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Refer to the diagram, where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. With independent pricing, the outcome of this duopoly game will gravitate to cell Multiple Choice A. B. C. D.

D.

Price leadership represents a situation where oligopolistic firms: A.reduce their reliance on nonprice competition. B.conspire to form a cartel. C.face a kinked demand curve. D.tacitly collude.

D. tacitly collude.

If an oligopolist's demand curve has a "kink" in it, then: A.the oligopolist's marginal cost curve has a break in it. B.the oligopolist need not fear entry into the industry by new firms. C.the oligopolist's competitors will not react to its price changes, either up or down. D.over some interval, a change in the oligopolist's marginal cost will not cause a change in the oligopolist's profit-maximizing price.

D.over some interval, a change in the oligopolist's marginal cost will not cause a change in the oligopolist's profit-maximizing price.

Which of the following is the best example of oligopoly? Multiple Choice women's dress manufacturing automobile manufacturing restaurants cotton farming

automobile manufacturing

If an oligopoly is faced with a kinked-demand curve that is relatively elastic above, and relatively inelastic below, the going price, then it will Multiple Choice increase total revenue by increasing price but lower total revenue by decreasing price. decrease total revenue by either increasing or decreasing price. increase total revenue by either increasing or decreasing price. increase total revenue by decreasing price but lower total revenue by increasing price.

decrease total revenue by either increasing or decreasing price.

The automobile, household appliance, and automobile tire industries are all illustrations of Multiple Choice homogeneous oligopoly. monopolistic competition. pure monopoly. differentiated oligopoly.

differentiated oligopoly.

If an oligopolist is faced with a marginal revenue curve that has a gap in it, we may assume that Multiple Choice it is colluding with its rivals to maximize joint profits. its demand curve is kinked. it is selling a standardized product. it is selling a differentiated product.

its demand curve is kinked.

Firm Market Share(%) A 40 B 30 C 20 D 5 E 5 Refer to the data. Suppose that enforcement of antitrust laws resulted in any firm in this industry with market share above 20 percent to be split into two firms, with each having equal market share. That would cause this industry to Multiple Choice remain monopolistically competitive. change from monopolistic competition to oligopoly. change from oligopoly to monopolistic competition. remain an oligopoly.

remain an oligopoly.

Product and locational differentiation are features found in analyzing most _____ markets. A. perfectly competitive B. monopolistically competitive C. oligopolistic D. monopolistic

B. monopolistically competitive

Ch 14 Homework

Ch 14 Homework

Before the innovation, the firm's maximum net profit per day is A.$30. B.$0. C.$750. D.$3,000. E.$4,500.

B. $0.

The oligopolist's kinked-demand curve is highly elastic below and highly inelastic above the going product price.

False

Two important characteristics of oligopolists are that they have significant control over price and that there is mutual interdependence among them.

True

Suppose that a particular industry has a four-firm concentration ratio of 85 and a Herfindahl index of 3,000. Most likely, this industry would achieve Multiple Choice both productive efficiency and allocative efficiency. allocative efficiency but not productive efficiency. neither productive efficiency nor allocative efficiency. productive efficiency but not allocative efficiency.

neither productive efficiency nor allocative efficiency.

Identify the definition for each term from the following list. 1. Payoff-matrix format. 2. Game-tree format. 3. A junction on a game tree. 4. One of the final outcomes of a game tree. 5. Divides the overall game tree into nested subgames before working backward from right to left. 6. A mini-game within the overall game. 7. The process of backward induction that relies on both firms having perfect information about the decisions made in each subgame. 8. A statement of coercion that is not believable by the threatened firm. 9. A statement of coercion (a threat!) that is believable by the other firm. 10. Allows a firm to preempt major rivals, or greatly slow their entry into an industry. 11. Both rivals see their current strategy as optimal given the other firm's strategic choice. ​Instructions: Enter a numeric response corresponding to a definition listed above using an​ integer. a. Backward induction: 5. b. Terminal nodes: 4. c. Nash equilibrium: 11.

a. 5 b. 4 c. 11 Explanation 1. Payoff-matrix format: Strategic form 2. Game-tree format: Extensive form 3. A junction on a game tree: Decision nodes 4. One of the final outcomes of a game tree: Terminal nodes 5. Divides the overall game tree into nested subgames before working backward from right to left: Backward induction 6. A mini-game within the overall game: Subgame ​ 7. The process of backward induction that relies on both firms having perfect information about the decisions that will be made in each subgame: Subgame perfect Nash equilibrium 8. A statement of coercion that is not believable by the threatened firm: Empty threat 9. A statement of coercion that is believable by the other firm: Credible threat 10. Allows a firm to preempt major rivals, or greatly slow their entry into an industry: First-mover advantage 11. Both rivals see their current strategy as optimal given the other firm's strategic choice: Nash equilibrium

The principle underlying the kinked demand curve model of oligopoly is that the demand curve facing one firm is more elastic when other firms in the industry: A.match the firm's price changes. B.hold price constant when the firm changes its prices. C.hold quantities constant when the firm changes its prices. D.change prices in the opposite direction when the firm changes its prices.

