Economics Final Review - Chapter 16

If a prisoners' dilemma game is repeated, the participants are more likely to independently maximize their profits and reach a Nash equilibrium.

False

When firms cooperate with one another, it is generally good for society as a whole.

False

When firms cooperate with one another, it is generally good for the cooperating firms.

False

Cooperation is easily maintained in an oligopoly because cooperation maximizes each individual firm's profits.

False

An oligopoly is a market structure in which many firms sell products that are similar but not identical.

False

As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more like a. monopoly. b. a competitive market. c. monopolistic competition. d. a collusion solution.

b - a competitive market.

The table shows the demand schedule for tickets to watch amateur football matches in a medium sized town. The local council provides the stadium, and the players play for free so the marginal cost of providing games is zero. The council has authorized two companies to provide football matches in two stadiums and the public considers the games in each stadium to be equivalent. Price Quantity €6 0 5 1000 4 2000 3 3000 2 4000 1 5000 0 6000 Refer to Figure 16-1. Under competition, the price and quantity in this market would be a. €1; 5000. b. €2; 4000. c. €4; 2000. d. €0; 6000. e. €3; 3000.

d - €0; 6000.

Antitrust laws require manufacturers to engage in resale price maintenance or fair trade.

False

The dominant strategy for an oligopolist is to cooperate with the group and maintain low production regardless of what the other oligopolists do.

False

The greater the number of firms in the oligopoly, the more the outcome of the market looks like that generated by a monopoly.

False

Predatory pricing occurs when a firm cuts prices with the intention of driving competitors out of the market so that the firm can become a monopolist and later raise prices

True

The market for crude oil is an example of an oligopolistic market.

True

The price and quantity generated by a Nash equilibrium is closer to the competitive solution than the price and quantity generated by a cartel.

True

The prisoners' dilemma demonstrates why it is difficult to maintain cooperation even when cooperation is mutually beneficial.

True

The unique feature of an oligopoly market is that the actions of one seller have a significant impact on the profits of all of the other sellers in the market.

True

There is a constant tension in an oligopoly between cooperation and self-interest because after an agreement to reduce production is reached, it is profitable for each individual firm to cheat and produce more.

True

When oligopolists collude and form a cartel, the outcome in the market is similar to that generated by a perfectly competitive market.

True

A situation in which oligopolists interacting with one another each choose their best strategy given the strategies that all the other oligopolists have chosen is known as a a. Nash equilibrium. b. dominant strategy. c. cartel. d. collusion solution.

a - Nash equilibrium.

Collusion is difficult for an oligopoly to maintain a. all of these answers. b. if additional firms enter of the oligopoly. c. because antitrust laws (also known as competition laws) make collusion illegal. d. because, in the case of oligopoly, self-interest is in conflict with cooperation.

a - all of these answers.

Many economists argue that resale price maintenance a. has a legitimate purpose of stopping discount retailers from free riding on the services provided by full service retailers. b. is price fixing and, therefore, is prohibited by law. c. is price fixing and, therefore, is prohibited by law and enhances the market power of the producer. d. enhances the market power of the producer.

a - has a legitimate purpose of stopping discount retailers from free riding on the services provided by full service retailers.

A market structure in which many firms sell products that are similar but not identical is known as a. monopolistic competition. b. monopoly. c. perfect competition. d. oligopoly.

a - monopolistic competition.

When an oligopolist individually chooses its level of production to maximize its profits, it produces an output that is a. more than the level produced by a monopoly and less than the level produced by a competitive market. b. less than the level produced by a monopoly and more than the level produced by a competitive market. c. less than the level produce by either monopoly or a competitive market. d. more than the level produced by either monopoly or a competitive market.

a - more than the level produced by a monopoly and less than the level produced by a competitive market.

Suppose an oligopolist individually maximizes its profits. When calculating profits, if the output effect exceeds the price effect on the marginal unit of production, then the oligopolist a. should produce more units. b. has maximized profits. c. is in a Nash equilibrium. d. should produce fewer units. e. should exit the industry.

a - should produce more units.

