PE Chap 16:
Hot-dog vendors on the beach fail to cooperate with one another on the quantity of hot-dogs they should sell to earn monopoly profits. A consequence of their failure is that, relative to the outcome the vendors would like, (i) the quantity of hot dogs supplied is closer to the socially optimal level. (ii) the price of hot dogs is closer to marginal cost. (iii) the hot-dog market at the beach is less competitive.
(i) and (ii)
OPEC can be classified as a (i) group whose concern is to control production levels of oil. (ii) cartel. (iii) resale price maintenance group.
(i) and (ii)
The theory of oligopoly provides another reason that free trade can benefit all countries because (i) as the number of firms within a given market increases, the price of the good falls. (ii) increased competition leads to smaller deadweight losses. (iii) profit increases with the level of competition for oligopoly firms.
(i) and (ii)
Crude oil is primarily supplied to the world market by a few Middle Eastern countries. Such a market is an example of a(n) (i) imperfectly competitive market. (ii) monopoly market. (iii) oligopoly market.
(i) and (iii)
Self-interest will typically cause a duopoly's (i) total level of output to exceed the monopoly level. (ii) total level of output to exceed the competitive level. (iii) price to fall short of the monopoly price.
(i) and (iii)
What happens when the prisoners' dilemma game is repeated numerous times in an oligopoly market? (i) The firms may well reach the monopoly outcome. (ii) The firms may well reach the competitive outcome. (iii) Buyers of the oligopolists' product will likely be worse off as a result.
(i) and (iii)
In 1971, Congress passed a law that banned cigarette advertising on television. After the ban it is most likely that the (i) profits of cigarette companies increased. (ii) prices of cigarettes increased. (iii) total costs incurred by cigarette companies increased.
(i) only
If, in a particular market, firms sell identical products, then the market is (i) perfectly competitive. (ii) monopolistically competitive. (iii) an oligopoly.
(i) or (iii)
Individual profit earned by Dave, the oligopolist, depends on which of the following? (i) The quantity of output that Dave produces (ii) The quantities of output that the other firms in the market produce (iii) The extent of collusion between Dave and the other firms in the market
(i), (ii), and (iii)
As the number of firms in an oligopoly increases, the quantity of output produced (i) decreases. (ii) increases. (iii) eventually approaches the socially-optimal level.
(ii) and (iii)
Which of the following will weaken OPEC's effect on the world price of oil? (i) Member countries abide by the regulatory policy set forth under the original collusive agreement. (ii) Member countries increase their own production. (iii) Member countries set their level of production in order to capture a larger share of the total profit available.
(ii) and (iii)
Which of the following statements is (are) true of the prisoners' dilemma? (i) Rational self-interest leads neither party to confess. (ii) Cooperation between the prisoners is difficult to maintain. (iii) Cooperation between the prisoners is individually rational.
(ii) only
A firm in a monopolistically competitive market is similar to a monopolist in the sense that it
A firm in a monopolistically competitive market is similar to a monopolist in the sense that it
Which of the following is a characteristic of oligopoly but NOT perfect competition?
Advertising and sales promotion
In the prisoners' dilemma game, self-interest leads
All of the above are correct.
As the number of firms in an oligopoly increases, the price approaches
As the number of firms in an oligopoly increases, the price approaches
Firms do not need to be concerned about striking a balance between the price effect and the output effect when making production decisions in which of the following types of markets?
Competitive markets
Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and finds a small bag of marijuana and arrests the two...
Confess regardless of the partner's decision
What do economists call a market structure in which there are many firms selling products that are similar but not identical?
Monopolistic competition
Why would lack of cooperation between criminal suspects be desirable for society as a whole?
More criminals will be convicted.
Which of the following statements is false?
Most economists agree that predatory pricing is a profitable business strategy that usually preserves market power.
If an oligopolist is part of a cartel that is collectively producing the monopoly level of output, then that oligopolist has the incentive to lower production with the aim of
None of the above is correct.
After initial success, the OPEC cartel saw the price of oil and the revenues of its members decline due, in part, to
OPEC members not producing their agreed upon production levels.
In which of the following markets is economic profit driven to zero in the long run?
Perfect competition
Which of the following statements is true?
Policymakers have the difficult task of determining whether some firms' decisions have legitimate purposes even though they appear anti-competitive.
The manufacturer of Bozz Radios sells radios to retail stores for $500 each, and it requires the retail stores to charge customers $550 per radio. Any retailer that charges less than $550 would violate its contract with Bozz Radios. What do economists call this business practice?
Resale price maintenance
Which of these situations produces the largest profits for oligopolists?
The firms reach the monopoly outcome.
The "arms race" is similar to which of the following economic scenarios?
The prisoners' dilemma
Which of the following is necessarily a problem with antitrust laws?
They may target a business whose practices appear to be anti-competitive but in fact have legitimate purposes.
Suppose that Makemoney Movies produces two new films — The Hulk and The Piano. Makemoney offers theaters the two films together at a single price but will not supply the movies separately. What do economists call this business practice?
