15) Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing
output and equally share the economic profit. If firm A increases its output, the market price
________ and total economic profit of the two firms combined ________.
A) falls; decreases
B) falls; increases
C) rises; decreases
D) rises; increases
E) falls; does not change
16) If one firm in a duopoly increases its production by one unit beyond the monopoly output,
that firm’s profit ________, the other firm’s profit ________, and the total profit of the duopoly
________.
A) increases; increases; increases
B) does not change; does not change; does not change
C) increases; decreases; does not change
D) increases; does not change; increases
E) increases; decreases; decreases
17) Which of the following is true? In the above figure, if the market is
A) a monopoly, output will be Q1 and price will be P3.
B) a monopoly, output will be Q3 and price will be P3.
C) perfect competition, output will be Q2 and price will be P2.
D) perfect competition, output will be Q1 and price will be P1.
E) perfect competition, output will be Q3 and price will be P3.
18) In the above figure, the output of an oligopoly will range between
A) 0 and Q1.
B) Q1 and Q2.
C) Q1 and Q3.
D) Q2 and Q3.
E) 0 and Q2.
19) Boeing and Airbus have entered into a cartel agreement that will enable them to boost their
profits. What occurs if Boeing decides to cheat on the agreement?
i. Boeing lowers the price of its airplanes.
ii. The total industry output increases.
iii. The total profits in the airplane industry will decrease.
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii
20) For a duopoly, the highest price is charged when the duopoly achieves
A) the competitive outcome.
B) the monopoly outcome.
C) an outcome between the competitive outcome and the monopoly outcome.
D) its noncooperative Nash equilibrium.
E) Both answers A and D are correct because both refer to the same price.
21) For a duopoly, the smallest total quantity is produced when the duopoly achieves
A) the competitive outcome.
B) the monopoly outcome.
C) an outcome between the competitive outcome and the monopoly outcome.
D) its noncooperative Nash equilibrium.
E) Both answers A and D are correct because both refer to the same amount of output.
22) For a duopoly, the maximum total profit is reached when the duopoly produces
A) the same amount of output as the competitive outcome.
B) the same amount of output as the monopoly outcome.
C) an amount of output that lies between the competitive outcome and the monopoly outcome.
D) more output than the competitive outcome.
E) less output than the monopoly outcome.
23) If a duopoly has reached the monopoly outcome, a firm can increase its profit by if it and it
alone ________ its price and ________ its production.
A) raises; increases
B) raises; decreases
C) lowers; increases
D) lowers; decreases
E) raises; does not change
24) If a duopoly has reached the monopoly outcome and only one firm increases its production,
that firm’s profit ________ and the other firm’s profit ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change
25) Suppose a duopoly had reached the monopoly outcome and then the first firm increased its
production. If the second firm next increases its production, the second firm’s profit ________
and the first firm’s profit ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change
26) If both firms in a duopoly increase their production by one unit beyond the monopoly output,
each firm’s profit ________ and the total profit of the duopoly ________.
A) increases; increases
B) does not change; does not change
C) decreases; decreases
D) does not change; increases
E) decreases; does not change
27) The very best joint outcome possible for the firms in a duopoly is to produce the
A) monopoly level of output.
B) perfectly competitive level of output.
C) amount of output that maximizes total revenue.
D) amount of output that minimizes total cost.
E) Nash equilibrium level of output if the game is not repeated.
17.3 Game Theory
1) The tool that economists use to analyze the mutual interdependence of oligopolies is
A) economies of scale.
B) the four-firm concentration ratio.
C) game theory.
D) the HHI.
E) the efficient scale.
2) Game theory is the tool that economists use to analyze strategic behavior, which is behavior
that takes into account the ________ behavior of others and the mutual recognition of ________.
A) unexpected; interdependence
B) unexpected; independence
C) expected; interdependence
D) expected; independence
E) random; profit
3) Game theory is used to analyze the interactions among firms in ________.
A) oligopoly
B) perfect competition
C) monopoly
D) monopolistic competition
E) Both answers A and D are correct.
