ECN midterm 3 - chp 15

46. What does it mean when an OPEC member cheats? a. The country produces less oil than it agreed to. b. The country produces lower-quality oil rather than higher-quality oil. c. The country produces more oil than it agreed to. d. The country closes down oil wells for routine maintenance during peak holiday seasons.

*c. The country produces more oil than it agreed to.

37. Which of the following describes how cartel members cheat? a. They use inferior inputs in production to save money. b. They steal production technologies from other firms. c. They produce more output than they promised. d. They fail to declare profits earned in foreign countries to avoid paying taxes.

*c. They produce more output than they promised.

29. A group of suppliers who try to act as if they are a monopoly is called a(n): a. network. b. oligopoly. c. cartel. d. dominant strategy.

*c. cartel.

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

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

47. Cheating pays when other firms _____ their promise. a. either keep or break b. break c. keep d. withhold

*c. keep

39. Oligopolies tend to set prices: a. higher than monopolies. b. higher than cartels. c. lower than monopolies but higher than competitive markets. d. that equal marginal cost.

*c. lower than monopolies but higher than competitive markets.

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

*c. more incentive to increase quantity than a standard monopolist does.

38. The table shows a payoff matrix with two players and two strategies. Player 1's payoffs are listed first, and player 2's payoffs second. What type of "game" does this payoff matrix represent? a. cartel game b. coordination game c. prisoner's dilemma d. cheating game

*c. prisoner's dilemma

5. Cartels tend to be more successful when: a. there are a large number of firms in the market. b. the cartel is producing a good that can be produced anywhere in the world. c. the cartel is producing a good for which there are few substitutes. d. demand for the good is more elastic

*c. the cartel is producing a good for which there are few substitutes.

53. High prices maintained by a cartel usually make the cartel less successful because a high price of the good: a. leads to more conservation. b. motivates demand to switch to substitutes of the goods. c. encourages a search for new supplies. d. All of the answers are correct.

*d. All of the answers are correct.

67. This table presents the profits earned by the brick producers Acme Brick and Hardscapes Brick. Profits are based on the price per cube each producer sells. Which of the following statement(s) is (are) TRUE? I. Acme Brick and Hardscapes Brick can earn higher profits by agreeing to charge a high price for bricks. II. Acme Brick and Hardscapes Brick will have no incentive to cheat on an agreement to charge a high price for bricks. III. If Acme Brick and Hardscapes Brick agree to charge a high price for brick, they will have formed a cartel. a. I and II only b. II and III only c. I, II, and III d. I and III only

*d. I and III only

20. Which of the following statements is (are) TRUE? I. A cartel is a single firm with competitive market power. II. A cartel is a group of firms that practice price discrimination in competitive markets. III. A cartel is a group of firms that attempt to reduce market output. IV. A cartel acts as if it were a monopolist in its market. a. I only b. II, III, and IV only c. II only d. III and IV only

*d. III and IV only

49. Which of the following is NOT a feature of the prisoner's dilemma? a. It explains why cartels fail. b. It describes how producers can lock themselves into a suboptimal outcome by pursuing their own self-interest. c. It shows a dominant strategy for each of the players. d. It explains why there is so much recidivism

*d. It explains why there is so much recidivism

4. _____ cartels can move an industry from competition to pure monopoly. a. All b. Most c. Many d. Very few

*d. Very few

56. In April 2011, the European Commission fined Procter & Gamble and Unilever 315 million euros for fixing the price of laundry detergent in eight European countries. They admitted to this cartel, which resulted in a 10% discount in the fines. The 3-year investigation started because of a tip-off by another competitor, Henkel, which was also part of the price-fixing scheme. Henkel received no fine because of its cooperation with investigators. Besides imposing fines, how did investigators make maintaining this cartel difficult to continue? a. by offering a 10% discount on the fine if the parties admitted to wrongdoing b. by investigating the cartel for 3 years so they could prosecute c. by reminding consumers that laundry detergent has a lot of long-run substitutes d. by waiving the fine for just Henkel, which encouraged Henkel to cheat

*d. by waiving the fine for just Henkel, which encouraged Henkel to cheat

14. A strategy that has a higher payoff than any other strategy no matter what the other player does is called a: a. cartel strategy. b. maximizing strategy. c. valuable strategy. d. dominant strategy

*d. dominant strategy

26. A strategy that has a higher payoff than any other strategy, no matter what the other player does, is called a: a. winning strategy. b. superior strategy. c. advanced strategy. d. dominant strategy

*d. dominant strategy

24. A dominant strategy is a strategy that: a. results in the highest payoff for all parties no matter what. b. has a higher payoff than another strategy some of the time and a lower payoff than another strategy the rest of the time. c. has a lower payoff than any other strategy, no matter what the other player does. d. has a higher payoff than any other strategy, no matter what the other player does.