B. hold price constant when the firm changes its prices.

When the excess capacity problem under monopolistic competition becomes greater, there will be: A.a narrower range of consumer choice. B.fewer advertisements and promotions. C.a wider range of consumer choice. D.more entry by firms into the market.

C. a wider range of consumer choice.

In the long run, the monopolistically competitive firm's demand curve pivots ______ with the entrance of rivals into the firm's market, until it becomes tangent to its ________ curve. A.upward, long-run marginal cost B.upward, long-run average cost C.downward, long-run average cost D.downward, long-run marginal E.downward, marginal revenue cost

C. downward, long-run average cost

The economic inefficiency of monopolistic competition means that: A.industries tend to evolve into oligopolies rather than become more competitive. B.industries spend money on advertising and sales promotion. C.producers produce at an output short of, and charge a price greater than, minimum average total cost. D.firms do not maximize profits at the MC equals MR output.

C. producers produce at an output short of, and charge a price greater than, minimum average total cost.

Firms in an industry will not earn long-run economic profits if: A.fixed costs are zero. B.the number of firms in the industry is fixed. C.there is free entry and exit of firms in the industry. D.production costs for a given level of output are minimized.

C. there is free entry and exit of firms in the industry.

Identify the definition for each term listed below from the following list. 1. The study of how people make decisions where attaining goals depends on interactions with others. 2. A table that shows the payoffs each firm earns from every combination of firm strategies. 3. An agreement among firms to charge the same price or otherwise not to compete. 4. A strategy that is the best for a​ firm, no matter what strategies other firms use. 5. A situation in which each firm chooses the best​ strategy, given the strategies chosen by other firms. 6. A game outcome in which players seek to increase their mutual payoff. 7. A situation where one firm announces a price​ change, which is matched by other firms in the industry. 8. A game in which the firms choose their strategies at the same time. 9. One firm's gain must equal the other firm's loss. 10. A game in which the sum of the two firms' outcomes is positive. 11. The firms select their optimal strategies in a single time period without regard to possible interactions in subsequent time periods. 12. A game that recurs more than once. ​Instructions: Enter a numeric response corresponding to a definition listed above using an​ integer. a. Zero-sum game: 9. b. Price leadership: 7. c. A repeated game: 12. d. Cooperative equilibrium: 6. e. Collusion: 3.

a. 9 b. 7 c. 12 d. 6 e. 3 Explanation 1. The study of how people make decisions where attaining goals depends on interactions with others: Game theory 2. A table that shows the payoffs each firm earns from every combination of firm strategies: Payoff matrix. 3. An agreement among firms to charge the same price or otherwise not to compete: Collusion 4. A strategy that is the best for a​ firm, no matter what strategies other firms use: Dominant strategy 5. A situation in which each firm chooses the best​ strategy, given the strategies chosen by other firms: Nash​ equilibrium 6. A game outcome in which players seek to increase their mutual payoff: Cooperative​ equilibrium 7. A situation where one firm announces a price​ change, which is matched by other firms in the industry: Price​ leadership 8. A game in which the firms choose their strategies at the same time: Simultaneous game 9. One firm's gain must equal the other firm's loss: Zero-sum game 10. A game in which the sum of the two firms' outcomes is positive: Positive-sum game 11. The firms select their optimal strategies in a single time period without regard to possible interactions in subsequent time periods: One-time game 12. A game that recurs more than once: A repeated game

Refer to the profit payof matrix and answer the following questions. All profit figures are in thousands. a. Using the payoff matrix, X and Y are interdependent, because their profits depend not just on their own price but also on the other firm's price. independent, because their profits depend on an agreed-upon price. interdependent, because their profits depend on an agreed-upon price. independent, because their profits depend on their own price. b. Using the payoff matrix, and assuming no collusion between X and Y, what is the likely pricing outcome? Firm X will charge $35, and firm Y will charge $40. Both firms will set price at $35. Both firms will set price at $40. Firm X will charge $40, and firm Y will charge $35. c. Refer to the matrix above. Price collusion is mutually profitable because each firm would achieve lower costs. higher productivity. increased sales. higher profits. d. There might be a temptation to cheat on the collusive agreement because each firm could achieve higher productivity. higher profits. lower costs. increased sales.