4) Economists use game theory to analyze strategic behavior, which takes into account
A) monopoly situations.
B) the expected behavior of others and the recognition of mutual interdependence.
C) the price-taking behavior of oligopolists.
D) non-price competition.
E) that increased demand decreases the market power of the firms in the market.
5) The concepts of mutual interdependence and game theory illustrate the fact that firms
competing in oligopoly
A) consider the actions of the rivals before changing the price of their product.
B) ignore the actions of their rivals when considering price changes.
C) engage in frequent price changes.
D) never change prices.
E) will mutually determine the combined best outcome for all players.
6) All games have which features?
A) prices, rules, and payoffs
B) rules, markets, and prices
C) rules, strategies, and payoffs
D) rules, strategies, and costs
E) equilibrium, prices, and quantities
7) The players in a game theory situation often do not act in their joint interest because of which
of the following?
A) They do not realize the benefit of cooperation.
B) Players strive to minimize their opponents’ profits.
C) Players do not understand the game and its payoffs.
D) It is not in each player’s self-interest to cooperate.
E) Players understand the game but they do not know which action(s) will benefit their joint
interest.
8) A Nash equilibrium
i. is named after the Nobel prize winning economist, John Nash.
ii. occurs when each player chooses the best strategy given the strategy of the other player.
iii. must give the best possible outcome for each player.
A) i only
B) ii only
C) iii only
D) i and ii
E) ii and iii
9) A Nash equilibrium is defined as
A) earning zero economic profit in the long run.
B) forming a cartel with strong penalties for cheaters.
C) relying on other game players to realize the benefit of cooperation.
D) each player taking the best possible action given the action of the other player.
E) each player taking the action that is best for all the players.
10) A Nash equilibrium occurs when each player in a game takes the ________ given the action
of the other player.
A) worst possible action for himself or herself
B) best possible action for himself or herself
C) most unpredictable possible action
D) most mutually beneficial possible action
E) best possible action for the other player
11) A Nash equilibrium in the duopoly game
A) means that one player has greater market power.
B) occurs when each player takes the best possible action regardless of the strategy chosen by
other firms.
C) will always lead to equilibrium in which the firms’ total profit is the largest.
D) can occur only if firms cooperate with each other.
E) means that a firm must be able to determine its actions and the actions of its competitor.
12) The prisoners’ dilemma is an example of
A) product differentiation.
B) collusion.
C) game theory.
D) monopolistic competition.
E) decision making in a monopoly.
13) The prisoners’ dilemma is
A) an example of a duopoly game.
B) a theory about why firms break the law.
C) competition that can occur among firms in monopolistic competition.
D) an example of the monopolist charging high prices.
E) an example of a game that does not have a Nash equilibrium.
14) In the prisoners’ dilemma, each player is ________ regardless of the other player’s actions.
A) forced to confess
B) forced to deny
C) better off confessing
D) better off denying
E) going to go free
15) The equilibrium in the prisoners’ dilemma
i. minimizes the prisoners’ combined jail time.
ii. has one prisoner confessing and the other denying.
iii. is a Nash equilibrium.
A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii, and iii
16) In a prisoners’ dilemma game, in the Nash equilibrium
A) neither player gets his or her best outcome.
B) both players get their best outcome.
C) one player gets his or her best outcome and the other player does not.
D) collusion would not alter the outcome.
E) Either answer A or C might be correct depending on whether the players communicate with
each other or do not communicate with each other.
17) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and
Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not
allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is
that Bonnie ________ and Clyde ________.
A) confesses; denies
B) confesses; confesses
C) denies; denies
D) denies; confesses
E) denies; either confess or denies, either outcome is consistent with the Nash equilibrium.
18) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and
Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not
allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is
A) Bonnie confesses only if she thinks Clyde denies committing the crime.
B) Clyde confesses only if he thinks Bonnie denies committing the crime.
C) both Bonnie and Clyde confess to the crime.