*d. has a higher payoff than any other strategy, no matter what the other player does.

58. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that the three countries have already formed a cartel, and are collectively producing at the profit maximizing price and quantity. Country A decides to cheat on the cartel agreement by producing 200 more barrels than the other two countries. What is the resultant profit earned by each of the other two countries? a. $20,000 b. $30,000 c. $70,000 d. $24,000

*a. $20,000

Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total of 100 MBD. The world price of oil at this quantity is $36 per barrel, so each country earns $360 million a day. Suppose that these countries form a cartel and each country produces 8 MBD. If nine of the cartel members cheat and produce 10 MBD while one country keeps its promise and maintains production at 8 MBD, each cheater will earn revenue of: a. $375 million a day, while the noncheating country will earn $300 million a day. b. $375 million a day, while the noncheating country will earn $360 million a day. c. $400 million a day, while the noncheating country will earn $300 million a day. d. $400 million a day, while the noncheating country will earn $360 million a day

*a. $375 million a day, while the noncheating country will earn $300 million a day.

10. The curve D reflects the demand curve for an industry served by six firms, and MC reflects the average and marginal costs of production. If the firms agree to a price of $6 and a quantity of 100 units per firm, what is the profit for each firm? a. $400 b. $600 c. $2,400 d. $300

*a. $400 (MC=2)

9. People sometimes point to similar gas prices at competing gas stations as evidence of collusion when they could just be selling at market price. If this is not good evidence of collusion, what is? a. The profits of the companies are unusually high in the short run. b. The station owners regularly have morning coffee together. c. There is some kind of punishment for cheating. d. Someone thinks they overheard the gas stations' plans for collusion.

*a. The profits of the companies are unusually high in the short run.

32. The prisoner's dilemma describes a scenario in which each player, acting out of self-interest, will make a decision that results in all players being worse off. a. True b. False

*a. True

42. Governments create barriers to entry with licenses or other regulations that limit entry. a. True b. False

*a. True

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

*a. True

54. In the prisoner's dilemma, both players have an incentive to cheat, even though they would both be better off if they both cooperated. a. True b. False

*a. True

55. When cheating is less profitable or easier to detect, a cartel will be easier to sustain. a. True b. False

*a. True

68. Cartels tend to collapse and lose their power because of new entrants. a. True b. False

*a. True

7. In the prisoner's dilemma, a dominant strategy: a. always exists. b. never exists. c. sometimes exists. d. cannot be determined to exist.

*a. always exists.

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

*a. cheating

12. In a cartel, the most profitable outcome in one period is achieved by: a. cheating when others cooperate. b. cheating when others cheat. c. cooperating when others cooperate. d. cooperating when others cheat

*a. cheating when others cooperate.

61. Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total of 100 MBD. The world price of oil at this quantity is $36 per barrel, so each country earns $360 million a day. Suppose that these countries form a cartel and each country produces 8 MBD. If one of the cartel members cheats by secretly pushing its production back to 10 MBD rather than 8, total revenue for the noncheating countries would: a. decrease from $400 million to $380 million a day. b. decrease from $360 million to $288 million a day. c. increase from $400 million to $500 million a day. d. remain unchanged at $380 million a day.

*a. decrease from $400 million to $380 million a day.

62. If both countries abide by the cartel agreement (i.e., do not cheat): a. each country earns $78 million. b. each country earns $65 million. c. Iraq earns $89 million and Iran earns $60 million. d. Iraq earns $60 million and Iran earns $89 million.

*a. each country earns $78 million.

22. Compared to a competitive market, firms operating in a cartel will charge a price that is: a. higher than the competitive price. b. lower than the competitive price. c. equal to their marginal cost of production. d. equal to their average cost of production.

