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Chap16 - Test bank

Introduction to Micro Economics (International University - VNU-HCM)

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Chapter 16
Oligopoly
MULTIPLE CHOICE

1
. Markets with only a few sellers, each offering a product similar or identical to the
others, are typically referred to as
a. monopolistically competitive markets.
b. oligopoly markets.
c. monopoly markets.
d. competitive markets.
2
. The general term for market structures that fall somewhere in between monopoly and
perfect competition is
a. oligopoly markets.
b. monopolistically competitive markets.
c. incomplete markets.
d. imperfectly competitive markets.
3
. Monopolistically competitive firms are typically characterized by
a. many firms selling identical products.
b. a few firms selling similar or identical products.
c. a few firms selling highly different products.
d. many firms selling similar, but not identical products.
4
. A special kind of imperfectly competitive market that has only two firms is called
a. a doublet.
b. a duopoly.
c. a two-tier competitive structure.
d. an incidental monopoly.
5
. In markets characterized by oligopoly,
a. collusive agreements will always prevail.
b. collective profits are lower under cartel arrangements.
c. pursuit of self-interest by profit maximizing firms always maximizes collective
profits in the market.
d. there is tension between cooperation and self-interest.
6
. 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)
a. oligopoly or perfectly competitive market.
b. oligopoly or monopolistically competitive market.
c. oligopoly or monopoly market.
d. monopoly or monopolistically competitive market.
7
. One characteristic of an oligopoly market structure is:

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2 Chapter 16/Oligopoly

a. Firms in the industry are typically characterized by very diverse product lines.
b. Products typically sell at a price that reflects their marginal cost of production.
c. The actions of one seller can have a large impact on the profitability of
other sellers.
d. Since markets are typically large, the actions of one seller largely go unnoticed by
its competitors.
8
. One key difference between an oligopoly market and a competitive market is that
a. oligopolistic firms are interdependent while competitive firms are not.
b. oligopolistic firms sell completely unrelated products while competitive firms do
not.
c. oligopolistic firms sell their product at a price equal to marginal cost while
competitive firms do not.
d. oligopolistic firms are price takers while competitive firms are not.

9
. Typical firms in our economy are classified as
a. imperfectly competitive.
b. perfectly competitive.
c. oligopolists.
d. duopolists.
10
. Crude oil is supplied to the world market primarily by a few Middle Eastern countries.
Such a market is an example of a(n)
(i) monopoly market.
(ii) oligopoly market.
(iii) imperfectly competitive market.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (i) only
11
. In a monopolistically competitive market, each firm has some degree of monopoly
power over the product that it makes, but
a. has no pricing power.
b. many other firms make similar products that compete for the same
customers.
c. many other firms produce identical products that compete for the same
customers.
d. has severely limited profit capacity.
12
. If identical products are sold by firms participating in a market, the market is
(i) perfectly competitive.
(ii) an oligopoly.
(iii) monopolistically competitive.
a. (i) or (ii)
b. (ii) or (iii)
c. (i) or (iii)
d. (i) only
13
. If there are many firms participating in a market, the market is either

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Chapter 16/Oligopoly 3

a. an oligopoly or perfectly competitive.

b. an oligopoly or monopolistically competitive.
c. perfectly competitive or monopolistically competitive.
d. All of the above are possible.
14
. As a group, oligopolists would always be better off if they would act collectively
a. as a single monopolist.
b. as a single competitor.
c. as if they were each seeking to maximize their own profit.
d. in a manner that would prohibit collusive agreements.
15
. As a group, oligopolists would always be better off collectively if they would
a. limit production.
b. increase production.
c. decrease prices.
d. operate according to their own self-interest.
16
. Because each oligopolist cares about its own profit rather than the collective profit of
all the oligopolists together,
a. society is worse off.
b. they are able to maximize their individual profits.
c. they are unable to maintain monopoly power.
d. all of the above

Use the information below to answer question 17 through 22

The information in the table below depicts the total demand for premium channel digital
cable TV subscriptions in a small urban market. Assume that digital cable TV operators pay
a fixed cost of $100,000 (per year) to provide premium digital channels in their market
area and that the marginal cost of providing the premium channel service to a household is
zero.

Quantity Price (per year)

0 $120
3,000 $100
6,000 $80
9,000 $60
12,000 $40
15,000 $20
18,000 $0
17
. If there is only one digital cable TV company in this market, what price would it
charge for a premium digital channel subscription to maximize its profit?
a. $80
b. $100
c. $60
d. $40
18
. Assume that there are two digital cable TV companies operating in this market. If they
are able to "collude" on price and quantity of subscriptions to sell, what price will they
charge, and how many subscriptions will they collectively sell?

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4 Chapter 16/Oligopoly

a. $80, 6,000
b. $100, 3,000
c. $60, 9,000
d. $40, 12,000
19
. Assume that there are two profit-maximizing digital cable TV companies operating in
this market. Further assume that they are able to "collude" on price and quantity of
premium digital channel subscriptions to sell. As part of their collusive agreement
they decide to take an equal share of the market. How much profit will each company
make?
a. $480,000
b. $170,000
c. $540,000
d. $240,000
20
. Assume that there are two profit-maximizing digital cable TV companies operating in
this market. Further assume that they are not able to "collude" on price and quantity
of premium digital channel subscriptions to sell. How many premium digital channel
cable TV subscriptions will be collectively sold (by both firms) when this market
reaches a Nash equilibrium?
a. 12,000
b. 3,000
c. 6,000
d. 9,000
21
. Assume that there are two profit-maximizing digital cable TV companies operating in
this market. Further assume that they are not able to "collude" on price and quantity
of premium digital channel subscriptions to sell. How much profit will each firm earn
when this market reaches a Nash equilibrium?
a. $0
b. $240,000
c. $140,000
d. Each firm will incur economic losses in a Nash equilibrium.
22
. Assume that there are two profit-maximizing digital cable TV companies operating in
this market. Further assume that they are not able to "collude" on price and quantity
of premium digital channel subscriptions to sell. What price will premium digital
channel cable TV subscriptions be sold at when this market reaches a Nash
equilibrium?
a. $40
b. $60
c. $80
d. From the information given in the table, we can't determine price in a Nash
equilibrium.

Use the following information to answer question 23 through 27

Imagine a small town in which only two residents—Tony and Jill—own wells that produce
water for safe drinking. Each Saturday, Tony and Jill work together to decide how many
gallons of water to pump, bring the water to town, and sell it at whatever price the market
will bear. To keep things simple, suppose that Tony and Jill can pump as much water as
they want without cost; therefore, the marginal cost of water equals zero.

The weekly town demand schedule and total revenue schedule for water is reflected in the
table below.

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Chapter 16/Oligopoly 5

Weekly Weekly
Quantity Total Revenue
(in gallons) Price (and Total Profit)
0 $12 $0
10 11 110
20 10 200
30 9 270
40 8 320
50 7 350
60 6 360
70 5 350
80 4 320
90 3 270
100 2 200
110 1 110
120 0 0
23
.
Since Tony and Jill operate as a profit -maximizing monopoly in the market for water,
what price will they charge to sell 80 gallons of water?
a. $4
b. $9
c. $12
d. None of the above; the price is arbitrary when dealing with a monopoly
market.
24
. If the market for water was perfectly competitive instead of monopolistic, how many
gallons of water would be produced and sold?
a. 70
b. 90
c. 110
d. 120
25
. As long as Tony and Jill operate as a profit-maximizing monopoly, what will their
weekly revenue equal?
a. $270
b. $320
c. $350
d. $360
26
. The socially efficient level of water supplied to the market would be
a. 60 gallons.
b. 80 gallons.
c. 100 gallons.
d. 120 gallons.
27
. Suppose the town enacts new antitrust laws that prohibit Tony and Jill from operating
as a monopolist. What will the new price of water end up being once the Nash
equilibrium is reached?

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6 Chapter 16/Oligopoly

a. $6
b. $5
c. $4
d. $3
28
. Assuming that oligopolists do not have the opportunity to collude, once they have
reached the Nash equilibrium,
a. it is always in their best interest to supply more to the market.
b. it is always in their best interest to leave supply unchanged.
c. it is always in their best interest to supply less to the market.
d. it may be in their best interest to do any of the above, depending on market
conditions.
29
. When an oligopoly market is in Nash equilibrium,
a. market price will be different for each firm.
b. firms will not behave as profit maximizers.
c. a firm will choose its best pricing strategy, given the strategies that it
observes other firms taking.
d. A firm will not take into account the strategies of competing firms.
30
. When firms have agreements among themselves on the quantity to produce and the
price to sell output they are organized as
a. a Nash arrangement.
b. competitive scale firms.
c. competitive oligopolists.
d. a cartel.
31
. Equilibrium quantity in markets characterized by oligopoly are
a. lower than in monopoly markets and higher than in perfectly competitive markets.
b. lower than in monopoly markets and lower than in perfectly competitive markets.
c. higher than in monopoly markets and higher than in perfectly competitive
markets.
d. higher than in monopoly markets and lower than in perfectly competitive
markets.
32
. Equilibrium prices in markets characterized by oligopoly are
a. lower than in monopoly markets and higher than in perfectly competitive
markets.
b. lower than in monopoly markets and lower than in perfectly competitive markets.
c. higher than in monopoly markets and higher than in perfectly competitive
markets.
d. higher than in monopoly markets and lower than in perfectly competitive markets.
33
. As the number of firms in an oligopoly market
a. decreases, the market approaches a cartel equilibrium.
b. increases, the market approaches a competitive market equilibrium.
c. decreases, the market approaches a competitive market equilibrium.
d. increases, the market approaches a monopoly market equilibrium.
34
. When oligopoly firms maximize profit, the output effect