D) both Bonnie and Clyde deny committing the crime.
E) Clyde confesses and Bonnie might either confess or not confess, either outcome is consistent
with the Nash equilibrium.
19) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and
Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not
allowed to communicate. Which of the following statements correctly describes the equilibrium
choices made by Bonnie and Clyde?
A) The Nash equilibrium is the best outcome for Bonnie and Clyde.
B) There is no equilibrium in this game.
C) In the Nash equilibrium, both Bonnie and Clyde deny committing the crime.
D) Bonnie and Clyde could improve upon the Nash equilibrium if they could communicate.
E) Bonnie and Clyde get the best outcome for themselves because they are not allowed to
communicate.
20) The prisoners’ dilemma is similar to the problem faced by firms in an oligopoly in the United
States because
A) mutual interdependence exists, and collusion is illegal in the United States, so the firms
cannot legally communicate.
B) collusion is legal in the United States, and firms can communicate their pricing decisions to
each other.
C) failure to cooperate leads to better outcomes than cooperation.
D) private prisons are run by oligopolies.
E) the firms can communicate but mutual interdependence exists.
21) In an oligopoly in which the firms have entered into a cartel agreement, the Nash equilibrium
exhibits which of the following?
A) firms jointly maximizing profits
B) the firms cheating on the cartel agreement, which benefits society
C) production at a price and output level close to monopolistic competition in the long run
D) the firms cheating on the cartel agreement, which harms society
E) one firm cheating on the cartel agreement and the other firms complying with the cartel
agreement.
22) Suppose MCI and AT&T can each charge either 3¢ or 4¢ a minute for a long distance call.
The above table illustrates the payoffs, in millions of dollars, from each of the four possible
outcomes that could occur in their duopoly setting. If MCI charges 4¢ a minute and AT&T
charges 4¢ a minute, then MCI’s profit will be ________ million and AT&T’s profit will be
________ million.
A) $320; $320
B) $200; $500
C) $500; $200
D) $450; $450
E) $320; $500
23) Suppose MCI and AT&T can each charge either 3¢ or 4¢ a minute for a long distance call.
The above table illustrates the payoffs, in millions of dollars, from each of the four possible
outcomes that could occur in their duopoly setting. What must MCI’s price be for AT&T to earn
$500 million in profit?
A) 4¢ a minute
B) 3¢ a minute
C) 0¢ a minute
D) either 4¢ or 3¢ a minute because AT&T earns $500 million in profit either way
E) None of the above answers is correct because the payoff matrix shows that it is not possible
for AT&T to earn $500 million in profit
24) Suppose MCI and AT&T can each charge either 3¢ or 4¢ a minute for a long distance call.
The above table illustrates the payoffs, in millions of dollars, from each of the four possible
outcomes that could occur in their duopoly setting. If MCI charges 3¢ a minute and AT&T
charges 4¢ a minute, then MCI’s profit will be ________ million and AT&T’s profit will be
________ million.
A) $320; $320
B) $200; $500
C) $500; $200
D) $450; $450
E) $320; $450
25) Long-run economic profits are most likely to be earned in
A) perfect competition and oligopoly.
B) perfect competition and monopoly.
C) monopoly and oligopoly.
D) oligopoly and monopolistic competition.
E) perfect competition and monopolistic competition.
26) If two duopolists can stick to a cartel agreement to boost their prices, then both
A) earn greater profits than if they did not collude.
B) price at marginal cost.
C) price below average total cost.
D) decrease their economic profits.
E) increase their production so that each produces more than if they did not collude.
27) If an oligopolistic game is repeatedly played, which of the following can occur?
A) players can learn ways to cooperate and earn an economic profit
B) the competitive price and output consistently is the final result
C) firms can learn how to cheat more effectively on the other player
D) one firm will be driven out of business
E) An implicit agreement is reached in which one firm constantly cheats on the cartel and the
other firm complies with it.
28) The only two firms in a market are trying to decide what price to charge. The payoff matrix
for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit.