*a. higher than the competitive price.

16. Loyalty programs, such as frequent flyer plans, tend to: a. increase prices. b. decrease prices. c. decrease the monopoly power of the firm. d. make demand more elastic

*a. increase prices.

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

*a. oligopoly.

15. Game theory is the study of: a. strategic decision making. b. strategies involved in board games, such as Monopoly. c. theories of hunting big game. d. strategies to play Sudoku.

*a. strategic decision making.

66. The equilibrium outcome is: a. $78, $78. b. $65, $65. c. $89, $60. d. $60, $89.

*b. $65, $65.

64. The curve D reflects the demand curve for an industry served by six firms, and MC reflects the average and marginal costs of production. The firms agree to a price of $6 and a quantity of 100 units per firm. If one firm decides to increase its output by 150 units, this firm will increase revenues by _____, while the other firms each will see decreased revenues of _____. a. $150; $100 b. $750; $100 c. $150; $750 d. $750; $500

*b. $750; $100

44. Five firms in an industry have equal and constant marginal costs and act as a cartel, with each firm agreeing to charge a price of $9. If they each sell an equal quantity of output, what output will each firm sell? a. 500 units b. 100 units c. 200 units d. 700 units

*b. 100 units

18. It is easy for a cartel to behave monopolistically. a. True b. False

*b. False

25. A cartel is a group of consumers that try to act together to increase their bargaining power. a. True b. False

*b. False

27. Consumers "win" when a firm offers to match any competitor's price plus 10%. a. True b. False

*b. False

30. With an oligopoly, if a group of firms is not able to coordinate or collude, prices will not be higher than in a competitive market. a. True b. False

*b. False

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

*b. False

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

*b. False

8. If the market is competitive, price and output in the market will be: a. P1 and Q1. b. P1 and Q2. c. P2 and Q1. d. P2 and Q2.

*b. P1 and Q2

2. The table shows a payoff matrix with two players and two strategies. Player 1's payoffs are listed first, and player 2's payoffs second. What is player 1's best strategy in this game? a. always cooperate b. always cheat c. cooperate when player 2 cooperates; cheat when player 2 cheats d. cheat when player 2 cooperates; cooperate when player 2 cheats

*b. always cheat

52. Within a cartel, cheating is often a(n) _____ strategy. a. dominated b. dominant c. unused d. unavailable

*b. dominant

40. Cartels do not last because their members find them difficult to maintain, since: a. each of the member firms can attain lower costs outside the cartel. b. each firm in the cartel can gain from secret price cuts. c. all the firms prefer an expansion in industry supply. d. all the firms face less elastic demand curves when outside the cartel.

*b. each firm in the cartel can gain from secret price cuts.

45. When all members of a cartel cheat, the cartel: a. earns monopoly profits. b. fails to earn monopoly profits. c. cannot profit. d. may or may not earn monopoly profits

*b. fails to earn monopoly profits.

59. A dominant strategy is a strategy that: a. all players must follow. b. has a higher payoff than any other strategy no matter what the other player does. c. leads to one player's interests dominating the interests of the other players. d. a player follows regardless of the strategies followed by other players.

*b. has a higher payoff than any other strategy no matter what the other player does.

6. In cases where a cartel controls access to a key production input, firms in the cartel: a. will always have an incentive to cheat on the agreement, as cheating increases profits. b. have less incentive to cheat for fear that they will be cut off from the key input. c. are typically good at finding ways to access the key input outside the cartel. d. will never cheat on the cartel agreement.

*b. have less incentive to cheat for fear that they will be cut off from the key input.

3. In the prisoner's dilemma, the dominant strategy is: a. in the best interest of the players in the game. b. in the least interest of the players in the game. c. a moderate outcome for the players in the game. d. not a possible outcome in the game.

*b. in the least interest of the players in the game.

17. Game theory studies: a. the choices made by agents when other agents engage in certain actions. b. interactive decision making. c. strategic reactions by firms. d. strategies to win at such games as Monopoly.

*b. interactive decision making.

69. If most cartel members keep their agreement to cut back production: a. it's not profitable in the short run for another member to increase production. b. it's profitable in the short run for another member to increase production. c. cheating by another member won't be detected. d. the losses associated with cheating are internalized by the cheater

*b. it's profitable in the short run for another member to increase production.