The table shows the demand schedule for tickets to watch amateur football matches in a medium sized town. The local council provides the stadium, and the players play for free so the marginal cost of providing games is zero. The council has authorized two companies to provide football matches in two stadiums and the public considers the games in each stadium to be equivalent. Price Quantity €6 0 5 1000 4 2000 3 3000 2 4000 1 5000 0 6000 Refer to Figure 16-1. If the duopolists in this baseball market collude and successfully form a cartel, how much profit will each earn? a. €4,500 b. €4,000 c. €1,500 d. €9,000 e. €3,000

a - €4,500

Suppose that ABC Publishing sells an economics textbook and accompanying study guide. Roberto is willing to pay €75 for the text and €15 for the study guide. Marie is willing to spend €60 for the text and €25 for the study guide. Suppose both the book and study guide have a zero marginal cost of production. If ABC Publishing charges separate prices for both products, its best strategy is to charge prices that, when combined, total a. €85. b. €75. c. €80. d. €60. e. €90.

b- €75.

The market for hand tools (such as hammers and screwdrivers) is dominated by Draper, Stanley, and Craftsman. This market is best described as a. monopolistically competitive. b. a monopoly. c. an oligopoly. d. competitive.

c - an oligopoly.

If oligopolists engage in collusion and successfully form a cartel, the market outcome is a. the same as if it were served by competitive firms. b. efficient because cooperation improves efficiency. c. the same as if it were served by a monopoly. d. known as a Nash equilibrium.

c - the same as if it were served by a monopoly.

The table shows the demand schedule for tickets to watch amateur football matches in a medium sized town. The local council provides the stadium, and the players play for free so the marginal cost of providing games is zero. The council has authorized two companies to provide football matches in two stadiums and the public considers the games in each stadium to be equivalent. Price Quantity €6 0 5 1000 4 2000 3 3000 2 4000 1 5000 0 6000 Refer to Figure 16-1. If the duopolists in this football market collude and successfully form a cartel, what is the price that each should charge in order to maximize profits? a. €5 b. €4 c. €3 d. €1 e. €2

c - €3

Suppose that ABC Publishing sells an economics textbook and accompanying study guide. Roberto is willing to pay €75 for the text and €15 for the study guide. Marie is willing to spend €60 for the text and €25 for the study guide. Suppose both the book and study guide have a zero marginal cost of production. If ABC Publishing engages in tying the two products, its best strategy is to charge a combined price of a. €60. b. €90. c. €85. d. €75. e. €80

c - €85

When an oligopolist individually chooses its level of production to maximize its profits, it charges a price that is a. more than the price charged by either monopoly or a competitive market. b. less than the price charged by either monopoly or a competitive market. c. more than the price charged by a monopoly and less than the price charged by a competitive market. d. less than the price charged by a monopoly and more than the price charged by a competitive market.

d - less than the price charged by a monopoly and more than the price charged by a competitive market.

As the number of sellers in an oligopoly increases, a. output in the market tends to fall because each firm must cut back on production. b. the price in the market moves further from marginal cost. c. collusion is more likely to occur because a larger number of firms can place pressure on any firm that defects. d. the price in the market moves closer to marginal cost.

d - the price in the market moves closer to marginal cost.

The table shows the demand schedule for tickets to watch amateur football matches in a medium sized town. The local council provides the stadium, and the players play for free so the marginal cost of providing games is zero. The council has authorized two companies to provide football matches in two stadiums and the public considers the games in each stadium to be equivalent. Price Quantity €6 0 5 1000 4 2000 3 3000 2 4000 1 5000 0 6000 Refer to Figure 16-1. If the duopolists are unable to collude, how much profit will each earn when the market reaches a Nash equilibrium? a. €8,000 b. €9,000 c. €2,500 d. €4,000 e. €4,500

d - €4,000

Laws that make it illegal for firms to conspire to raise prices or reduce production are known as a. antimonopoly laws. b. all of these answers. c. anti-collusion laws. d. pro-competition laws. e. antitrust laws.

e - antitrust laws.