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Chapter 16/Oligopoly 7

a. can be larger or smaller than the price effect.

b. must balance with the price effect.
c. must dominate the price effect.
d. must be smaller than the price effect.
35
. Cartels are difficult to maintain because
a. laws often prohibit explicit collusive agreements among competing firms.
b. cartel agreements are difficult to enforce.
c. there is always tension between cooperation and self-interest in a cartel.
d. all of the above
36
. Some companies have competitors but do not face much competition; in this case they
are not price takers. Economists call this situation
a. imperfect competition.
b. an oligopoly.
c. a duopoly.
d. monopolistic competition.
37
. 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
a. oligopoly and duopoly.
b. imperfect competition and monopolistic competition.
c. duopoly and imperfect competition.
d. monopolistic competition and oligopoly.
38
. In what type of market do the actions of any one seller have a significant impact on
the profits of all other sellers?
a. a monopoly
b. an oligopoly
c. perfect competition
d. monopolistic competition
39
. A group of firms that are acting in unison to maximize collective profits is called a
a. cartel.
b. dilemma game.
c. union.
d. coalition.
40
. An agreement among firms over production and price is called
a. collusion.
b. conspiracy.
c. multinational corporation.
d. trade arrangement.
41
. If duopolists individually pursue their own self-interest when deciding how much to
produce, the amount they will produce collectively will
a. be less than the monopoly quantity.
b. be greater than the monopoly quantity.
c. be equal to the monopoly quantity.
d. Any of the above are possible.
42
. If duopolists individually pursue their own self-interest when deciding how much to
produce, the price they are able to charge for their product will be

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8 Chapter 16/Oligopoly

a. less than the monopoly price.

b. greater than the monopoly price.
c. possibly less than or greater than the monopoly price.
d. equal to the perfectly competitive market price.
43
. To increase their profits further, members of a cartel have an incentive to
a. collude.
b. lower production.
c. cheat.
d. limit membership.
44
. Once a cartel is formed, the market is in effect served by
a. imperfect competition.
b. monopolistic competition.
c. a monopoly.
d. an oligopoly.
45
. A situation in which economic actors interacting with one another each choose their
best strategy given the strategies the others have chosen is called a
a. socially optimal solution.
b. Nash equilibrium.
c. competitive equilibrium.
d. open market solution.
46
. If an oligopolist is part of a cartel that is collectively producing at the monopoly level
of output, then the oligopolist, being self-interested, will
a. lower production and drive up prices.
b. increase production and push prices down.
c. do nothing thus allowing the cartel to realize monopoly profits.
d. none of the above
47
. For the noncolluding oligopolist, there are two factors that affect the decision to raise
production. These factors are
a. the output effect and the price effect.
b. the cost effect and the price effect.
c. the production effect and the output effect.
d. the output effect and the cost effect.
48
. When price is above marginal cost, selling one more unit of output at the going price
will increase profit. This concept is known as the
a. income effect.
b. price effect.
c. cost effect.
d. output effect.
49
. Raising production will increase total units sold, which will decrease the per unit price
of all units sold. This concept is known as the
a. cost effect.
b. output effect.
c. price effect.
d. income effect.
50
. An oligopolist will increase production if the output effect is

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Chapter 16/Oligopoly 9

a. greater than the price effect.

b. less than the price effect.
c. equal to the price effect.
d. greater than or equal to the price effect.
51
. An oligopolist has no profit incentive to change production when the output effect is
a. rising faster than the price effect.
b. equal to the price effect.
c. less than the price effect.
d. greater than the price effect.
52
. When an oligopoly grows very large, the
a. output effect disappears.
b. income effect disappears.
c. price effect disappears.
d. homogeneous product effect disappears.
53
. As the number of firms in an oligopoly grows larger, an oligopolistic market looks
more and more like
a. a monopoly.
b. a duopoly.
c. a competitive market.
d. none of the above
54
. As the number of firms in an oligopolistic market grows larger, the price approaches
a. the monopoly price.
b. average cost.
c. marginal revenue.
d. marginal cost.
55
. As the number of firms in an oligopoly grows larger, the quantity produced
(i) approaches the socially optimal level.
(ii) increases.
(iii) decreases.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (ii) only
56
. 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
markets?
a. monopoly
b. competitive markets
c. oligopoly
d. duopoly
57
. When firms are faced with making strategic choices in order to maximize profit,
economists typically use

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10 Chapter 16/Oligopoly

a. the theory of monopoly to model their behavior.

b. game theory to model their behavior.
c. cartel theory to model their behavior.
d. the theory of aggressive competition to model their behavior.
58
. When strategic interactions are important to pricing and production decisions, a firm
will
a. assume that competing firms are already maximizing profit.
b. consider exiting the market.
c. consider how competing firms might respond to its actions.
d. generally operate as if it is a monopolist.
59
. The prisoners' dilemma is an important game to study because
a. it identifies the fundamental difficulty in maintaining cooperative
agreements.
b. most games present zero-sum alternatives.
c. strategic decisions faced by prisoners are identical to those faced by firms
engaged in competitive agreements.
d. all of the above
60
. A prisoners' dilemma game demonstrates how cooperative action is often not rational
even though
a. cooperation would make everyone worse off.
b. cooperation would make everyone better off.
c. prisoners are not capable of individual choice.
d. All of the above can be demonstrated with a prisoners’ dilemma game.
61
. When the player of a game chooses a dominant strategy,
a. it is the best strategy only if other players are cooperative.
b. it always leads to a Nash equilibrium that makes all players equally well off.
c. the game can never reach a Nash equilibrium.
d. it is the best strategy, regardless of choices made by other players.
62
. Dominant strategies in a two-person game often lead to
a. the best possible outcome for both players.
b. one person gaining advantage at the expense of the other person.
c. profit minimization.
d. a less preferred outcome for both players.
63
. Self-interest usually dictates what kind of outcome for the players in a prisoner
dilemma game?
a. sub-optimal
b. optimal
c. indeterminate
d. symmetrical

Use the following information to answer questions 64 through 66.

Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to
recover the health care related expenses associated with cigarette smoking. Both cigarette
firms have evidence that indicates that cigarette smoke causes lung cancer (and other
related illness). State prosecutors do not have access to the same data used by cigarette
manufacturers and thus will have difficulty recovering full costs without the help of at least
one cigarette firm study. Each firm has been presented with an opportunity to lower their
liability in the suit if they cooperate with attorneys representing the states.

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Chapter 16/Oligopoly 11

Firm A
Concede that Argue that there is
cigarette smoke no evidence that
causes lung smoke causes
cancer cancer

Concede that Firm A profit = - Firm A profit = -$50

Firm B cigarette smoke $20 b b
causes lung Firm B profit = - Firm B profit = -$5 b
cancer $15 b

Argue that there Firm A profit = -$5 Firm A profit = -$10

is no evidence b b
that smoke Firm B profit = - Firm B profit = -$10
causes cancer $50 b b

64
. If both firms follow a dominant strategy, Firm A's profits (losses) will be
a. -$5 b.
b. -$10 b.
c. -$20 b.
d. -$50 b.
65
. If both firms follow a dominant strategy, Firm B's profits (losses) will be
a. -$5 b.
b. -$10 b.
c. -$15 b.
d. -$50 b.
66
. When this game reaches a Nash equilibrium, profits for firm A and firm B will be
a. -$20 b and -$15 b, respectively.
b. -$50 b and -$5 b, respectively.
c. -$5 b and -$50 b, respectively.
d. -$10 band -$10 b, respectively.

Use the following information to answer questions 67 through 72.

Each year the United States considers renewal of Most Favored Nation (MFN) trading
status with China. Historically, legislators have made threats of not renewing MFN status
because of human rights abuses in China. The non-renewal of MFN trading status is likely
to involve some retaliatory measures by China. The game below reflects the potential
economic gains associated with a two-outcome game in which China may impose trade
sanctions against U.S. firms and the United States may not renew MFN status with China.
The following table contains the dollar value of all trade flow benefits to the United States
and China under two-trade relationship scenarios.

China
Impose trade sanctions Do not impose trade
against U.S. firms sanctions against U.S. firms

Don't renew MFN U.S. trade value = $65 U.S. trade value = $140 b
United status with China b China trade value = $5 b
States China trade value = $75
b

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12 Chapter 16/Oligopoly

Renew MFN U.S. trade value = $35 U.S. trade value = $130 b
status with China b China trade value = $275 b
China trade value =
$285 b

67
. If both countries follow a dominant strategy, the value of trade flow benefits for China
will be
a. $285 b.
b. $275 b.
c. $75 b.
d. $5 b.
68
. If both countries follow a dominant strategy, the value of trade flow benefits for the
United States will be
a. $35 b.
b. $65 b.
c. $130 b.
d. $140 b.
69
. When this game reaches a Nash equilibrium, the value of trade flow benefits will be
a. United States $140 b and China $5 b.
b. United States $65 b and China $75 b.
c. United States $35 b and China $285 b.
d. United States $130 b and China $275 b.
70
. If trade negotiators are able to communicate effectively about the consequences of
various trade policies (i.e., enter into an agreement about the policy they should
adopt), then we would expect the game outcome to be.
a. United States $140 b and China $5 b.
b. United States $65 b and China $75 b.
c. United States $35 b and China $285 b.
d. United States $130 b and China $275 b.
71
. Assume that trade negotiators meet to discuss trade policy between the United States
and China. If neither party to the negotiation is able to trust the other party, then
a. each should follow their dominant strategy.
b. each should assume that the other will choose a strategy that optimizes total
value of the trade relationship.
c. the Nash equilibrium will provide the largest possible gains to each party.
d. Chinese negotiators should assume that United States negotiators will implement
a policy that is in the mutual best interest of both countries.
72
. Trade negotiations are repeated each year. In a repeated game scenario it is likely
that
a. the Nash equilibrium will provide the largest possible gains to each party.
b. Chinese negotiators should assume that United States negotiators will never
retaliate for a noncooperative trade policy.
c. both parties will assume that the other will choose a strategy that
optimizes total value of the trade relationship.
d. each should follow a dominant strategy based entirely on self-interest.

