Chapter 15 Econ Questions

As the price of oil goes up, what happens to the incentive to develop alternative fuels? a. It decreases. b. It increases. c. Nothing happens. d. It is impossible to say without more information.

b. It increases.

(Figure: Competitive Market) Refer to the figure. If all firms in the market form a successful cartel, price and output in the market would be: a. P1 and Q1. b. P2 and Q1. c. P2 and Q2. d. P1 and Q2.

b. P2 and Q1.

Most cartels in the United States were outlawed with the passage of the: a. ACA Act of 1957. b. Sherman Antitrust Act of 1890. c. Fair Labor Standards Act of 1938. d. Wagner Act of 1935.

b. Sherman Antitrust Act of 1890.

A dominant strategy is a strategy that a player should take regardless of the strategy chosen by the other player. a. False b. True

b. True

A dominant strategy is a strategy that has a higher payoff than any other strategy, no matter what the other player does. a. False b. True

b. True

Cartels in manufactured goods are difficult to maintain because other firms can enter the market and easily produce substitute products. a. False b. True

b. True

Cartels such as OPEC are difficult to maintain because cheating is a dominant strategy for all firms involved. a. False b. True

b. True

Cartels are ______ by new market entrants. a. discovered b. challenged c. ignored d. reinforced

b. challenged

A market dominated by a small number of firms is called a(n): a. network market. b. oligopoly. c. natural monopoly. d. monopoly.

b. oligopoly.

(Table: Mary, Silvia Payoff Table)Refer to the table. Mary and Silvia are producers. If Mary cheats, what is Silvia's dominant strategy? a. to cooperate and earn 20 b. to cheat and earn 15 c. to cooperate and earn 40 d. to cheat and earn 40

b. to cheat and earn 15

A cartel can remain powerful even when all the members engage in secret price cuts. a. False b. True

a. False

All cartels and cartel-like behavior are illegal in the United States. a. False b. True

a. False

Game theory is the study of independent decision making. a. False b. True

a. False

(Table: Ozzie's, Manny's Payoff Table)Refer to the table. Which of the following statements is TRUE? a. Manny's dominant strategy is low price, and Ozzie's dominant strategy is low price. b. Manny's dominant strategy is low price, and Ozzie's dominant strategy is high price. c. Manny's dominant strategy is high price, and Ozzie's dominant strategy is high price. d. Manny and Ozzie do not have dominant strategies.

a. Manny's dominant strategy is low price, and Ozzie's dominant strategy is low price.

(Table: Ozzie's, Manny's Payoff Table)Refer to the table. The equilibrium outcome is: a. $20, $130 or $130, $20. b. $80, $80. c. $60, $60. d. undefined in this game.

c. $60, $60.

Another possible source of why cartels break down is the growth potential of the industry. Although industries with a lot of potential are more willing to invest in the time to form a collusive agreement, such growth potential also deters them from making this investment. Why would that be? a. High-growth industries are more likely to be monitored by the government. b. High-growth industries are less likely to have the support of the government. c. High-growth industries are more likely to have lots of entrants. d. High-growth industries are less likely to face an inelastic demand curve.

c. High-growth industries are more likely to have lots of entrants

Barriers to entry include: a. economies of scale. b. control over a key resource or input. c. These are all barriers to entry. d. government barriers.

c. These are all barriers to entry.

A 2006 paper by Margeret Levenstein and Valerie Suslow ("What Determines Cartel Success?") found that the following causes are common reasons why cartels broke down: entering firms, the nature of the demand curve, growth of the industry, and difficulty of bargaining between conspirators. What other cause is also associated with bargaining difficulties? a. exiting firms b. the nature of the supply curve c. cheating d. the nature of the industry

c. cheating

Cartels for natural resources tend to be ______ than cartels for manufactured goods. a. less successful b. less cumbersome c. more successful d. more cumbersome

c. more successful

A firm receives the largest profit from cheating on a cartel agreement when: a. its demand curve is more inelastic than other cartel members. b. all members of the cartel cheat. c. none of the other cartel members cheats. d. all cartel members expand output.

c. none of the other cartel members cheats.

(Figure: Competitive Market) Refer to the figure. If the market is competitive, price and output in the market would be: a. P1 and Q1. b. P2 and Q1. c. P2 and Q2. d. P1 and Q2.

d. P1 and Q2.

(Figure: Demand 1) Refer to the figure. A cartel facing the market in this diagram would try to cause industry output to: a. increase from 3 to 6. b. decrease from 5 to 2. c. increase from 5 to 10. d. decrease from 6 to 3.

d. decrease from 6 to 3.

Cartel member strategy can be like a prisoner's ______ game. a. cooperation b. call c. release d. dilemma

d. dilemma

Antitrust laws: a. ensure that everyone keeps his or her promises. b. offer subsidies for cartels. c. give the government the power to tax the trust funds of the children of rich families. d. give the government the power to prohibit or regulate anticompetitive business practices.

d. give the government the power to prohibit or regulate anticompetitive business practices.

A government-supported cartel usually means: a. higher quality of service. b. more innovation. c. lower prices. d. higher prices.

d. higher prices.

Barriers to entry are factors that: a. decrease costs to new firms entering the market. b. increase costs to existing firms in the market. c. decrease costs to existing firms in the market. d. increase costs to new firms entering the market.

d. increase costs to new firms entering the market.

(Figure: Demand 1) Refer to the figure. A successful cartel facing the market in this diagram would cause the industry price to: a. decrease from $8 to $4. b. not change at all. c. increase from $7 to $8. d. increase from $4 to $7.

d. increase from $4 to $7.

A cartel member has _____ incentive to increase quantity than a standard monopolist does. a. equal b. no c. less d. more

d. more

A cartel is a group of suppliers who act together in order to: a. increase demand, raise prices, and increase profits. b. increase demand, reduce prices, and increase profits. c. increase supply, reduce prices, and increase profits. d. reduce supply, increase prices, and increase profits.

d. reduce supply, increase prices, and increase profits.

(Table: Mary, Silvia Payoff Table)Refer to the table. Mary and Silvia are producers. If Silvia cooperates, what is Mary's dominant strategy? a. to cooperate and earn 40 b. to cooperate and earn 20 c. to cheat and earn 15 d. to cheat and earn 40

d. to cheat and earn 40