ECON 221- Chapter 14

The sum of the squared market shares of each firm in an industry is the:

Herfindahl-Hirschman index.

(Figure: Payoff Matrix for Ajinomoto and ADM) Look at the figure Payoff Matrix for Ajinomoto and ADM. The optimal combination for maximum combined profit occurs when ADM produces _____ million pounds and Ajinomoto produces _____ million pounds.

30; 30

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. Suppose that these two producers have formed a cartel, agreed to split production of output evenly, and are maximizing total industry profits. If Margaret decides to cheat on the agreement and sell 100 more gadgets, how many gadgets will Margaret sell?

300

(Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms X and Y, if firm X and firm Y wish to maximize joint profits:

Firm Y should choose a dominant strategy and Firm X, a nondominant strategy.

A firm that is in an oligopoly knows that its _____ affect its _____ and that the _____ of its rivals will affect it.

actions; rivals; reactions

(Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms X and Y, if firm X were to choose its dominant strategy, it would:

choose a high price.

Overt collusion exists if:

firms agree openly on price and output and they jointly make other decisions aimed at achieving monopoly profits.

In an oligopoly:

firms recognize their interdependence.

The study of behavior in situations of interdependence is called:

game theory.

Gary's Gas and Frank's Fuel are the only two providers of gasoline in their small town. Gary and Frank decide to form a cartel to raise the price of gasoline. The total industry profits are highest when _____ cheat(s) on the agreement, and Gary's profits are highest when _____.

neither firm; Gary cheats but Frank does not

(Figure: Prisoners' Dilemma for Thelma and Louise) Look at the Figure Prisoners' Dilemma for Thelma and Louise. Thelma and Louise are arrested and jailed for murder. Given the payoff matrix in the figure, the optimal behavior for Thelma and Louise to minimize their joint sentence is for Thelma _____ and for Louise ____.

not to confess; not to confess

(Figure: Prisoners' Dilemma for Thelma and Louise) Look at the Figure Prisoners' Dilemma for Thelma and Louise. Thelma and Louise are arrested and jailed for murder. Given the payoff matrix in the figure, the Nash equilibrium behavior is for Thelma _____ and Louise _____.

to confess; to confess

(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. Suppose that these two producers have formed a cartel, agreed to split production of output evenly, and are maximizing total industry profits. If Margaret decides to cheat on the agreement and sell 100 more gadgets, the market price of gadgets will be:

$5