a.interdependent, because their profits depend not just on their own price but also on the other firm's price. b. Both firms will set price at $35. c. higher profits. d. higher profits. Explanation a. X and Y are interdependent, because their profits depend not just on their own price but also on the other firm's price. Note that Y's profits are in the lower corner and X's profits are in the upper corner. b. Both firms will set price at $35. If either charged $40, it would be concerned the other would undercut the price and its profit by charging $35. For example, if firm X chooses a price of $40 and firm Y chooses a price of $40, then firm X's profits are $57,000 and firm Y's profits are $60,000. However, if firm Y chooses to charge $35, it can increase its profit to $69,000. In effect, firm Y has an incentive to deviate from the price of $40. The same logic applies to firm X. If firm X deviates from the price of $40, it can increase profits to $59,000. The catch is that both firms recognize this incentive structure and realize that if they continue to charge $40 and the other firm deviates from this price, their profits will fall. (If firm X continues to charge $40 and firm Y charges $35, rather than $40, to capture higher profits, then firm X's profits will fall to $50,000. If firm X also charged $35, its profits would be $55,000, which is better than $50,000). Thus, both firms charge a price of $35; X's profit is $55,000, Y's, $58,000. c. and d. Through price collusion—agreeing to charge $40—each firm would achieve higher profits (X = $57,000; Y = $60,000). But once both firms agree on $40, each sees it can increase its profit even more by secretly charging $35 while its rival charges $40.

Advertising can enhance economic efficiency when it Multiple Choice increases brand loyalty. raises entry barriers. increases consumer awareness of substitute products. boosts average total cost.

increases consumer awareness of substitute products.

Firm Market Share(%) A 40 B 30 C 20 D 5 E 5 This industry shown in this table illustrates Multiple Choice pure competition. monopolistic competition. oligopoly. pure monopoly.

oligopoly.

In a sequential game with two firms, the first mover into a new market Multiple Choice is guaranteed positive economic profits. is assured of blocking any potential second mover from entering the market. runs the risk that the untested new market will not provide enough customers. will likely set a high price to reap greater profits until the second mover enters.

runs the risk that the untested new market will not provide enough customers.

In a cooperative joint monopoly, is there any incentive to cheat on the part of the participants? A.No, because output shares are strictly regulated by the government. B.No, because there with only one firm no cheating is possible. C.No, because none of the firms can increase their own profit by cheating. D.Yes, because individual firms may increase their own profit by cheating. E.Yes, because joint profits are minimized at the joint monopoly output.

D.Yes, because individual firms may increase their own profit by cheating.

Suppose that Big Bad Company (BB) is an existing firm producing bricks. New Entrant (NE) is a potential new entrant in the brick market. Big Bad says that if NE enters, then it will force them out of the market. Specifically, if BB keeps NE out of the market, it will earn $100 million in revenue. If NE enters and BB fights, BB will earn $-25 million and NE will earn $-25 million. If NE enters and BB does not fight, BB will earn $50 million and NE will earn $50 million. Complete the blanks in the figure, where the terminal nodes c through i indicate the revenue earned by each specific firm: a. = New Entrant. b. = Big Bad. c. = 100. d. = 0. e. = -25. f. = -25. h. = 50. i. = 50. New Entrant (NE) should enter.

a. = New Entrant. b. = Big Bad. c. = 100. d. = 0. e. = -25. f. = -25. h. = 50. i. = 50. Explanation New Entrant (NE) is the first mover. If NE does not enter, it has a zero revenue. If NE enters and BB fights, BB will earn a revenue of $-25 million and NE will earn $-25 million. If NE enters and BB does not fight, BB will earn $50 million and NE will earn $50 million. Given that the revenue for BB is higher when they choose to not fight compared to fight, the threat to fight is an empty one. This is why New Entrant (NE) should enter this market.

