Chapter 15 Micro Econ

decrease from 6 to 3.

(Figure: Demand 1) A cartel facing the market in this diagram would try to cause industry output to:

$65, $65.

(Table: Oil Output) Refer to the table. The equilibrium outcome is:

$60, $60.

(Table: Ozzie's, Manny's Payoff Table) Refer to the table. The equilibrium outcome is:

in the least interest of the players in the game.

In the prisoner's dilemma, the dominant strategy is:

C. 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. Which of the following statements is TRUE? A. Manny's dominant strategy is low price, and Ozzie's dominant strategy is high price. B. Manny and Ozzie do not have dominant strategies. C. Manny's dominant strategy is low price, and Ozzie's dominant strategy is low price. D. Manny's dominant strategy is high price, and Ozzie's dominant strategy is high price.

50

(Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the new market price when Country A cheats on the agreement?

30,000

(Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the resultant profit earned by Country A?

20,000

(Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats 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?

400

(Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. If the countries create a cartel and agree to mimic monopoly-like behavior, what level of output would each firm produce?

increase its own quantity to 600 units

(Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Suppose that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What would Country B's reaction be?

cheating

A 2006 paper by Margeret Levenstein and Valerie Suslow ("What Determines Cartel Success?") found that although cheating is a common cause of why cartels broke down, the following causes are even more common: 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?

reduce supply, increase prices, and increase profits.

A cartel is a group of suppliers who act together in order to:

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

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?

I and III only

Cartel agreements tend to fail: I. if they produce manufactured rather than natural goods. II. if they produce natural rather than manufactured goods. III. in the long run as demand curves become more elastic.

more;keep

Cheaters in cartels make ________ profit when the other cartel members ________ their promise.

increase costs to new firms entering the market.

Barriers to entry are factors that:

lowering prices and increasing production.

Firms operating in a cartel have a large incentive to cheat on the agreement by:

It can lead to innovation.

How can the pursuit of market power lead to the social good?

collapse; lose

If anything, a cartel is likely to ________ and ________ power over time.

Some women will secretly allow guys to take them to cheaper restaurants.

If women conspired together and demanded that any man wishing to take them on a date must take them to a nice restaurant, why would this be unsustainable?

cheating when others cooperate.

In a cartel, the most profitable outcome is achieved by:

increase prices

Loyalty programs, such as frequent flyer plans, tend to:

lower than monopolies but higher than competitive markets

Oligopolies tend to set prices:

The high price of oil charged by OPEC made it profitable to invest in such research.

Scientists are working on techniques to create bacteria that excrete oil as waste. How might OPEC have contributed to this research?

increase from $400 million to $475 million a day.

Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total 100 MBD. The world price of oil at this quantity is $36 per barrel so each country earns $360 million a day. (Table: Market for Oil) Refer to the table. 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 cheating country would:

cheat, for both Russia and Saudi Arabia.

Suppose that the oil market is dominated by two large firms, Saudi Arabia and Russia. Both Saudi Arabia and Russia have two choices or strategies: cooperate by cutting back production or cheat by increasing production. The payoff table below shows the potential revenues associated with each firm's strategies. For instance, if Saudi Arabia cheats and Russia cooperates, the payoff to Saudi Arabia is $1,000 and the payoff to Russia is $400. (Table: Russia, Saudi Payoff Table) Refer to the table. The dominant strategies are to:

limits cartel-like behavior in the United States.

The Sherman Antitrust Act of 1890:

always cheat

The following shows a payoff matrix with two players and two strategies. The payoffs are listed in the order of Player 1's payoffs, Player 2's payoffs. (Table: Payoff Matrix) Refer to the table. What is Player 1's strategy in this game?

always cheat

The following shows a payoff matrix with two players and two strategies. The payoffs are listed in the order of Player 1's payoffs, Player 2's payoffs. (Table: Payoff Matrix) Refer to the table. What is Player 2's strategy in this game?

consists of government-controlled cartels that raise the price of milk and punish any seller who violates the cartel.

The milk industry in the United States:

the early 1970's

There was a dramatic increase in the price of oil in:

$24; $4

Two firms in an industry act as a cartel, with each firm agreeing to charge a price of $16 and sell two units of output. If one of them cheats and produces two more units of output, the cheating firm's total revenue increases by ______ and the other firm's total revenue decreases by ______.

fails to earn monopoly profits.

When all members of a cartel cheat, the cartel:

new firms will begin to enter the market.

When cartels are successful at driving up prices,:

C. It explains why there is so much recidivism.

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

"Network effects" tend to limit the size of the firm.

Which of the following is NOT a result of the network effect?

D. The high prices charged by a cartel might lead to new firms entering the industry, reducing the cartel's market power.

Which of the following statements is TRUE? A. Cartels are more successful when there are many substitutes for the cartel's good. B. It is easier to establish a cartel for a manufactured good than for a natural resource. C. OPEC's high oil prices encourage countries like Mexico, Great Britain, and the Netherlands to cut back on oil production. D. The high prices charged by a cartel might lead to new firms entering the industry, reducing the cartel's market power.

III and IV only

Which of the following statements is 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 that market.

D. Cartels should control natural resources that are rare and more valuable.

Which of the following statements regarding cartels is FALSE? A. Cheating by cartel members is less profitable and easier to detect if there are fewer firms in the industry. B. Cartels are more successful if they are backed by government and the power of the law. C. New entrants can be prevented when the cartel-controlled good is limited in supply. D. Cartels should control natural resources that are rare and more valuable.

producing oil beyond quota

Within OPEC, cheating is associated with: