in the​ prisoners' dilemma because the equilibrium in the trade game is not a bad outcome for both players. In​ fact, in this trade​ game, the United States has its best possible outcome and receives its highest payoff of 170. In the Nash equilibrium for the​ prisoners' dilemma, neither player achieves his best outcome. B Canada would benefit more from a free trade agreement. The equilibrium is that Canada exports and the United States imposes a tariff. Canada has a payoff of 68 and the United States has a payoff of 170. Under a free trade​ agreement, Canada continues to export but the United States does not impose a tariff. So Canada has a payoff of 136 and the United States has a payoff of 136. Canada​'s payoff increases under free trade. The payoff to the United States decreases under free trade.

Estopia claims that Sudland subsidizes the production of steel and that imports of Sudlandian steel damage the interests of Estopia's producers. Estopia has imposed a tariff on Sudlandian imports to counter the subsidy. Sudland is thinking of retaliating by refusing to export rice to Estopia. The table shows a payoff matrix for the game that Estopia and Sudland are playing. What is the best strategy for Estopia​? What is the best strategy for Sudland​? What is the outcome of this​ game? The best strategy for Estopia is to​ _______ and the best strategy for Sudland is to​ _______. A. stop all trade with Sudland​; stop all trade with Estopia B. impose a tariff only if Sudland ​exports; export only if Estopia does not impose a tariff C. impose a tariff only if Sudland does not​ export; export only if Estopia imposes a tariff D. impose a​ tariff; export Your answer is correct. E. not impose a​ tariff; not export The outcome of this game is that​ _______. A. all trade between the two countries stops B. Sudland exports and Estopia does not impose a tariff C. Sudland does not export and Estopia imposes a tariff D. Sudland exports and Estopia imposes a tariff Your answer is correct. E. Sudland does not export and Estopia does not impose a tariff

D To find the best strategy for Estopia​, first look at the left column and then look at the right column. In the left​ column, Sudland exports. Estopia receives a greater payoff when it imposes a tariff. In the right​ column, Sudland does not export. Estopia receives a greater payoff when it imposes a tariff. To find the best strategy for Sudland​, first look at the top row and then look at the bottom row. In the top​ row, Estopia does not impose a tariff. Sudland receives a greater payoff when it exports. In the bottom​ row, Estopia imposes a tariff. Sudland receives a greater payoff when it exports. So the best strategy is for Estopia to impose a tariff and for Sudland to export. D The equilibrium of the game occurs when Estopia takes the best possible action given the action of Sudland​, and Sudland takes the best possible action given the action of Estopia. The outcome of this game is that Sudland exports and Estopia imposes a tariff.

Sodas is earning ​$25.0 million a year economic profit on a mango-flavored soda on which it has a monopoly. Sweetie Sodas is considering entering the market and producing a mango soda. Tastee warns Sweetie to stay out and threatens to cut the price to the point at which Sweetie will make no profit if it enters. Sweetie determines that the payoff matrix for the game in which it is engaged with Tastee is that shown in the table. Does Sweetie believe Tastee​'s ​assertion? Does Sweetie enter or​ not? Sweetie ​_______ believe Tastee​'s assertion because​ _______. A. does​ not; Tastee will charge a higher price if Sweetie enters the market and a lower price if it​ doesn't B. ​does; Sweetie would do the same thing if roles were reversed C. ​does; it makes good economic sense D. ​does; Tastee will charge a lower price regardless of Sweetie​'s decision E. does​ not; Tastee will charge a higher price regardless of Sweetie​'s decision Sweetie ​_______ the market because it will​ _______. A. ​enters; receive a profit of ​$17.5 million rather than zero B. does not​ enter; incur an economic loss if it enters C. ​enters; break even rather than incur an economic loss by not entering the market D. does not​ enter; break even if it​ enters, and it​ isn't worth the effort E. ​enters; receive a profit of ​$12.5 million rather than zero

E Sweetie does not believe Tastee​'s assertion. Look at the rows in the matrix. If Sweetie ​enters, then Tastee charges a high price instead of a low​ price, because Tastee will earn an economic profit of ​$17.5 million instead of ​$2.5 million. And if Sweetie does not​ enter, Tastee charges a high price instead of a low​ price, because Tastee will earn an economic profit of ​$25.0 million instead of ​$12.5 million. So Tastee will not cut the price to the point at which Sweetie will make no profit if it enters. E Look at the left column in the matrix. Sweetie knows that Tastee will charge a high​ price, so Sweetie will enter the market and make an economic profit of ​$12.5 million rather than zero.

Isolated Island has two dance studios​, one owned by Pat and the other owned by Zack. The graph shows the market demand curve for dance lessons. For both​ firms, minimum average total cost is ​$1 a lesson and occurs at a quantity of 16 dance lessons. If Pat and Zack produce the same quantity of dance lessons as would be produced in perfect​ competition, what are the quantity of dance lessons​, the price of a lesson​, and the economic profit of Pat and Zack​? Would Pat and Zack have an incentive to collude and raise their​ price? Draw the average total cost curve for one of the firms. Label it ATC. Draw the marginal cost curve for one of the firms. Label it MC. Draw a point to show the total quantity of lessons produced and the price in perfect competition. The economic profit made by each firm in this perfectly competitive market is ​$00. Pat and Zack ​_______ an incentive to collude because collusion would result in producing​ _______. A. do not​ have; less and incurring an economic loss at the current price B. ​have; the monopoly​ quantity, charging the monopoly​ price, and making an economic profit

graph in one note 0 Economic profit equals total revenue minus total cost. Total revenue equals price multiplied by​ quantity, and total cost equals quantity multiplied by average total cost. In perfect​ competition, price equals average total cost. And when price equals average total​ cost, economic profit equals in zero. B If Pat and Zack collude they could operate as a monopoly. Their economic profit when they act as a monopoly is greater than their economic profit in a perfectly competitive market.

Isolated Island has two taxi​ companies, one owned by Ann and the other owned by Zack. The graph shows the market demand curve for taxi rides and the average total cost and the marginal cost curves of one of the firms. If Ann and Zack form a cartel and produce the same quantity of rides as would be produced in​ monopoly, what are the quantity of​ rides, the price of a​ ride, and the economic profit of Ann and​ Zack? Would Ann and Zack have an incentive to break the cartel agreement and cut their​ price? Draw the marginal revenue curve. Label it MR. Suppose Ann and Zack form a cartel. The graph shows the​ cartel's marginal cost​ curve, MC2. The cartel maximizes its profit if together Ann and Zack produce 2020 taxi rides and the price of a ride is ​$2020. Ann and Zack each produce 1010 rides and make an economic profit of about ​$3030. Ann and Zack​ _______ an incentive to break the cartel agreement​ _______. A. ​have; to increase economic profit This is the correct answer. B. do not​ have; because they are making maximum economic profit

graph in one note 20, 20 In a​ monopoly, the​ profit-maximizing quantity is the quantity at the intersection of the marginal revenue curve and the marginal cost curve. The price charged is the price on the demand curve at the profit maximizing quantity. The quantity of taxi rides at the intersection of the marginal revenue curve and the marginal cost curve for both​ firms, MC2​, is 20 rides and the price charged is​ $20 a ride. 10, 30 Economic profit is calculated as the price minus the average total cost multiplied by the​ profit-maximizing quantity. Ann and Zack each produce 10 taxi rides and the market price is​ $20 a ride. The average total cost of producing 10 taxi rides is about​ $17 a ride. So economic profit for each of Ann and Zack is 10×​($20−​$17), which is​ $30. A Ann and Zack have an incentive to break the cartel agreement. Each of them is producing a quantity at which price is greater than marginal cost. So if one of them provides another taxi​ ride, the benefit earned from that taxi ride is greater than the cost incurred to provide it. If one of them cheats on the​ agreement, then the cheater earns a larger economic​ profit, and the person who continues to follow the agreement earns a smaller economic profit.