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Chapter 16/Oligopoly 13

Use the information below to answer questions 73 through 77.

Two discount superstores (Ultimate Saver and SuperDuper Saver) in a growing urban area
are interested in expanding their market share. Both are interested in expanding the size of
their store and parking lot to accommodate potential growth in their customer base. The
following game depicts the strategic outcomes that result from the game. Growth related
profits of the two discount superstores under two scenarios are reflected in the table below.

SuperDuper Saver
Increase the size of store Do not increase the size
and parking lot of store and parking lot

Increase the size SuperDuper Saver = $50 SuperDuper Saver =

Ultimat of store and Ultimate Saver = $65 $25
e Saver parking lot Ultimate Saver = $275

Do not increase SuperDuper Saver = SuperDuper Saver =

the size of store $250 $85
and parking lot Ultimate Saver = $35 Ultimate Saver = $135

73
. If both stores follow a dominant strategy, Ultimate Saver's growth related profits will
be
a. $35.
b. $135.
c. $275.
d. $65.
74
. If both stores follow a dominant strategy, SuperDuper Saver's growth related profits
will be
a. $85.
b. $250.
c. $50.
d. $25.
75
. When this game reaches a Nash equilibrium, the dollar value of growth related profits
will be
a. Ultimate Saver $275 and SuperDuper Saver $25.
b. Ultimate Saver $65 and SuperDuper Saver $50.
c. Ultimate Saver $35 and SuperDuper Saver $250.
d. Ultimate Saver $135 and SuperDuper Saver $85.
76
. If the owners of SuperDuper Saver and Ultimate Saver meet for a friendly game of
golf one afternoon and happen to discuss a strategy to optimize growth related profit.
They should both agree to

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14 Chapter 16/Oligopoly

a. share the context of their conversation with the Federal Trade Commission.
b. be more competitive in capturing market share.
c. not increase their store sizes or parking lots.
d. increase their store sizes and parking lots.
77
. Noncooperative outcomes typically imply an outcome
a. that is worse for both parties to the "game."
b. better for both parties to the "game."
c. in which society is always worse off.
d. in which society is always better off.
78
. Dominant strategies lead the players to a sub-optimal outcome of the game when
a. cooperation is likely to be individually irrational.
b. self-interest is likely to be individually irrational.
c. cooperation is likely to be collectively irrational.
d. self-interest is likely to be collectively rational.
79
. Cartel agreements are difficult to maintain because
a. self-interest is likely to be individually irrational.
b. cooperation is likely to be collectively irrational.
c. self-interest is likely to be collectively rational.
d. cooperation is likely to be individually irrational.
80
. In a typical cartel agreement, the cartel optimizes profit when it
a. behaves as a duopolist.
b. is flexible in enforcing production targets.
c. behaves as a monopolist.
d. behaves as a perfectly competitive firm.
81
. In a world with only two countries, the noncooperative outcome to an "arms race"
game clearly
a. could not be considered a waste of economic resources.
b. is bad for society.
c. is the best possible outcome for society.
d. is optimal for one player at the expense of the other.
82
. Games that are played more than once
a. generally make collusive arrangements easier to enforce.
b. typically lead to outcomes dominated purely by self-interest.
c. always enhance social well-being.
d. encourage cheating on cartel production quotas.
83
. Very often, the reason that players can solve the prisoners’ dilemma game and reach
the most profitable outcome is that

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a. they play the game not once but many times.

b. the game becomes more competitive.
c. each player tries to capture a large portion of the market share.
d. All of the above can solve the prisoners' dilemma.
84
. Complex gaming strategies in repeated prisoners’ dilemma games
a. are often dominated by a simple tit-for-tat strategy.
b. are never dominated by a simple tit-for-tat strategy.
c. were found to be socially optimal by Robert Axelrod.
d. always lead to outcomes which reduce the well-being of society in general.
85
. In a two-person repeated game, a tit-for-tat strategy starts with
a. noncooperation and then each player pursues his or her own self-interest.
b. cooperation and then each player is unresponsive to the strategic moves of the
other player.
c. noncooperation and then each player cooperates when the other player
demonstrates a desire for the cooperative solution.
d. cooperation and then each player mimics the other player's last move.
86
. Game theory is not necessary for understanding competitive markets but is quite
useful in understanding the behavior of
a. oligopolies.
b. monopolies.
c. oligarchies.
d. competitive markets.
87
. 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 he/she do?
a. not confess regardless of the partner's decision
b. not confess and hope that the partner does confess
c. confess regardless of the partner's decision
d. confess in hopes that the partner does not confess
88
. While on vacation in Berserkistan you are arrested and accused of spying for the
United States. You are, of course, innocent. Your captors inform you that if you
confess, you will receive a sentence of two years while your co-conspirator (whom you
have never heard of) will receive a sentence of twenty years. If you both confess you
will each receive a sentence of three years. You are also told that your co-conspirator
is being offered the same option. You suspect that there is not enough evidence to
convict you unless your alleged co-conspirator confesses. If you are risk averse, what
should you choose to do?
a. confess because it is always the best solution to this type of "game"
b. confess, even though you are innocent, to avoid a twenty-year sentence
c. not confess because you are innocent even though you may spend 20 years in a
Berserkistan prison
d. not confess in hopes that your alleged co-conspirator also remains silent
89
. A lack of cooperation by oligopolists trying to maintain monopoly profits

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16 Chapter 16/Oligopoly

a. may or may not be desirable for society as a whole.

b. is desirable for society as a whole.
c. is not desirable for society as a whole.
d. is not a concern due to antitrust laws.
90
. The Sherman Antitrust Act
a. enhanced the ability to enforce cartel agreements.
b. restricted the ability of competitors to engage in cooperative agreements.
c. was passed to encourage judicial leniency in the review of cooperative
agreements.
d. was concerned with self-interest dominated Nash equilibriums in prisoners'
dilemma games.
91
. Antitrust laws in general are used to
a. encourage oligopolists to pursue cooperative-interest at the expense of self-
interest.
b. prevent oligopolists from acting in ways that make markets less
competitive.
c. encourage frivolous lawsuits among competitive firms.
d. all of the above
92
. Economists claim that a resale price maintenance agreement is not anti-competitive
because
a. suppliers are never able to exercise noncompetitive market power.
b. retail markets are inherently noncompetitive.
c. retail cartel agreements cannot increase retail profits.
d. if a supplier has market power, it will be likely to exert that power through
wholesale price rather than retail price.
93
. The information obtained from a retail outlet can be considered a
a. private good.
b. cooperative good.
c. public good.
d. collective good.
94
. When discount retailers free ride on information about products provided by
nondiscount retailers, the information that is provided about products is considered
to be
a. more than optimal quantity.
b. less than optimal quantity.
c. of poor quality.
d. not useful to the consumer.
95
. Assume that Peach Computers has entered into a resale price maintenance agreement
with Computer Super Stores Inc. (CSS Inc.) but not with CompuMart. In this case,

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Chapter 16/Oligopoly 17

a. CompuMart will benefit from customers who go to CSS Inc. for

information about different computers.
b. CSS Inc. will sell Peach computers at a lower price than CompuMart.
c. The wholesale price of Peach computers will be different for CSS Inc. than it is for
CompuMart.
d. Peach computers will never increase profits by having a resale price maintenance
agreement with all retail outlets that sell its products.
96
. Assume that Apple Computers has entered into an enforceable resale price
maintenance agreement with Computer Super Stores Inc. (CSS Inc.) and Wal-Mart.
Which of the following will always be true?
a. The wholesale price of Apple computers will be different for CSS Inc. than it is for
Wal-Mart.
b. Wal-Mart and CSS Inc. will always sell Apple Computers for exactly the
same price.
c. Wal-Mart will benefit from customers who go to CSS Inc. for information about
different computers.
d. CSS Inc. will sell Apple computers at a lower price than Wal-Mart.
97
. The practice of tying is illegal on the grounds that
a. it allows firms to form collusive arrangements.
b. it increases the well-being of society.
c. collusive agreements are not conducive to cooperative outcomes.
d. it allows firms to expand their market power.
98
. The practice of tying is used to
a. enhance the enforcement of antitrust laws.
b. package products to sell at a combined price closer to a buyer's total
willingness to pay.
c. encourage the enforcement of collusive agreements.
d. control the retail price of a collection of related products.
99
. Tying is becoming increasingly important in the market for
a. crude oil.
b. long-distance phone calls.
c. wheat.
d. computer software.

Use the following to answer questions 104 through 107.

