Review Questions: Games and strategic behavior
A prisoner's dilemma illustrates situations in which:
there is a conflict between the narrow self-interest of individuals and the broader interests of a group.
As a group, oligopolists would always be better of it they would act collectively:
in a manner that would promote collusive agreements, as a single monopolist
Oligopolies can end up looking like competitive markets if the number of firms is
large and they do not cooperate
Individual profit earned by an oligopolist company, depends on:
1. The quantity of output that the oligopolist company produces 2. The quantity of output that the other companies in the market produce 3. The extent of collusion between the oligopolist company and the other companies in the market
An oligopoly would tend to restrict output and drive up price if barriers to entering the industry are negligible
FALSE
An oligopoly would tend to restrict output and drive up price if firms produce a standardized product
FALSE
As the number of firms in an oligopoly increases, it is easier to collude
FALSE
As the number of firms in an oligopoly increases, price and quantity approach the monopoly levels
FALSE
If nations such as Germany, Japan and the U.S. prohibited international trade in automobiles, a likely effect would be automobile produces in the U.S. would collude to produce a large number of cars
FALSE
In a game a dominant strategy is the best strategy for a player to follow only if other players are cooperative
FALSE
In a game, a dominant strategy is a strategy that makes everyone better off
FALSE
In a game, a dominant strategy is a strategy that must appear in every game
FALSE
In an oligopoly, self-interest drives the market to the competitive outcome in equilibrium
FALSE
Prisoners' dilemma: Cooperation between the prisoners is individually rational
FALSE
Prisoners' dilemma: Rational self-interest leads neither party to confess
FALSE
Prisoners' dilemma: provides insight into why cooperation is individually rational
FALSE
The more firms an oligopoly has, the more market power the oligopoly has. This results in higher prices and lower quantities of output than an oligopoly with fewer firms would have
FALSE
The prisoner's dilemma game is a game in which exactly one of the two players has a dominant strategy
FALSE
When duopoly firms reach a Nash equilibrium, their combined level of output is the monopoly level of output
FALSE
If a certain market were a monopoly, then the monopolist would maximize its profit by producing 1,000 units of output. If, instead, that market were a duopoly, then which of the following outcomes would be most likely if the duopolists successfully collude?
One duopolist produces 400 units of output and the other produces 600 units of output
An oligopoly would tend to restrict output and drive up price if firms collude and behave like a monopoly
TRUE
As the number of firms in an oligopoly decreases, individual firms' profits increase
TRUE
As the number of firms in an oligopoly increases, the price approaches marginal cost, and the quantity approaches the socially efficient level
TRUE
Collusive agreements are hard to sustain.
TRUE
During the 1990s, the members of OPEC operated independently from one another, causing the world market for crude oil to become close to a competitive market
TRUE
Prisoners' dilemma is a game in which both players have a dominant strategy
TRUE
Prisoners' dilemma: Cooperation between the prisoners is difficult to maintain
TRUE
Prisoners' dilemma: cooperation is easier to sustain with tit-for-tat strategy
TRUE
Prisoners' dilemma: provides insight into why cooperation is difficult
TRUE
The more firms an oligopoly has, the more likely the firms will charge a price closer to the perfectly competitive price
TRUE
When oligopoly firms collude, they are behaving as a cartel.
TRUE
When prisoner's dilemma games are repeated over and over, sometimes the threat of penalty causes both parties to cooperate
TRUE
What happens when the prisoners' dilemma game is repeated numerous times in an oligopoly market?
The firms may well reach the monopoly outcome Buyers of the oligopolists' product will likely to be worse off as a result
Other things the same, in which case is the total quantity produced the largest?
There are very large number of firms
A situation in which firms choose their best strategy given the strategies chosen by the other firms in the market is called
a Nash equilibrium
The likely outcome of the standard prisoners' dilemma game is that
both prisoners confess
The prisoners' dilemma provides insights into the
difficulty of maintaining cooperation
In the prisoners' dilemma game, self-interest leads
each prisoner to confess, to a breakdown of any agreement that the prisoners might have made before being questioned, to an outcome that is not particularly good for either prisoner
If a market is a duopoly and additional firms enter and do not cooperate, then
price falls and quantity rises
Like monopolists, oligopolists are aware that an increase in the quantity of output always
reduces the price of their product
Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists together,
they are unable to maintain the same degree of monopoly power enjoyed by a monopolist
The paradoxical nature of oligopoly can be demonstrated by the fact that, even though the monopoly outcome is the best for the oligopolists,
they have incentives to increase production above the monopoly outcome