The Price System (Quiz 9)

In which of the following markets are strategic interactions among firms most likely to occur? a. The market for corn b. The market for tennis balls c. The market for piano lessons d. Markets to which patent and copyright laws apply

The market for tennis balls

As the number of firms in an oligopoly increases, a. the output effect decreases. b. the oligopoly has more market power and firms earn a greater profit c. the price approaches marginal cost. d. the price of the product greatly exceeds marginal cost.

The price approaches marginal cost

As the number of sellers in an oligopoly becomes very large, a. the price effect is magnified. b. the quantity of output approaches the monopoly quantity. c. the price approaches the monopoly price. d. the quantity of output approaches the socially efficient quantity.

The quantity of output approaches the socially efficient quantity

Refer to Figure 18-1. Suppose this market is served by two firms that each face the marginal cost curve shown in the diagram. The marginal revenue curve that a monopolist would face in this market is also shown. If the firms are able to collude successfully, a. the total output will be 8 units and the price will be $2.00 per unit. b. the total output will be 4 units and the price will be $2.00 per unit. c. there will be no deadweight loss. d. the total output will be 4 units and the price will be $6.00 per unit.

The total output will be 4 units and the price will be $6.00 per unit

Whenever a cartel in a duopoly breaks down, a. both firms obtain higher profits. b. the socially optimal output will be produced. c. total output in the market will rise. d. price in the market will rise.

Total output in the market will rise

In imperfectly competitive markets, increasing production will decrease the price of all units sold. This concept is known as the a. cartel effect. b. income effect. c. price effect. d. output effect.

Price effect

If duopoly firms that are not colluding were able to successfully collude, then a. price would rise and quantity would fall. b. price would fall and quantity would rise. c. price and quantity would fall. d. price and quantity would rise.

Price would rise and quantity would fall

Table 18-1 Imagine a small town in which only two residents, Alana and Matthew, own wells that produce safe drinking water. Each week Alana and Matthew work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Alana and Matthew can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: Refer to Table 18-1. If Alana and Matthew operate as a profit-maximizing monopoly in the market for water, what price will they charge? a. $28 b. $32 c. $20 d. $24

$24

Imagine a small town in which only two residents, Alana and Matthew, own wells that produce safe drinking water. Each week Alana and Matthew work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Alana and Matthew can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: Refer to Table 18-1. If Alana and Matthew operate as a profit-maximizing monopoly in the market for water, how many gallons of water will be produced and sold? a. 540 b. 1,080 c. 0 d. 630

540

Which of the following examples illustrates an oligopoly market? a. A city with many independently owned hair styling salons b. A farmers' market with many individuals selling sweet corn and tomatoes c. A city with two firms that are licensed to sell school uniforms for the local schools d. A city whose electrical service is provided by one electric co-operative

A city with two firms that are licensed to sell school uniforms for the local schools

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. a decrease in market output and an increase in the price of the product. b. an increase in market output and an decrease in the price of the product. c. a decrease in market output and a decrease in the price of the product. d. an increase in market output and an increase in the price of the product.

A decrease in market output and an increase in the price of the product

When an oligopoly market reaches a Nash equilibrium, a. a firm will not take into account the strategies of competing firms. b. the market price will be different for each firm. c. a firm will have chosen its best strategy, given the strategies chosen by other firms in the market. d. the firms will not have behaved as profit maximizers.

A firm will have chosen its best strategy, given the strategies chosen by other firms in the market

Juan Pablo and Zak 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 $8,000. If they both advertise on radio, each will earn a profit of $14,000. If neither advertises at all, each will earn a profit of $20,000. If one advertises on TV and the other advertises on radio, then the one advertising on TV will earn $12,000 and the other will earn $10,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $22,000 and the other will earn $4,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $24,000 and the other will earn $8,000. If both follow their dominant strategy, then Juan Pablo will a. not advertise and earn $20,000. b. advertise on TV and earn $8,000. c. advertise on radio and earn $14,000. d. advertise on TV and earn $22,000.