Assume that a local bank sells two services, checking accounts and ATM card services. Mr.
Donethat is willing to pay $8 a month for the bank to service his checking account and $2 a
month for unlimited use of his ATM card. Ms. Beenthere is willing to pay only $5 for a
checking account, but is willing to pay $9 for unlimited use of her ATM card. To keep this
example simple, assume that the bank can provide each of these services at zero marginal
cost.
100
. If the bank is unable to use tying, what is the profit-maximizing price to charge for a
checking account?
a. $5
b. $8
c. $13
d. $18

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18 Chapter 16/Oligopoly

101
. If the bank is unable to use tying, what is the profit-maximizing price to charge for
unlimited use of an ATM card?
a. $2
b. $9
c. $15
d. $20
102
. If the bank is able to use tying to price checking account and ATM service, what is the
profit-maximizing price to charge for the "tied" good?
a. $5
b. $9
c. $10
d. $14
103
. How much additional profit does the bank make when it switches to use of a tying
strategy to price checking account and ATM service?
a. $1
b. $8
c. $10
d. $14
104
. The practice of selling a product to retailers and requiring the retailers to charge a
specific price for the product is called
a. fixed retail pricing.
b. unfair trade.
c. resale price maintenance.
d. cost plus pricing.
105
. The practice of requiring someone to buy two or more items together, rather than
separately, is called
a. product fixing.
b. tying.
c. free-riding.
d. resale maintenance.
106
. If Levi Strauss & Co. were to require every store that carried their clothing to charge
customers 20% more than the store's cost for each item of clothing, Levi Strauss &
Co. would be practicing
a. tying.
b. cost plus pricing.
c. resale price maintenance.
d. fixed retail pricing.
107
. 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?.
a. resale price maintenance
b. cost plus pricing
c. tying
d. free-riding
108
. As a legitimate means of discouraging the problem of free-riders, economists suggest
the use of

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Chapter 16/Oligopoly 19

a. resale price maintenance.

b. cost plus pricing.
c. tying.
d. marginal cost pricing.
109
. In which of the following markets is economic profit driven to zero in the long run?
a. oligopoly
b. monopoly
c. monopolistic competition
d. perfect competition

110
. The typical firm in the economy
a. is an oligopoly
b. is perfectly competitive.
c. is a monopoly.
d. has some degree of market power.
111
. When deciding which structure best describes a market, you will need know
(i) the number of sellers.
(ii) the type of product being sold.
(iii) the average fixed cost curves for the given firms.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. all of the above
112
. Profit-maximizing production decisions will drive price to equal marginal cost when
a. there are only a few sellers.
b. many sellers sell products that are slightly differentiated.
c. there is only one seller.
d. many sellers sell products that are identical.
113
. The standard price for monopoly firms is a price that
a. exceeds marginal cost.
b. exceeds demand.
c. exceeds fixed costs.
d. equals marginal revenue.
114
. If a few of New York’s prominent drug smugglers were to form a cartel, the
arrangement would most likely limit
(i) the total amount of drugs sold in New York.
(ii) the total amount each member of the cartel is allowed to sell in New York.
(iii) competition among the drug smugglers.

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20 Chapter 16/Oligopoly

a. (i) and (ii).

b. (ii) and (iii).
c. (i) and (iii)
d. all of the above.
115
. Name the industry that has somehow managed to remain exempt from antitrust laws
directed at cartels.
a. the U.S. Postal Service
b. the automobile industry
c. the long-distance telephone industry
d. the ocean shipping industry
116
. Binding agreements concerning production levels between oligopolists can lead the
involved firms to
a. bankruptcy.
b. higher prices and less profit.
c. monopoly profit.
d. lower prices and more profit.
117
. The logic of self-interest causes the duopoly’s output level to be
(i) above the monopoly level.
(ii) above the oligopoly level.
(iii) below the competitive level.
a. (i) and (ii)
b. (i) and (iii)
c. (ii) and (iii)
d. all of the above.
118
. Like monopolists, oligopolists are aware that increases in the amount they produce
a. reduces their profit
b. reduces their revenue.
c. reduces the price of their product.
d. reduces productivity.
119
. As the number of firms in an oligopoly market grows larger, the price will approach
a. marginal revenue.
b. marginal cost.
c. zero.
d. the monopoly price.
120
. 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 less deadweight losses.
(iii) profit increases directly with competition for oligopoly firms.
a. (i) and (ii)
b. (ii) and (iii)
c (i) and (iii)
d. (ii) only
121
. OPEC can be classified as a
(i) a group whose concern is to control production levels of oil.
(ii) a group of oligopolists.
(iii) a cartel.

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Chapter 16/Oligopoly 21

a. (i) and (ii)

b. (ii)and (iii)
c. (i) and (iii)
d. all of the above
122
. OPEC is able to raise the price of its product by
a. tying.
b. bundling.
c. setting production levels for each of its members.
d. all of the above.
123
. Which of the following will weaken OPEC’s effect on the world price of oil?
(i) Member countries increase their own production.
(ii) Member countries set their level of production in order to capture a larger share
of the total profit available
(iii) Member countries abide by the regulatory policy set forth under the original
collusive agreement.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (i) only

124
. During the 1990s, the members of OPEC operated independently from one another,
causing the world market for crude oil to become close to
a. a monopoly market.
b. an oligopoly market.
c. a competitive market.
d. a duopoly market.
125
. All cartels are inherently reliant on
a. the cooperation of their members.
b. a horizontal demand curve.
c. an inelastic demand for their product.
d. competitive market profits.
126
. Individual profit earned by Dave, the oligopolist, depends on which of the following?
(i) the quantity that Dave produces
(ii) the quantity that the other firms in the market produce
(iii) the price Dave can sell his product for in the market
a. (i) and (ii)
b. (ii) and (iii)
c. (iii) only
d. all of the above
127
. Which of the following statements are true of the prisoners’ dilemma?
(i) Cooperation between the prisoners is difficult to maintain.
(ii) Rational self-interest leads neither party to confess.
(iii) Cooperation between the prisoners is individually irrational.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. all of the above

Use the following information to answer question 137 through143.

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22 Chapter 16/Oligopoly

Assume that the countries of Irun and Urun are the only two producers of crude oil.
Further assume that both countries have entered into an agreement to maintain certain
production levels in order to maximize profits. The world market for oil is represented by a
downward sloping demand curve.
128
. The fact that both countries have colluded to earn higher profit shows their desire to
keep production levels
a. higher than the competitive market equilibrium.
b. at the Nash equilibrium.
c. lower than the Nash equilibrium.
d. higher than the Nash equilibrium.
129
. As long as production levels are less than the Nash equilibrium, both Irun and Urun
have the individual incentive to
a. hold production levels constant.
b. increase production.
c. decrease production.
d. All of the above are possible.

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Chapter 16/Oligopoly 23

130
. The agreed upon production level between the two countries will invariably be
a. lower than the Nash equilibrium.
b. equal to the duopoly market equilibrium.
c. higher than the duopoly market equilibrium.
d. equal to the Nash equilibrium.
131
. If Irun fails to live up to the production agreement and overproduces, Urun will be
a. better off producing more than the agreed upon quantity.
b. better off producing less than the agreed upon quantity.
c. worse off producing more than the agreed upon quantity.
d. better off producing the agreed upon quantity.
132
. If Irun fails to live up to the production agreement and overproduces, which of the
following statements will be true of Urun’s condition?
a. Urun’s profit will be maximized by holding its production constant.
b. Urun will be hurt worse if it follows suit and increases production.
c. Urun will invariably be worse off than before the agreement was broken.
d. Urun will counter by decreasing its production in order to maintain price stability.
133
. In a nonrepetitive game, which of the following is the dominant strategy of Irun when
production levels are in accordance with the collusive agreement?
a. INCREASE production only after Urun increases production.
b. Unilaterally increase production.
c. Decrease production only after Urun increases production.
d. Unilaterally decrease production.
134
. As the production level deviates from the agreed upon quantity, the total profits
earned collectively by the two countries
a. falls.
b. falls as long as production levels are greater than the Nash equilibrium.
c. falls as long as production levels are equal to the Nash equilibrium.
d. falls as long as production levels are greater than the competitive equilibrium.
135
. The paradoxical nature of the oligopoly game can be described by the fact that even
though the monopoly outcome is best for all the oligopolists,
a. they cheat themselves out of monopoly profits by increasing production.
b. they collude to set output level equivalent to the Nash equilibrium.
c. they do not behave as profit maximizers.
d. self-interest juxtaposes the profits earned at the Nash equilibrium.
136
. The “arms race” is similar to which of the following economic scenarios?
a. the competitive game
b. the prisoners’ dilemma
c. the welfare choice
d. cost allocation theory

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24 Chapter 16/Oligopoly

Use the following information to answer questions 146 through 150.

Consider two countries, Eudora and the Inhabii, that are engaged in an arms race. The
question each country must face is whether to build new weapons or to disarm existing
weapons. Each country prefers to have more arms than the other because a large arsenal
gives it more influence in world affairs. But each country also prefers to live in a world safe
from the other country's weapons. The following figure shows the possible outcomes for
each decision combination.

Eudora
Arm Disarm

Eudora at risk and same Eudora at risk and less

influence in world affairs. influence in world affairs.
Arm
Inhabii at risk and same Inhabii safe and more
Inhabii influence in world affairs. influence in world affairs.

Eudora safe and more Eudora safe and same

influence in world affairs. influence in world affairs.
Disarm
Inhabii at risk and less Inhabii safe and same
influence in world affairs influence in world affairs.

137
. If Inhabii chooses to arm, the country of Eudora will
a. arm in order to promote world peace.
b. arm in order to prevent the loss of influence in world affairs.
c. disarm in order to prevent the loss of influence in world affairs.
d. disarms in order to promote world peace.
138
. Eudora is better off arming
(i) if Inhabii arms.
(ii) if Inhabii disarms.
(iii) if arming is their sub-dominant gaming strategy.

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Chapter 16/Oligopoly 25

a. (i) and (ii)

b. (ii) and (iii)
c. (i) and (iii)
d. all of the above
139
. For each country, arming is what type of strategy?
a. sub-dominant
b. dominant
c. sub-optimal
d. inferior strategy
140
. If both countries get together and agree on a certain level of arms, what will happen
to social welfare assuming that both countries keep their end of the bargain?
a. Social welfare will remain unchanged due to game theory.
b. Social welfare will remain unchanged due to dominant gaming strategies.
c. Social welfare will increase.
d. Social welfare will decrease.
141
. In reality these two countries may have a hard time keeping arms levels at the social
optimal level due to which of the following reasons?
(i) Both countries have incentives to cheat on the agreement.
(ii) They may have trouble agreeing on the level of allowable arms.
(iii) They both want to increase their world power.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. all of the above

Use the following information to answer questions 151 through 154.

Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises,
the two companies split the market. If they both advertise, they again split the market, but
profits are lower, since each company must bear the cost of advertising. Yet if one company
advertises while the other does not, the one that advertises attracts customers from the
other.
142
. What will these two companies do if they behave as individual profit maximizers?
a. They will both advertise.
b. Neither will advertise.
c. One will advertise, the other will not.
d. There is no way of knowing without more information.

143
. What is PM Inc.’s dominant strategy?
a. to advertise
b. to advertise only if Brown Inc. advertises
c. to advertise only if Brown Inc. does not advertise
d. to not advertise

Use the following information to answer questions 155 through 156

At Lincoln High School, Mr. Burns teaches history to the senior class. Mr. Burns takes
medication that makes him drowsy. After he distributes an exam to the class he always
falls asleep at his desk. As a result, many of the students cheat on the exams in Mr. Burns’
class. The students have never been caught cheating and to make things simple, assume

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26 Chapter 16/Oligopoly

that they never will. Mr. Burns also believes in competition among the students, and
therefore he grades exams on a relative scale. In other words, students have the incentive
to score better than their classmates, and scoring worse than their classmates will always
lead to an inferior grade.
144
. Even though Sam is an honest young man, he decides to cheat on the exam because
he feels he is a victim of the prisoners’ dilemma. Which of the following statements
would support Sam’s decision to cheat?
a. If any of the other students cheat, Sam will do worse on the test if he doesn’t
cheat as well.
b. If the other students do not cheat, Sam can boost his score by cheating.
c. Cheating is Sam’s dominant strategy.
d. all of the above.

145
. The problem with grading students relative to their classmates is that
(i) it creates an incentive to cheat on the exams.
(ii) as long as at least one student cheats, it penalizes all those who are unwilling to
cheat.
(iii) it forces students to follow a sub-dominant strategy.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (i) only

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Chapter 16/Oligopoly 27

Use the following information to answer questions 157 through 159.

Imagine that two oil companies, Big Petro Inc. and Gargantuan Gas, own adjacent oil
fields. Under the fields is a common pool of oil worth $12 million. Drilling a well to recover
oil costs $1 million per well. If each company drills one well, each will get half of the oil and
earn a $5 million profit ($6 million in revenue - $1 million in costs). Assume that if you
have X percent of the total wells then you will collect X percent of the total revenue.
146
. If Big Petro Inc. were to drill a second well, what would its profit be if Gargantuan Gas
did not drill a second well?
a. $7 million
b. $6 million
c. $5 million
d. $4 million
147
. If Big Petro Inc. were to drill a second well and Gargantuan Gas also drilled a second
well, what would Big Petro Inc's profit be?
a. $7 million
b. $6 million
c. $5 million
d. $4 million
148
. Gargantuan Gas’s dominant strategy would lead to what sort of well drilling behavior?
a. Gargantuan Gas will drill a second well only if Big Petro Inc. drills a well.
b. Gargantuan Gas will drill a second well only if Big Petro Inc. does not drill a well.
c. Gargantuan Gas will never drill a second well.
d. Gargantuan Gas will always drill a second well.
149
. In which of the following prisoners’ dilemma games is the noncooperative outcome
actually bad for society as well as for the players?
(i) Oligopolists try to maintain monopoly profits.
(ii) Two countries are involved in an arms race.
(iii) Two oil producer act on their own self-interest when deciding how many wells to
dig.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. all of the above
150
. In the case of oligopolists trying to maintain monopoly profits, the profit-maximizing
level of production is
a. good for consumers and bad for the oligopolists.
b. good for consumers and good for the oligopolists.
c. bad for consumers and good for the oligopolists.
d. bad for the consumers and bad for the oligopolists.
151
. Which of the following is a consequence of oligopolist hot-dog vendors on the beach
failing to cooperate with one another on the quantity of hot-dogs they should sell?
(i) The quantity supplied to the market will be closer to the socially optimal level.
(ii) The invisible hand of the market will help to allocate resources more efficiently.
(iii) Markets will become less competitive

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28 Chapter 16/Oligopoly

a. (i) and (ii)

b. (ii) and (iii)
c. (i) and (iii)
d. (iii) only
152
. Why would lack of cooperation between the criminal suspects be desirable for society
as a whole?
a. The police will be able to convict more criminals.
b. The suspects are able to chose optimal outcomes for themselves by acting on self-
interest.
c. The prisoners’ dilemma safeguards the criminals’ constitutional rights.
d. all of the above
153
. What happens when the prisoners’ dilemma game is repeated numerous times in an
oligopoly market?
(i) The firms might reach the monopoly outcome.
(ii) The firms might reach the cooperative outcome.
(iii) Society will always be better off.

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Chapter 16/Oligopoly 29

a. (i) and (ii)

b. (ii) and (iii)
c. (i) and (iii)
d. (ii) only
154
. To move the allocation of resources closer to the social optimum, policymakers should
typically try to induce firms in an oligopoly to
a. compete rather than cooperate with each other.
b. cooperate rather than compete with each other.
c. collude with each other.
d. form various degrees of cartels.
155
. Which of the following is necessarily a problem with the antitrust laws?
a. They promote competition.
b. They limit monopoly power.
c. They may target a business whose practices appear to be anti-competitive
but in fact have legitimate purposes.
d. all of the above
156
. Predatory pricing is best exemplified when a firm
a. cuts its prices in order make itself more competitive.
b. cuts its prices temporarily in order to drive out any competition.
c. exercises its monopoly power by raising its price.
d. exercises its oligopoly power by raising its price through the formation of a cartel.
157
. Although predatory pricing is a common claim in antitrust suits, some economists are
skeptical of this argument because they believe
a. the evidence is nearly impossible to collect.
b. the evidence is littered with statistical uncertainties.
c. predatory pricing is not a profitable business strategy.
d. all of the above.
158
. Oligopolies would like to act like a
a. monopoly but self-interest often drives them closer to duopoly.
b. monopoly but self-interest often drives them closer to competition.
c. duopoly but self-interest often drives them closer to competition.
d. competitor but self-interest often drives them closer to duopoly.
159
. Oligopolies can end up looking like competitive firms if
a. the number of firms is large and they all cooperate.
b. the number of firms is small and they all cooperate.
c. the number of firms is large and they do not cooperate.
d. the number of firms is small and they do not cooperate.
160
. Which of the following explains why oligopolies can fail to maintain cooperation?
(i) the story of the prisoners' dilemma
(ii) the cartel theory
(iii) self-interest is not consistent with collective group interest

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30 Chapter 16/Oligopoly

a. (i) and (ii)

b. (ii) and (iii)
c. (i) and (iii)
d. all of the above
161
. Which of the following is true of limiting a firm’s behavior through antitrust laws?
a. Antitrust laws focus on granting competitive firms the option to form a cartel.
b. Policymakers have the difficult task of determining whether the some
firms’ decisions have legitimate purposes even though they appear anti-
competitive.
c. Policymakers should always limit a firm’s pricing power.
d. The proper scope of antitrust laws is well defined and definite.
162
. Which of the following statements is(are) true of the U.S. ocean shipping industry?
(i) The industry has an antitrust exemption from Congress.
(ii) The industry practices price fixing.
(iii) The industry operates like a cartel.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. all of the above
163
. How are the collusive agreements made between the firms of the U.S. ocean shipping
industry weakened?
(i) Member firms increase rates.
(ii) New entrants to the market create competition.
(iii) Member firms undercut rates.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. all of the above
164
.
A report by the Federal Trade Commission in 1995 found that when the U.S. ocean
shipping lines broke free of the cartel rates, contract prices
a. rose.
b. fell.
c. remained steady.
d. rose and then tapered off.
ANSWER: b. fell.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

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Chapter 16/Oligopoly 31

165
. Which two oil producing countries recently joined OPEC?
a. Iran and Cuba
b. Canada and the United States
c. Ireland and France
d. Mexico and Norway
166
. A central issue in the Microsoft antitrust lawsuit involved Microsoft’s integrating its
Internet browser into its Windows operating system, to be sold as one unit. This
practice is known as
a. price fixing.
b. resale maintenance.
c. tying.
d. collusion.
167
. In the Microsoft antitrust lawsuit, Microsoft’s lawyers argued that selling an Internet
browser and operating system together is no different than
a. selling a car with a radio.
b. selling a camera with a flash.
c. selling a car with an air-conditioner.
d. all of the above.