57. Tacit collusion occurs when firms: a. meet and decide on their collusion tactics. b. limit competition with one another but do so without explicit agreement or communication. c. meet and play the prisoner's dilemma just once. d. cheat rather than cooperate.

*b. limit competition with one another but do so without explicit agreement or communication.

28. The more successful a cartel is in raising the profits of the firms in the cartel, the: a. less likely there will be cheating. b. more likely there will be cheating. c. more competitive the cartel. d. more likely there will be a price war.

*b. more likely there will be cheating.

1. Cheating in cartels is most likely to occur when actions are: a. always observable. b. not observable. c. sometimes observable. d. usually observable.

*b. not observable.

63. The situation between Iraq and Iran is similar to a: a. calibration cramp. b. prisoner's dilemma. c. flippant switch. d. cooperative equilibrium.

*b. prisoner's dilemma.

41. Which of the following is the MOST likely to be a cartel? a. a group of restaurants that join together to create a delivery service b. two brick producers who agree to raise the price of bricks in a city c. an office supply store that buys its only competitor d. an automobile manufacturer that purchases the tire producer from which it gets tires

*b. two brick producers who agree to raise the price of bricks in a city

36. If the two-firm oligopoly facing the market in this diagram is currently producing at the competitive output level and one of the firms reduces output by 4 units, the firm's profits would increase from: a. $64 to $96. b. $0 to $24. c. $0 to $48. d. $32 to $48

*c. $0 to $48.

60. The curve D reflects the demand curve for an industry served by six firms. Which of the following is a possible cartel agreement on price and firm quantity? a. $8; 100 units per firm b. $4; 900 units per firm c. $6; 100 units per firm d. $6; 600 units per firm

*c. $6; 100 units per firm

13. With price matching plus paying the consumer 10% of the difference, which of the following is (are) TRUE? I. The consumer benefits. II. The seller benefits. III. The consumer pays a higher price. a. I only b. II only c. II and III only d. I and II only

*c. II and III only

31. Which of the following statements is TRUE? a. Cartels are an important source of economic growth in developing countries. b. Economists are not opposed to government-created cartels, since they usually provide high-quality products and service. c. One cost of government-sponsored cartels is that people spend resources trying to obtain or maintain a cartel rather than produce better products. d. Government-supported cartels usually mean more innovation.

*c. One cost of government-sponsored cartels is that people spend resources trying to obtain or maintain a cartel rather than produce better products.

23. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that the three countries have already formed a cartel, and are collectively producing at the profit maximizing price and quantity. Suppose that country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What will country B's reaction be? a. lower its own quantity to 200 units b. increase its own quantity to 1,600 units c. increase the market price to $60 d. increase its own quantity to 600 units

*d. increase its own quantity to 600 units

19. This table presents the profits earned by the brick producers Acme Brick and Hardscapes Brick. Profits are based on the price per cube each producer sells. Acme's profits are listed first in each cell, and Hardscapes's are listed second. Hardscapes's dominant strategy is to charge a _____ price. Acme's dominant strategy is to charge a _____ price. a. high; high b. high; low c. low; high d. low; low

*d. low; low

35. This table presents the profits earned by the brick producers Acme Brick and Hardscapes Brick. Profits are based on the price per cube each producer sells. Acme's profits are listed first in each cell, and Hardscapes's are listed second. If Acme chooses to charge a low price, charging a _____ price is the best strategy for Hardscapes. If Acme chooses to charge a high price, charging a _____ price is the best strategy for Hardscapes. a. high; high b. high; low c. low; high d. low; low

*d. low; low

51. The table presents the profits earned by the two tractor stores in a farm town, Betsy's Tractors and Ben's Farm Supplies. Profits are based on the price per tractor each producer sells. Betsy's profits are listed first in each cell, and Ben's are listed second. Betsy's dominant strategy is to charge a _____ price. Ben's dominant strategy is to charge a _____ price. a. high; high b. high; low c. low; high d. low; low

*d. low; low

65. In some cases a cartel is successful because: a. the cartel produces a manufactured good with many substitutes. b. the marginal costs of production are high. c. the barriers to entry in the market are low. d. the cartel controls access to a key input.

*d. the cartel controls access to a key input.