Advertise on radio and earn $14,000

Suppose that Guilherme and Zima are duopolists. Guilherme is producing 510 units of output, and Zima is producing 810 units of output. When Zima produces 810 units, Guilherme maximizes profit by producing 510 units. When Guilherme produces 510 units of output, Zima maximizes profit by producing 810 units. Guilherme and Zima are a. pricing at the minimum of marginal cost. b. in a competitive market. c. at a Nash equilibrium. d. engaging in monopoly pricing.

At a Nash equilibrium

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. During the interrogation, each is separately offered the following: "If you confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will get 10 years in prison. If you both confess, you will each get 5 years." If neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of marijuana. If each suspected drug dealer follows a dominant strategy, what should they do? a. Don't confess regardless of the partner's decision b. Confess regardless of the partner's decision c. Confess only if the partner confesses d. Don't confess only if the partner doesn't confess

Confess regardless of the partner's decision

Cartels are difficult to maintain because a. costs to the firms in a cartel are continually rising. b. the monopoly output is very difficult to determine. c. each firm has an incentive to deviate from its agreed output level. d. the number of firms is always large.

Each firm has an incentive to deviate from its agreed output level

In the prisoners' dilemma game, self-interest leads a. each prisoner to stay silent. b. each prisoner to confess. c. to the follow-through of any agreement that the prisoners might have made before being questioned. d. to an outcome that is better for both prisoners.

Each prisoner to confess

An oligopolist will increase production if the output effect is? a. greater than the price effect. b. less than the price effect. c. equal to the price effect. d. the oligopolist never has an incentive to increase production.

Greater than the price effect

Which of the following statements is correct? a. If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly. b. If duopolists successfully collude, then their combined output will be less than the output that would be observed if the market were a monopoly. c. The logic of self-interest increases a duopoly's level of output above the monopoly level, and it pushes the duopolists to reach the competitive price. d. The logic of self-interest decreases a duopoly's price below the monopoly price, and it pushes the duopolists to reach the competitive level of output.

If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly

The equilibrium price in markets characterized by oligopoly is a. higher than in monopoly markets and lower than in perfectly competitive markets b. higher than in monopoly markets and higher than in perfectly competitive markets. c. lower than in monopoly markets and lower than in perfectly competitive markets. d. lower than in monopoly markets and higher than in perfectly competitive markets

Lower than in monopoly markets and higher than in perfectly competitive markets

If a certain market were a monopoly, then the monopolist would maximize its profit by producing 4,000 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? a. Each duopolist produces 4,000 units of output. b. One duopolist produces 2,400 units of output and the other produces 1,600 units of output. c. Each duopolist produces 1,500 units of output. d. One duopolist produces 3,000 units of output and the other produces 1,500 units of output.

One duopolist produces 2,400 units of output and the other produces 1,600 units of output

If one firm left a duopoly market where the firms did not cooperate, then a. quantity would rise and price would fall. b. price would rise and quantity would fall. c. price and quantity would rise. d. quantity and price would fall.

Price would rise and quantity would fall.

In which of the following games is it clearly the case that the cooperative outcome of the game is good for the two players and bad for society? a. There are no games where the cooperative outcome of the game is good for the two players and bad for society. b. Two oil companies own adjacent oil fields over a common pool of oil, and each company decides whether to drill one well or two wells. c. Two superpowers decide whether to build new weapons or to disarm. d. Two airlines dominate air travel between City A and City B, and each airline decides whether to charge a "high" airfare or a "low" airfare on flights between those two cities.

Two airlines dominate air travel between City A and City B, and each airline decides whether to charge a "high" airfare or a "low" airfare on flights between those two cities.

Which of the following statements about oligopolies is not correct! a. An oligopolistic market has only a few sellers. b. Oligopolistic firms are interdependent in a way that competitive firms are not. c. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal costs. d. The actions of any one seller can have a large impact on the profits of all other sellers.

Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal costs

Suppose that Zion and Haidy are duopolists in the music industry. In May, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By June, each singer is considering breaking the agreement. What would you expect to happen next? a. Zion and Haidy will each break the agreement. Both singers' profits will increase. b. Zion and Haidy will each break the agreement. Both singers' profits will decrease. c. Zion and Haidy will determine that it is in each singer's self-interest to maintain the agreement. d. Zion and Haidy will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase.

Zion and Haidy will each break the agreement. Both singers' profits will decrease