TRUE/FALSE
168
.
Perfect competition occurs when there are many firms in a market offering essentially
identical products.
ANSWER: T
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y
169
. When prices exceed marginal cost the result is a deadweight loss for society.
ANSWER: T
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y
170
.
When deciding whether the market is an oligopoly or not, there is no magical number
of firms that defines an oligopoly.
ANSWER: T
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y
171
. Duopolists and oligopolists face different pricing dilemmas.
ANSWER: F.
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y
172
.
Larger cartels have a greater probability of reaching the monopoly outcome than do
smaller cartels.
ANSWER: F
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y
173
. In a competitive market, strategic interactions among the firms are not important.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y
174
.
The story of the prisoners’ dilemma contains a general lesson that applies to any
group trying to maintain cooperation among its members.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

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32 Chapter 16/Oligopoly

175
.
In the story of the prisoners’ dilemma, Clyde is always better off confessing, no matter
what Bonnie does.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y
176
.
The game that monopolists play in trying to reach the monopoly outcome is similar to
the game that the two prisoners play in the prisoners’ dilemma.
ANSWER: F.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y
177
.
In the case of oligopoly markets, self-interest prevents cooperation and leads to an
inferior outcome for the parties involved.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y
178
.
When prisoners’ dilemma games are repeated over and over, sometime the threat of
penalty causes both parties to cooperate.
ANSWER: T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y
179
.
One way that public policy encourages cooperation among oligopolists is through
common law.
ANSWER: F
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y
180
.
The Sherman Antitrust Act prohibits competing firms from even talking about fixing
prices.
ANSWER: T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y
181
. Resale price maintenance prevents retailers from competing on price.
ANSWER: T
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y
182
. There are some logical economical arguments in favor of resale price maintenance.
ANSWER: T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y
183
. Tying can be thought of as a form of price discrimination.
ANSWER: T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y
184
An oligopoly is a market with only a few sellers, each offering a similar or identical
product.
ANSWER: T
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y
185
. Total profit for an oligopolist is less than that of a perfectly competitive firm.
ANSWER: F
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y
186
.
Total profit for all firms in an oligopolistic market is greater than that of a monopolist,
assuming no price-fixings occurs in the market.
ANSWER: F
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

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Chapter 16/Oligopoly 33

187
.
If all the oligopolists in a market collude to form a cartel, total profit for the cartel is
less than that of a monopolist.
ANSWER: F
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y
188
.
When an oligopolist decreases production it is likely that the output effect is less than
the price effect.
ANSWER: T
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

SHORT ANSWER
189
.
Briefly contrast the difference between equilibrium market outcomes in a monopoly,
oligopoly, and perfect competition.
ANSWER: Let: PC = Perfect Competition
O = Oligopoly
M = Monopoly
QPC > QO > QM
PM > PO > PPC
TYPE: S SECTION: 2 OBJECTIVE: 1 RANDOM:Y
190
.
Even when allowed to collude, firms in an oligopoly will choose to cheat on their
agreements with the rest of the cartel. Why?
ANSWER: Individual profits can be increased at the expense of group profits if individuals
cheat on the cartel's cooperative agreement.
TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM:Y
191
.
What effect does the number of firms in an oligopoly have on the characteristics of the
market?
ANSWER: As the number of firms increases, the equilibrium quantity of goods provided
increases and price falls.
TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM:Y
192
.
Ford and General Motors are considering expanding into the Vietnamese automobile
market. Devise a simple prisoners' dilemma game to demonstrate the strategic
considerations that are relevant to this decision.
ANSWER: The answer should show that if both car companies expand into the Vietnamese
market they will both be worse off than if they did not. It should also show that each
company has the individual incentive to expand. The dominant strategy of both car
companies will be to expand, regardless of whether or not the other is expanding.
TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM:Y
193
. Outline the purpose of antitrust laws. What do they accomplish?
ANSWER: The purpose of antitrust laws is to move markets toward a competitive
equilibrium outcome. These laws are used to prevent mergers that would lead to
excessive market power by any single firm.
TYPE: S SECTION: 4 OBJECTIVE: 4 RANDOM:Y
194
. Explain the practice of resale price maintenance and discuss why it is controversial.
ANSWER: Resale price maintenance is a requirement by producers that retailers sell their
product for a price specified by the manufacturer. It is controversial because on the
surface it appears to limit the ability of retailers to compete on the basis of price.
However, if the manufacturer does not exercise retail-price maintenance a free-rider
problem may become evident among the retailers and ultimately lead to lower profits
for the manufacturer.

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34 Chapter 16/Oligopoly

TYPE: S SECTION: 4 OBJECTIVE: 4 RANDOM:Y

195
. Explain the practice of tying and discuss why it is controversial.
ANSWER: Tying is the practice of bundling goods for sale. It is controversial because it is
perceived as a tool for expanding the market power of firms by forcing consumers to
purchase additional products. However, economists are skeptical that a buyer’s
willingness to pay increases just because two products are bundled together. In other
words, simply bundling two products together doesn’t necessarily add any value. It is
more accurately believed to be a form of price discrimination.
TYPE: S SECTION: 4 OBJECTIVE: 4 RANDOM:Y
196
. Assume that demand for a product that is produced at zero marginal cost is reflected
in the table below.

Quantity Price
0 $36
200 $33
400 $30
600 $27
800 $24
1000 $21
1200 $18
1400 $15
1600 $12
1800 $9
2000 $6
2200 $3
2400 $0

a.
What is the profit-maximizing level of production for a group of oligopolistic firms
that operate as a cartel?
b. Assume that this market is characterized by a duopoly in which collusive
agreements are illegal. What market price and quantity will be associated with a
profit maximizing Nash equilibrium?
c. Assume that this market is served by three identical firms who operate as
independent oligopolists (no collusive agreements). What market price and
quantity will be associated with a profit maximizing Nash equilibrium? How does
your answer differ from (b) above?
ANSWER: a. Q = 1200
b. Q = 1600, P = 12
c. Q = 1800, P = 9; As more firms enter the market it gets closer to the competitive
equilibrium
TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM:Y
197
. Describe the source of tension between cooperation and self interest in a market
characterized by oligopoly. Use an example of an actual cartel arrangement to demonstrate
why this tension creates instability in cartels.
ANSWER: The source of the tension exists because total profits are maximized when
oligopolists cooperate on price and quantity by operating as a monopolist. However,
individual profits can be gained by individuals cheating on their cooperative
agreement. This is why cooperative agreements among members of a cartel are
inherently unstable. This is evident in the problem OPEC experiences in enforcing the
cooperative agreement on production and price of crude oil.
TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM:Y

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Chapter 16/Oligopoly 35

198
.
Describe the output and price effects which influence the profit maximizing decision
faced by a firm in an oligopoly market. How does this differ from output and price
effects in a monopoly market?
ANSWER: Output effect: Price > Marginal cost => increased output will add to profit
Price effect: increased quantity is sold at a lower price => lower revenue (profit?)
An oligopolist must take into account how the output and price effects will be
influenced by competitors' production decisions, or it must assume competitors'
production will not change in response to its own actions.
TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM:Y
199
.
Explain how the output effect and the price effect influence the production decision of
the individual oligopolist.
ANSWER: Since the individual oligopolist faces a downward-sloping demand curve, she
realizes that if she increases output, all output must be sold at a lower market price.
As such the revenue from selling the last unit at the market price must exceed the loss
in revenue from selling all previous units at the new lower price. Otherwise, profits
will fall as output (production) is increased.
TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM:Y
200
.
Nike and Reebok (athletic shoe companies) are considering whether or not to
advertise during the Super Bowl. Devise a simple prisoners' dilemma game to
demonstrate the strategic considerations that are relevant to this decision. Does the
repeated game scenario differ from a single period game? Is it possible that a
repeated game (without collusive agreements) could lead to an outcome that is better
than a single period game? Explain the circumstances in which this may be true.
ANSWER: The answer should show that if both shoe companies decide to advertise they
will both be worse off than if they did not. It should also show that each company has
the individual incentive to advertise. The dominant strategy of both companies will be
to advertise, regardless of what the other is doing. If the game is repeated more than
once it is possible that the shoe companies will decide not to advertise in the hopes
that the other company adequately understands the mutually beneficial gains that
come from not advertising.
TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM:Y
201
. Two discount superstores (Ultimate Saver and SuperDuper Saver) in a growing urban
area are interested in expanding their market share. Both are interested in expanding
the size of their store and parking lot to accommodate potential growth in their
customer base. The following game depicts the strategic outcomes that result from the
game. Growth related profits of the two discount superstores under two scenarios are
reflected in the table below.

SuperDuper Saver
Increase the size of Do not increase the size
store and parking lot of store and parking lot

Increase the size SuperDuper Saver = SuperDuper Saver = $45

of store and $70 Ultimate Saver = $295
Ultimat parking lot Ultimate Saver = $85
e Saver
Do not increase SuperDuper Saver = SuperDuper Saver =
the size of store $270 $105
and parking lot Ultimate Saver = $55 Ultimate Saver = $155

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36 Chapter 16/Oligopoly

a.
What are growth related profits for Ultimate Saver if both stores follow a
dominant strategy?
b. What are growth related profits for SuperDuper Saver if both stores follow a
dominant strategy?
c. If the owner of Ultimate Saver and SuperDuper Saver meet for a friendly game of
golf one afternoon and happen to discuss a strategy to optimize growth related
profit, what strategy should they agree to? How would they enforce this
agreement? If the collusive agreement was enforceable, how would the well-being
of society be impacted by the agreement?
ANSWER: a. $85
b. $70
c. It is likely that they would agree to not increase the size of their stores and
parking lots. Enforcement is probably best ensured by suggesting a tit-for-tat
strategy would be followed if someone cheats on the agreement. The collusive
agreement to do nothing leads to higher profits for both firms; as such, it may
mean that profits are gained at the expense of consumers. However, this is not
necessarily true; profits may result from lower average total cost of production.
TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM:Y
202
.
While on vacation in Berserkistan, you are arrested and accused of spying for your
country. You are, of course, innocent. Your captors inform you that if you confess, you
will receive a sentence of six months while your co-conspirator (whom you have never
heard of) will receive a sentence of thirty years. If you both confess you will each
receive a sentence of three years. You are also told that your co-conspirator is being
offered the same option. You suspect that there is not enough evidence to convict you
(and you will be allowed to leave Berserkistan immediately) unless your alleged co-
conspirator confesses. What should you choose to do and why?
ANSWER: If the co-conspirator "confesses" your options are three years if you confess or
thirty years if you don't confess. If the co-conspirator does not "confess" your options
are six months if you confess or freedom if you don't confess. In this case there is not a
dominant strategy. Your choice will depend on your assessment about the subjective
probabilities you place on the choice of your "co-conspirator."
TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM:Y
203
. Assume that a local bank sells two services, checking accounts and ATM card services.
Mr. Donethat is willing to pay $8 a month for the bank to service his checking account
and $5 a month for unlimited use of his ATM card. Ms. Beenthere is willing to pay only
$3 for a checking account, but is willing to pay $10 for unlimited use of her ATM card.
To keep this example simple, assume that the bank can provide each of these services
at zero marginal cost.
a. If the bank is unable to use tying, what is the profit maximizing price to charge for
a checking account?
b. If the bank is unable to use tying, what is the profit maximizing price to charge for
unlimited use of an ATM card?
c. If the bank is able to use tying to price checking account and ATM service, what is
the profit maximizing price to charge for the "tied" good?
d. How much additional profit does the bank make when it switches to use of a tying
strategy to price checking account and ATM service?