Answer the following questions, which relate to measures of concentration. Instructions: Enter your answers as whole numbers. a. What is the meaning of a four-firm concentration ratio of 60 percent? What is the meaning of a four-firm concentration ratio of 90 percent? Which of the following is a shortcoming of concentration ratios as measures of monopoly power? They do not account for interindustry competition. They only show the dispersion of size among the top four firms. The data are for international products. They do not pertain to the nation as a whole. b. Suppose that the five firms in industry A have annual sales of 30, 30, 20, 10, and 10 percent of total industry sales. For the five firms in industry B, the figures are 60, 25, 5, 5, and 5 percent. Calculate the Herfindahl index for each industry and compare their likely competitiveness. Herfindahl index for industry A = Herfindahl index for industry B = Your comparison of their likely competitiveness: Industry A will be more competitive than industry B.

a. The largest four firms in the industry account for 60 percent of sales. The largest four firms in the industry account for90 percent of sales. They do not account for interindustry competition. b. 2,400 4,300 more competitive Explanation a. A four-firm concentration ratio of 60 percent means the largest four firms in the industry account for 60 percent of sales; a four-firm concentration ratio of 90 percent means the largest four firms account for 90 percent of sales. Although concentration ratios help identify oligopoly, they have four shortcomings. Concentration ratios are based on somewhat arbitrary definitions of industries—often they do not account for interindustry competition. Concentration ratios also account only for products produced in the United States and may overstate concentration because they do not account for the import competition of foreign suppliers. Lastly, the four-firm concentration ratio does not reveal the extent to which one or two firms dominate an industry. b. For industry A, we have a Herfindahl index = 30^2 + 30^2 + 20^2 + 10^2 + 10^2 = 900 + 900 + 400 + 100 + 100 = 2,400. For industry B, we have a Herfindahl index = 60^2 + 25^2 + 5^2 + 5^2 + 5^2 = 3,600 + 625 + 25 + 25 + 25 = 4,300. We would expect industry A to be more competitive than industry B because the largest two firms in industry B control a greater percentage of the market. If all firms controlled an equal share of the market (20 percent for the five firms above ), the Herfindahl index would equal 2,000. If one firm (out of the five) controlled the entire market (100 percent), the Herfindahl index would equal 10,000. The latter case is obviously a monopoly. The closer the Herfindahl index is to the monopoly case, the less competition there will be in the market.

a. Advertising is an important aspect of monopolistic competition and oligopoly because there are significant substitution possibilities in these industries. price changes are not allowed. brand distinction encourages consumer loyalty, which increases profits. there is product homogeneity in these industries. b. Advertising promotes efficiency and benefits consumers by helping consumers determine their preferences and increasing the number of products firms have to produce. providing information about new products, reducing the number of firms in the industry, and raising average revenue. helping consumers determine their preferences and limiting the number of products firms have to produce. providing information about new products, increasing sales and output, and lowering average total cost. c. Which of the following statements is true? Persuasive advertising can be important in encouraging new entry into the industry. Persuasive advertising can be excessive, creating a barrier to entering the industry. Persuasive advertising can increase brand loyalty, which encourages new entry into the industry. Excessive advertising can decrease brand loyalty, which encourages new entry into the industry.

a. brand distinction encourages consumer loyalty, which increases profits. b. providing information about new products, increasing sales and output, and lowering average total cost. c. Persuasive advertising can be excessive, creating a barrier to entering the industry. Explanation a. Two ways for monopolistically competitive firms to maintain economic profits are through product development and advertising. Also, advertising will increase the demand for the firm's product. The oligopolist would rather not compete on a basis of price. Oligopolists can increase their market share through advertising that is financed with economic profits from past advertising campaigns. Advertising can operate as a barrier to entry. b. Advertising provides information about new products and product improvements to the consumer. Advertising may result in an increase in competition by promoting new products and product improvements. It may also result in increased output for a firm, pushing it down its ATC curve and closer to productive efficiency (P = minimum ATC). c. Advertising may result in manipulation and persuasion rather than information. An increase in brand loyalty through advertising will increase the producer's monopoly power. Excessive advertising may create barriers to entry into the industry.

a. The most common reason that oligopolies exist is regulation. diminishing marginal returns. economies of scale. there are a large number of firms. b. Which of the following are products or services of oligopolists that you regularly purchase or own? Automobiles, personal computers, and gasoline Refrigerators, bakery goods, and courier services Clothing stores, office supplies, and personal computers Ovens, refrigerators, and hair salon services c. Oligopoly differs from monopolistic competition in that oligopoly has few firms, whereas monopolistic competition has more firms. the firms have relatively easy entry. the firms are not mutually interdependent with regard to price. has many firms, whereas monopolistic competition has few firms.