Tying
The argument that consumers will not be willing to pay any more for two items sold as one than they would for the two items sold separately is used to justify the legality of which of the following?
Tying
Which of the following would be most likely to contribute to the breakdown of a cartel in a natural resource (e.g., bauxite) market?
Unequal member ownership of the natural resource
When an oligopoly grows very large, the
When an oligopoly grows very large, the
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.
An equilibrium in which each firm in an oligopoly maximizes profit, given the actions of its rivals, is called
a Nash equilibrium.
lower than in monopoly markets and higher than in perfectly competitive markets.
a Nash equilibrium.
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.
Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time, however, suppose the merging of firms results in the market being served by only three or four firms selling this same product. As a result, we would expect
a decrease in market output and an increase in the price of the product.
A special kind of imperfectly competitive market that has only two firms is called
a duopoly.
The U.S. market for locomotives is divided between two producers: General Electric has 70 percent of the market and General Motors has 30 percent. This market is an example of
a duopoly.
When an oligopoly market reaches a Nash equilibrium,
a firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
Once a cartel is formed, the market is in effect served by
a monopoly.
Barb and Sue are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all....
advertise on TV and earn $5,000.
Dave and Andy are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $4,000. If they both advertise on radio, each will earn a profit of $7,000.
advertise on radio and earn $7,000.
Laurel and Janet are competitors in a local market and each is trying to decide if it is worthwhile to advertise. If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit of $10,000...
advertise, but if the game is to be repeated many times she should probably not advertise.
In order to be successful, a cartel must
agree on the total level of production and on the amount produced by each member.
The theory of oligopoly provides a reason as to why
all countries can benefit from free trade among nations.
An equilibrium occurs in a game when
all players follow a strategy that they have no incentive to change.
The cigarette industry consists of large firms that compete vigorously through advertising which is directed at creating fantasy and image. Economists would characterize this industry as
an oligopoly.
A law that encourages market competition by prohibiting firms from gaining or exercising excessive market power is
antitrust law.
the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
as a single monopolist.
If duopolists individually pursue their own self-interest when deciding how much to produce, the amount they will produce collectively will
be greater than the monopoly quantity.
In a typical cartel agreement, the cartel maximizes profit when it
behaves as a monopolist.
The likely outcome of the standard prisoners' dilemma is that
both prisoners confess.
One key difference between an oligopoly market and a competitive market is that oligopolistic firms
can affect the profit of other firms in the market by the choices they make while firms in competitive markets do not affect each other by the choices they make.
A group of firms that are acting in unison to maximize collective profits is called a
cartel.
When firms have agreements among themselves on the quantity to produce and the price at which to sell output, we refer to their form of organization as a
cartel.
as a single monopolist.
charge the same price that a monopolist would charge if the market were a monopoly.
An agreement among firms regarding price and/or production levels is called
collusion.
To move the allocation of resources closer to the social optimum, policymakers should typically try to induce firms in an oligopoly to
compete rather than cooperate with each other.
When strategic interactions are important to pricing and production decisions, a typical firm will
consider how competing firms might respond to its actions.
In a two-person repeated game, a tit-for-tat strategy starts with
cooperation and then each player mimics the other player's last move.
Predatory pricing occurs when a firm
cuts its prices temporarily in order to drive out any competition.
The prisoners' dilemma provides insights into the
difficulty of maintaining cooperation.
The players in a two-person game are choosing between Strategy X and Strategy Y. If the second player chooses Strategy X, the first player's best outcome is to select X. If the second player chooses Strategy Y, the first player's best outcome is to select X. For the first player, Strategy X is called a
dominant strategy.
In a particular town, Metrovision and Cableview are the only two providers of cable TV service. Metrovision and Cableview constitute a
duopoly, whether they collude or not.
The profit-maximizing price for a monopoly is a price that
exceeds marginal cost.
In a duopoly situation, the logic of self-interest results in a total output level that
exceeds the monopoly level of output, but falls short of the competitive level of output.
An oligopoly would tend to restrict output and drive up price if
firms collude and behave like a monopoly.
One characteristic of an oligopoly market structure is:
firms in the industry have some degree of market power.
A tit-for-tat strategy starts out
friendly, then penalizes unfriendly players, and forgives them if warranted.
When firms are faced with making strategic choices in order to maximize profit, economists typically use
game theory to model their behavior.
An oligopolist will increase production if the output effect is
greater than the price effect.
The prisoners' dilemma game
has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would agree to if they could cooperate with each other.
Martha and Oleg are competitors in a local market and each is trying to decide if it is worthwhile to advertise. If both of them advertise, each will earn a profit of $5,000...
has no dominant strategy.
The typical firm in the U. S. economy
has some degree of market power.
The equilibrium quantity in markets characterized by oligopoly is
higher than in monopoly markets and lower than in perfectly competitive markets.
In a prisoners' dilemma game,
if the players play the game repeatedly, the players can achieve a higher payoff, on average, than when they play the game only once.
Cartels in the United States are
illegal.
A typical firm in the U. S. economy would be classified as
imperfectly competitive
The general term for market structures that fall somewhere in-between monopoly and perfect competition is
imperfectly competitive markets.