ANSWER: a. $8

b. $5 or $10, doesn’t matter.

c. $13

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Chapter 16/Oligopoly 37

d. $8
TYPE: S SECTION: 4 OBJECTIVE: 4 RANDOM:Y
204
.
In Berserkistan, two political parties vie for control of the country. Each political party,
when it is not in power, has a tendency to call general strikes to influence the policy of
the ruling party. Evaluate this strategy in the context of a multiple period game. Is it
possible, in this situation, that a multiple period game reduces, rather than enhances,
social well-being? What would have to happen in this game to improve social welfare if
a tit-for-tat strategy is used?
ANSWER: The multi-period game is likely to follow a tit-for-tat strategy; as such, each
political party tries to punish the other party when they are in power. In this case, the
game is sub-optimal as long as the "punish" motive dominates behavior. In order for
tit-for-tat to improve social welfare, one of the parties would have to take a position of
nonpunishment in order to demonstrate goodwill in changing the dynamics of the
game, and the other party would have to follow suit.
TYPE: S SECTION: 4 OBJECTIVE: 3 RANDOM:Y

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~ANSWER:
b. oligopoly markets.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

~ANSWER:
d. imperfectly competitive markets.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

~ANSWER:
d. many firms selling similar, but not identical products.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

~ANSWER:
b. a duopoly.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

~ANSWER:
d. there is tension between cooperation and self-interest.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 1 RANDOM:Y

~ANSWER:
b. oligopoly or monopolistically competitive market.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

~ANSWER:
c. The actions of one seller can have a large impact on the profitability of other
sellers.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

~ANSWER:
a. oligopolistic firms are interdependent while competitive firm are not.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

~ANSWER:
a. imperfectly competitive.

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TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

10

~ANSWER:
b. (ii) and (iii)
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

11
ANSWER
b. many other firms make similar products that compete for the same customers.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

12

~ANSWER:
a. (i) or (ii)
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

13

~ANSWER:
c. perfectly competitive or monopolistically competitive.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

14

~ANSWER:
a. as a single monopolist.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 1 RANDOM:Y

15

~ANSWER:
a. limit production.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 1 RANDOM:Y

16

~ANSWER:
c. they are unable to maintain monopoly power.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 1 RANDOM:Y

17
ANSWER:
c. $60
TYPE:MKEY1:DSECTION:2OBJECTIVE:2RANDOM:Y

18

~ANSWER:

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c. $60, 9,000
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

19

~ANSWER:
b. $170,000
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

20

~ANSWER:
a. 12,000
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

21

~ANSWER:
c. $140,000
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

22

~ANSWER:
a. $40
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

23
ANSWER
a. $4
TYPE:MKEY1:DSECTION:2OBJECTIVE:2RANDOM:Y

24

~ANSWER:
d. 120
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

25

~ANSWER:
d. $360
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

26

~ANSWER:
d. 120 gallons.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

27

~ANSWER:

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c. $4
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

28

~ANSWER:
b. it is always in their best interest to leave supply unchanged.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

29

~ANSWER:
c. a firm will choose its best pricing strategy, given the strategies that it observes
other firms taking.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

30

~ANSWER:
d. a cartel.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

31

~ANSWER:
d. higher than in monopoly markets and lower than in perfectly competitive
markets.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

32

~ANSWER:
a. lower than in monopoly markets and higher than in perfectly competitive
markets.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

33

~ANSWER:
b. increases, the market approaches a competitive market equilibrium.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

34

~ANSWER:
b. must balance with the price effect.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

35

~ANSWER:
d. all of the above
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

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36

~ANSWER:
a. imperfect competition
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 1 RANDOM:Y

37

~ANSWER:
d. monopolistic competition and oligopoly.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

38

~ANSWER:
b. an oligopoly
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

39

~ANSWER:
a. cartel.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

40

~ANSWER:
a. collusion.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

41

~ANSWER:
b. be greater than the monopoly quantity.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

42

~ANSWER:
a. less than the monopoly price.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

43

~ANSWER:
c. cheat.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

44

~ANSWER:
c. a monopoly.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

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45

~ANSWER:
b. Nash equilibrium.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

46

~ANSWER:
b. increase production and push prices down.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

47

~ANSWER:
a. the output effect and the price effect.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

48

~ANSWER:
d. output effect.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

49

~ANSWER:
c. price effect.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

50

~ANSWER:
a. greater than the price effect.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

51

~ANSWER:
b. equal to the price effect.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

52

~ANSWER:
c. price effect disappears.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

53

~ANSWER:
c. a competitive market.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

54

~ANSWER:

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d. marginal cost.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

55

~ANSWER:
a. (i) and (ii)
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

56

~ANSWER:
b. competitive markets
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

57

~ANSWER:
b. game theory to model their behavior.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

58

~ANSWER:
c. consider how competing firms might respond to its actions.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

59

~ANSWER:
a. it identifies the fundamental difficulty in maintaining cooperative agreements.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

60

~ANSWER:
b. cooperation would make everyone better off
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

61

~ANSWER:
d. it is the best strategy, regardless of choices made by other players.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

62

~ANSWER:
d. a less preferred outcome for both players.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

63

~ANSWER:

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a. sub-optimal
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y
64

~ANSWER:
c. -$20 b.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

65

~ANSWER:
c. -$15 b.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

66

~ANSWER:
a. -$20 b and -$15 b respectively.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

67

~ANSWER:
c. $75 b.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

68

~ANSWER:
b. $65 b.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

69

~ANSWER:
b. United States $65 b and China $75 b.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

70

~ANSWER:
d. United States $130 b and China $275 b.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

71

~ANSWER:
a. each should follow their dominant strategy.

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TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

72

~ANSWER:
c. both parties will assume that the other will choose a strategy that optimizes
total value of the trade relationship.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

73

~ANSWER:
d. $65.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

74

~ANSWER:
c. $50.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

75

~ANSWER:
b. Ultimate Saver $65 and SuperDuper Saver $50.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

76

~ANSWER:
c. not increase their store sizes or parking lots.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

77

~ANSWER:
a. that is worse for both parties to the "game."
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

78

~ANSWER:
a. cooperation is likely to be individually irrational
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

79

~ANSWER:
d. cooperation is likely to be individually irrational.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

80

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~ANSWER:
c. behaves as a monopolist.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

81

~ANSWER:
b. is bad for society.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

82

~ANSWER:
a. generally make collusive arrangements easier to enforce.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

83

~ANSWER:
a. they play the game not once but many times.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

84

~ANSWER:
a. are often dominated by a simple tit-for-tat strategy.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

85

~ANSWER:
d. cooperation and then each player mimics the other player's last move.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

86

~ANSWER:
a. oligopolies.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

87

~ANSWER:
c. Confess regardless of the partner's decision.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

88

~ANSWER:
b. confess, even though you are innocent, to avoid a twenty-year sentence
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

89

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~ANSWER:
b. is desirable for society as a whole.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

90

~ANSWER:
b. restricted the ability of competitors to engage in cooperative agreements.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

91

~ANSWER:
b. prevent oligopolists from acting in ways that make markets less competitive.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

92

~ANSWER:
d. if a supplier has market power, it will be likely to exert that power through
wholesale price rather than retail price.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

93

~ANSWER:
c. public good.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

94

~ANSWER:
d. less than optimal quantity.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

95

~ANSWER:
a. CompuMart will benefit from customers who go to CSS Inc. for information
about
different computers.

96

~ANSWER:
b. Wal-Mart and CSS Inc. will always sell Apple Computers for exactly the same
price.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

97

~ANSWER:
d. it allows firms to expand their market power.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

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98

~ANSWER:
b. package products to sell at a combined price closer to a buyer's total
willingness to pay.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

99

~ANSWER:
d. computer software.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y
100
ANSWER:
a. $5
TYPE:MKEY1:DSECTION:4OBJECTIVE:4RANDOM:Y

101

~ANSWER:
b. $9
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

102

~ANSWER:
c. $10
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

103

~ANSWER:
a. $1
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

104

~ANSWER:
c. resale price maintenance.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

105

~ANSWER:
b. tying.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

106

~ANSWER:
c. resale price maintenance.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

107

~ANSWER:

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c. tying
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

108

~ANSWER:
a. resale price maintenance.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

109

~ANSWER:
d. perfect competition
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

110

~ANSWER:
d. has some degree of market power.
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

111

~ANSWER:
a. (i) and (ii)
TYPE: M KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

112

~ANSWER:
d. many sellers sell products that are identical.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

113

~ANSWER:
a. exceeds marginal cost.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

114

~ANSWER:
d. all of the above.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

115

~ANSWER:
d. the ocean shipping industry

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TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

116

~ANSWER:
c. monopoly profit.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

117

~ANSWER:
b. (i) and (iii)
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

118

~ANSWER:
c. reduces the price of their product.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

119

~ANSWER:
b. marginal cost.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

120

~ANSWER:
a. (i) and (ii)
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

121

~ANSWER:
d. all of the above
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

122

~ANSWER:
c. setting production levels for each of its members.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

123

~ANSWER:
a. (i) and (ii)

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TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

124

~ANSWER:
c. a competitive market.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

125

~ANSWER:
a. the cooperation of their members.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

126

~ANSWER:
d. all of the above
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

127

~ANSWER:
c. (i) and (iii)
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

128

ANSWER
c. lower than the Nash equilibrium.
TYPE:MKEY1:DSECTION:3OBJECTIVE:3RANDOM:Y
129

ANSWER
b. increase production.
TYPE:MKEY1:DSECTION:3OBJECTIVE:3RANDOM:Y

130

~ANSWER:
a. lower than the Nash equilibrium.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

131

~ANSWER: a. better off producing more than the agreed upon quantity.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

132

~ANSWER:
c. Urun will invariably be worse off than before the agreement was broken.