a. economies of scale. b. Automobiles, personal computers, and gasoline c. has few firms, whereas monopolistic competition has more firms. Explanation a. Oligopolies exist for several reasons, the most common probably being economies of scale. If these are substantial, as they are in the automobile industry, for example, only very large firms can produce at minimum average cost. This makes it virtually impossible for new firms to enter the industry. A small firm could not produce at minimum cost and would soon be competed out of the business and to start at the required very large scale would take far more money than an unestablished firm is likely to be able to raise before proving it will be profitable. b. Oligopolies in which we deal include manufacturers of automobiles, ovens, refrigerators, personal computers, gasoline, and courier services. c. Oligopolistic industries are characterized by the presence of few firms, each having a significant fraction of the market. Firms thus situated engage in strategic behavior and are mutually interdependent. The behavior of any one firm directly affects, and is affected by, the actions of rivals. Products may be either virtually uniform or significantly differentiated.

a. The kinked-demand curve for oligopolists assumes that rivals will match price cuts, but ignore price increases. match price cuts and price increases. neither match price cuts nor price increases. match price increases, but ignore price cuts. b. There is a gap in the oligopolist's marginal-revenue curve because price rises abruptly. the slope of the demand curve changes abruptly. price drops abruptly. the cost of production changes abruptly. c. The kinked-demand curve explains price rigidity in oligopoly because firms expect any change in price will lower revenue and profits. firms will not agree to a given price. the firm's revenue will fall as the price falls. firms agree to a given price. d. Shortcomings of the kinked-demand model include the allowance for price leadership. a lack of explanation for how the final price is set. the allowance for collusion. a lack of explanation for how the initial price is set.

a. match price cuts, but ignore price increases. b. the slope of the demand curve changes abruptly. c. firms expect any change in price will lower revenue and profits. d. a lack of explanation for how the initial price is set. Explanation a. The kinked-demand curve assumes that rivals will match a price cut but ignore an increase in price. b. The gap in the MR curve results from the abrupt change in the slope of the demand curve at the going price. c. Firms will not change their price because they fear that if they do their total revenue and profits will fall. d. The kinked-demand model has two shortcomings. First, it does not explain how the going price evolved in the first place. Second, it does not allow for leadership and other forms of collusion.

a. Price collusion occurs in oligopolistic industries because costs are similar among firms. price competition results in economies of scale. price competition results in diseconomies of scale. price competition can lower revenue for all firms. b. Assess the economic desirability of collusive pricing. Collusive pricing is economically desirable from society's viewpoint because it is a capital drain. Collusive pricing is not economically desirable from society's viewpoint because price equals average total cost. Collusive pricing is economically desirable from the oligopoly's viewpoint because it results in monopoly profits. Collusive pricing is not economically desirable from the oligopoly's viewpoint because it cannot control entry. c. Price leadership is legal in the United States, whereas price-fixing is not. This is because price leadership is an agreement, whereas price-fixing is not. not an agreement, whereas price-fixing is. a registered arrangement subject to oversight, whereas price-fixing is not. not a registered arrangement subject to oversight, whereas price-fixing is.

a. price competition can lower revenue for all firms. b. Collusive pricing is economically desirable from the oligopoly's viewpoint because it results in monopoly profits. c. not an agreement, whereas price-fixing is. Explanation a. Price wars are a form of competition that can benefit the consumer but can be highly detrimental to producers. As a result, oligopolists are naturally drawn to the idea of price-fixing among themselves, i.e., colluding with regard to price. In a recession, it is nice to know whether one's rivals will cut prices or quantity so that a mutually satisfactory solution can be reached. It is also convenient to be able to agree on what price to set to bankrupt any would-be developer in the industry. b. From the viewpoint of society, collusive pricing is not economically desirable. From the oligopoly's viewpoint, it is highly desirable since, when entirely successful, it allows the oligopoly to set price and quantity as would a profit-maximizing monopolist. c. Price leadership entails a type of implicit understanding in which prices are coordinated without engaging in outright collusion based on formal agreements and secret meetings. Rather, a practice evolves whereby the dominant firm initiates price changes and all other firms typically follow the leader.

Industries X and Y both have four-firm concentration ratios of 70 percent, but the Herfindahl index for X is 2,500, while that for Y is 2,000. These data suggest Multiple Choice greater market power in Y than in X. greater market power in X than in Y. that X is more technologically progressive than Y. that price competition is stronger in X than in Y.

greater market power in X than in Y.

Firm Market Share (%) A 20 B 20 C 20 D 20 E 10 F 10 If firms E and Fin this table merged into a single firm, the Herfindahl index would Multiple Choice not change. rise, as would the four-firm concentration ratio. rise, but the four-firm concentration ratio would remain unchanged. fall.

rise, but the four-firm concentration ratio would remain unchanged.