To increase their individual profits, members of a cartel have an incentive to
increase production above the level agreed upon.
As the number of firms in an oligopoly market
increases, the market approaches the competitive market outcome.
Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash equilibrium, it
is always in their best interest to leave their quantities supplied unchanged.
A dominant strategy is one that
is best for the player, regardless of what strategy other players follow.
A lack of cooperation by oligopolists trying to maintain monopoly profits
is desirable for society as a whole.
The prisoners' dilemma is an important game to study because
it identifies the fundamental difficulty in maintaining cooperative agreements.
Oligopolies can end up looking like competitive markets if the number of firms is
large and they do not cooperate.
If duopolists individually pursue their own self-interest when deciding how much to produce, the profit-maximizing price they will charge for their product will be
less than the monopoly price.
The equilibrium price in a market characterized by oligopoly is
lower than in monopoly markets and higher than in perfectly competitive markets.
Games that are played more than once generally
make collusive arrangements easier to enforce.
Monopolistically competitive firms are typically characterized by
many firms selling products that are similar, but not identical.
There are two types of imperfectly competitive markets:
monopolistic competition and oligopoly.
There are two types of markets in which firms face some competition yet are still able to have some control over the prices of their products. The names given to these market structures are
monopolistic competition and oligopoly.
A market structure in which there are many firms selling products that are similar but not identical is known as
monopolistic competition.
When an industry has many firms, the industry is
monopolistically competitive if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical products.
Oligopolies would like to act like a
monopoly, but self-interest often drives them closer to the perfectly competitive outcome.
Assume oligopoly firms are profit maximizers, they do not form a cartel, and they take other firms' production levels as given. Then in equilibrium the output effect
must balance with the price effect.
George and Jerry are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $3,000. If they both advertise on radio, each will earn a profit of $5,000...
not advertise and earn $10,000.
Game theory is important for the understanding of
oligopolies.
Firms in industries that have competitors but, at the same time, do not face so much competition that they are price takers, are operating in either a(n)
oligopoly or monopolistically competitive market.
A market structure with only a few sellers, offering similar or identical products, is known as
oligopoly.
The commercial jetliner industry, consisting of Boeing and Airbus, would best be described as a (an)
oligopoly.
None of the above is correct.
output effect.
If there are many firms participating in a market, the market is either
perfectly competitive or monopolistically competitive.
Although the practice of predatory pricing is a common claim in antitrust suits, some economists are skeptical of this argument because they believe
predatory pricing is not a profitable business strategy.
Consider a market served by a monopolist, Firm A. A new firm, Firm B, enters the market and, as a result, Firm A lowers its price to try to drive Firm B out of the market. This practice is known as
predatory pricing.
In imperfectly competitive markets, increasing production will increase the quantity sold, but will also decrease the price of all units sold. This concept is known as the
price effect.
Advertising and sales promotion
price making ability.
As a group, oligopolists earn the highest profit when they
produce a total quantity of output that falls short of the Nash-equilibrium total quantity.
The primary purpose of antitrust legislation is to
protect the competitiveness of U.S. markets.
Like monopolists, oligopolists are aware that an increase in the quantity of output always
reduces the price of their product.
The practice of selling a product to retailers and requiring the retailers to charge a specific price for the product is called
resale price maintenance.
OPEC is able to raise the price of its product by
setting production levels for each of its members.
In a game, a dominant strategy is, by definition,
the best strategy for a player to follow, regardless of the strategies followed by other players.
All cartels are inherently reliant on
the cooperation of their members.
Oligopolists may well be able to reach their preferred, cooperative outcome if
the game they play is repeated a sufficient number of times.
For cartels, as the number of firms (members of the cartel) increases,
the magnitude of the price effect decreases.
The more firms an oligopoly has,
the more likely the firms will charge a price closer to the perfectly competitive price.
In markets characterized by oligopoly,
the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
Very often, the reason that players can solve the prisoners' dilemma and reach the most profitable outcome is that
the players play the game not once but many times.
If nations such as Germany, Japan, and the United States prohibited international trade in automobiles, a likely effect would be that
the price effect would become a more significant consideration for each firm that makes automobiles.
In an oligopoly,
the total output produced in the market is higher than the total output that would be produced if the market were a monopoly but lower than the total output that would be produced if the market were perfectly competitive.
As the number of firms in an oligopoly increases,
the total quantity of output produced by firms in the market gets closer to the socially efficient quantity.
In a market that is characterized by imperfect competition,
there are at least a few firms that compete with one another.
An oligopoly is a market in which
there are only a few sellers, each offering a product similar or identical to the products offered by other firms in the market.
a decrease in market output and an increase in the price of the product.
there is always tension between cooperation and self-interest in a cartel.
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
A key issue in the Microsoft case involved whether or not the bundling of the Windows operating system with an Internet browser was an example of
tying.
The practice of requiring someone to buy two or more items together, rather than separately, is called
tying.
In the prisoners' dilemma,
when each player chooses his dominant strategy the players reach a Nash equilibrium.