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TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

133

~ANSWER:
b. Unilaterally increase production.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

134

~ANSWER:
a. falls
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

135

~ANSWER:
a. they cheat themselves out of monopoly profits by increasing production.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

136

~ANSWER:
b. the prisoners’ dilemma
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

137

~ANSWER:
b. arm in order to prevent the loss of influence in world affairs.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

138

~ANSWER:
a. (i) and (ii)
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

139

~ANSWER:
b. dominant
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

140

~ANSWER:
c. Social welfare will increase.

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TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

141

~ANSWER:
d. all of the above
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

142
ANSWER:
a. They will both advertise.
TYPE:MKEY1:DSECTION:3OBJECTIVE:3RANDOM:Y

143

~ANSWER:
a. to advertise
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

144
ANSWER
d. all of the above
TYPE:MKEY1:DSECTION:3OBJECTIVE:3RANDOM:Y

145

~ANSWER:
a. (i) and (ii)
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

146

~ANSWER:
b. $6 million
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

147

~ANSWER:
b. $4 million
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

148

~ANSWER:
d. Gargantuan Gas will always drill a second well.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

149

~ANSWER:
b. (ii) and (iii)

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TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

150

~ANSWER:
c. bad for consumers and good for the oligopolists.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

151

~ANSWER:
a. (i) and (ii)
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

152

~ANSWER:
a. The police will be able to convict more criminals.
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

153

~ANSWER:
a. (i) and (ii)
TYPE: M KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

154

~ANSWER:
a. compete rather than cooperate with each other.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

155

~ANSWER:
c. They may target a business whose practices appear to be anti-competitive but
in fact have legitimate purposes.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

156

~ANSWER:
b. cuts its prices temporarily in order to drive out any competition.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

157

~ANSWER:

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c. predatory pricing is not a profitable business strategy.

TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

158

~ANSWER:
b. monopoly but self-interest often drives them closer to competition.
TYPE: M KEY1:D SECTION:5 OBJECTIVE: 4 RANDOM:Y

159

~ANSWER:
c. the number of firms is large and they do not cooperate.
TYPE: M KEY1:D SECTION:5 OBJECTIVE: 4 RANDOM:Y

160

~ANSWER:
c. (i) and (iii)
TYPE: M KEY1:D SECTION:5 OBJECTIVE: 4 RANDOM:Y

161

~ANSWER:
b. Policymakers have the difficult task of determining whether the some firms’
decisions have legitimate purposes even though they appear anti-competitive.
TYPE: M KEY1:D SECTION:5 OBJECTIVE: 4 RANDOM:Y

162

~ANSWER:
d. all of the above
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

163

~ANSWER:
b. (ii) and (iii)
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

164

~ANSWER:
b. fell.
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

165

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~ANSWER:
d. Mexico and Norway
TYPE: M KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

166

~ANSWER:
c. tying.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

167

~ANSWER:
d. all of the above.
TYPE: M KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

168

~ANSWER:
T
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

169

~ANSWER:
T
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

170

~ANSWER:
T
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

171

~ANSWER:
F.
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

172

~ANSWER:
F
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

173

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~ANSWER:
T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

174

~ANSWER:
T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

175

~ANSWER:
T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

176

~ANSWER:
F.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

177

~ANSWER:
T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

178

~ANSWER:
T.
TYPE: T KEY1:D SECTION:3 OBJECTIVE: 3 RANDOM:Y

179

~ANSWER:
F
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

180

~ANSWER:
T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

181

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~ANSWER:
T
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

182

~ANSWER:
T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

183

~ANSWER:
T.
TYPE: T KEY1:D SECTION:4 OBJECTIVE: 4 RANDOM:Y

184

~ANSWER: T
TYPE: T KEY1:D SECTION:1 OBJECTIVE: 1 RANDOM:Y

185

~ANSWER:
F
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

186

~ANSWER:
F
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

187

~ANSWER:
F
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

188

~ANSWER:
T
TYPE: T KEY1:D SECTION:2 OBJECTIVE: 2 RANDOM:Y

189

~ANSWER:
Let: PC = Perfect Competition
O = Oligopoly
M = Monopoly
QPC > QO > QM
PM > PO > PPC

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TYPE: S SECTION: 2 OBJECTIVE: 1 RANDOM:Y

190

~ANSWER:
Individual profits can be increased at the expense of group profits if individuals cheat on the
cartel's cooperative agreement.
TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM:Y

191

~ANSWER:
As the number of firms increases, the equilibrium quantity of goods provided increases and
price falls.
TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM:Y

192

~ANSWER:
The answer should show that if both car companies expand into the Vietnamese market they
will both be worse off than if they did not. It should also show that each company has the
individual incentive to expand. The dominant strategy of both car companies will be to
expand, regardless of whether or not the other is expanding.
TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM:Y

193

~ANSWER:
The purpose of antitrust laws is to move markets toward a competitive equilibrium outcome.
These laws are used to prevent mergers that would lead to excessive market power by any
single firm.
TYPE: S SECTION: 4 OBJECTIVE: 4 RANDOM:Y

194

~ANSWER:
Resale price maintenance is a requirement by producers that retailers sell their product for a
price specified by the manufacturer. It is controversial because on the surface it appears to
limit the ability of retailers to compete on the basis of price. However, if the manufacturer
does not exercise retail-price maintenance a free-rider problem may become evident among
the retailers and ultimately lead to lower profits for the manufacturer.
TYPE: S SECTION: 4 OBJECTIVE: 4 RANDOM:Y

195

~ANSWER:
Tying is the practice of bundling goods for sale. It is controversial because it is perceived as a
tool for expanding the market power of firms by forcing consumers to purchase additional
products. However, economists are skeptical that a buyer’s willingness to pay increases just
because two products are bundled together. In other words, simply bundling two products
together doesn’t necessarily add any value. It is more accurately believed to be a form of price
discrimination.

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196

~ANSWER:
a. Q = 1200
b. Q = 1600, P = 12
c. Q = 1800, P = 9; As more firms enter the market it gets closer to the competitive
equilibrium
TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM:Y

197

~ANSWER:
The source of the tension exists because total profits are maximized when oligopolists
cooperate on price and quantity by operating as a monopolist. However, individual profits
can be gained by individuals cheating on their cooperative agreement. This is why
cooperative agreements among members of a cartel are inherently unstable. This is
evident in the problem OPEC experiences in enforcing the cooperative agreement on
production and price of crude oil.
TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM:Y

198

~ANSWER:
Output effect: Price > Marginal cost => increased output will add to profit
Price effect: increased quantity is sold at a lower price => lower revenue (profit?)

199

~ANSWER:
Since the individual oligopolist faces a downward-sloping demand curve, she realizes that if
she increases output, all output must be sold at a lower market price. As such the revenue
from selling the last unit at the market price must exceed the loss in revenue from selling all
previous units at the new lower price. Otherwise, profits will fall as output (production) is
increased.
TYPE: S SECTION: 2 OBJECTIVE: 2 RANDOM:Y

200

~ANSWER:
The answer should show that if both shoe companies decide to advertise they will both be
worse off than if they did not. It should also show that each company has the individual
incentive to advertise. The dominant strategy of both companies will be to advertise,
regardless of what the other is doing. If the game is repeated more than once it is possible
that the shoe companies will decide not to advertise in the hopes that the other company
adequately understands the mutually beneficial gains that come from not advertising.
TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM:Y

201

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~ANSWER:
a. $85
b. $70
c. It is likely that they would agree to not increase the size of their stores and parking
lots. Enforcement is probably best ensured by suggesting a tit-for-tat strategy would
be followed if someone cheats on the agreement. The collusive agreement to do
nothing leads to higher profits for both firms; as such, it may mean that profits are
gained at the expense of consumers. However, this is not necessarily true; profits
may result from lower average total cost of production.
TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM:Y

202

~ANSWER:
If the co-conspirator "confesses" your options are three years if you confess or thirty years if
you don't confess. If the co-conspirator does not "confess" your options are six months if
you confess or freedom if you don't confess. In this case there is not a dominant strategy.
Your choice will depend on your assessment about the subjective probabilities you place
on the choice of your "co-conspirator."
TYPE: S SECTION: 3 OBJECTIVE: 3 RANDOM:Y

203

204
ANSWER: a. $8
b. $5 or $10, doesn’t matter.
c. $13
d. $8
TYPE: S SECTION: 4 OBJECTIVE: 4 RANDOM:Y

~ ANSWER: The multi-period game is likely to follow a tit-for-tat strategy; as such, each
political party tries to punish the other party when they are in power. In this case, the game is
sub-optimal as long as the "punish" motive dominates behavior. In order for tit-for-tat to
improve social welfare, one of the parties would have to take a position of nonpunishment in
order to demonstrate goodwill in changing the dynamics of the game, and the other party
would have to follow suit.
TYPE: S SECTION: 4 OBJECTIVE: 3 RANDOM:Y

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