In the Nash equilibrium, Firm A will set a price of ________ and Firm B will set a price of
________.
A) $10; $20
B) $20; $10
C) $10; $10
D) $20; $20
E) $20; something, but more information is needed to determine Firm B’s price
29) The only two firms in a market are trying to decide what price to charge. The payoff matrix
for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit.
In the above game, in the Nash equilibrium,
A) Firm A and Firm B are both making $40,000 in economic profit.
B) Firm A and Firm B are both making $55,000 in economic profit.
C) Firm A is making $60,000 and Firm B is making $55,000 in economic profit.
D) Firm A and Firm B are both making $60,000 in economic profit.
E) Firm A and Firm B are both making $35,000 in economic profit.
30) The only two firms in a market are trying to decide what price to charge. The payoff matrix
for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit.
Which of the following statements is correct?
A) If the firms play this game repeatedly, one would end up charging $20 and the other $10.
B) If the firms cooperate, they could both earn $55,000 in economic profit.
C) The Nash equilibrium in this game is for both firms to set P = $20 because that maximizes
their combined profit.
D) Firm B’s strategy is to always set P= $20 because that gives Firm B the highest possible
profit.
E) If Firm B sets P = $20, then Firm A will maximize its profit by setting its P = $20.
31) Intel and AMD are a duopoly that produce CPU chips. Intel and AMD can conduct R&D or
they can not conduct R&D. The table above shows the payoff matrix for the two firms. The
numbers are millions of dollars of profit. The Nash equilibrium is for Intel to ________ and for
AMD to ________ .
A) conduct R&D; conduct R&D
B) conduct R&D; not conduct R&D
C) not conduct R&D; conduct R&D
D) not conduct R&D; not conduct R&D
E) conduct R&D; either conduct R&D or not conduct R&D, the equilibrium could be either
choice for AMD
32) Intel and AMD are a duopoly that produce CPU chips. Intel and AMD can conduct R&D or
they can not conduct R&D. The table above shows the payoff matrix for the two firms. If AMD
is playing a tit-for-tat strategy, then if Intel conducted R&D last period, AMD
A) definitely conducts R&D this period.
B) definitely does not conduct R&D this period.
C) might conduct R&D or might not conduct R&D, depending on Intel’s profit.
D) might conduct R&D or might not conduct R&D, depending on its profit.
E) might conduct R&D or might not conduct R&D, but more information is needed to determine
its action.
33) Intel and AMD are a duopoly that produce CPU chips. Intel and AMD can conduct R&D or
they can not conduct R&D. The table above shows the payoff matrix for the two firms. AMD is
playing a tit-for-tat strategy and Intel did not conduct R&D last period. Then, of the following
answers, Intel’s total profit for the next two periods is the highest if Intel ________ R&D this
period and ________ R&D next period.
A) conducts; conducts
B) does not conduct; conducts
C) conducts; does not conduct
D) does not conduct; does not conduct
E) conducts; either conducts or does not conduct because the profit is the same in either case
34) One of the main tools economists use to analyze strategic behavior is
A) the Herfindahl-Hirschman Index.
B) game theory.
C) cartel theory.
D) the collusion index.
E) dual theory, which is used to study duopolies.
35) Game theory reveals that
A) the equilibrium might not be the best solution for the parties involved.
B) firms in oligopoly are not interdependent.
C) each player looks after what is best for the industry.
D) if all firms in an oligopoly take the action that maximizes their profit, then the equilibrium
will have the largest possible combined profit of all the firms.
E) firms in an oligopoly choose their actions without regard for what the other firms might do.
36) A Nash equilibrium occurs
A) when each player acts without considering the actions of the other player.
B) when each player takes the best possible action given the action of the other player.
C) only when players use the tit-for-tat strategy.
D) only when the game is played in Nashville, TN.
E) when each player takes the action that makes the combined payoff for all players as large as
possible.
37) The prisoners’ dilemma game
A) shows that prisoners are better off if they cooperate.
B) shows it is easy to cooperate.
C) has an equilibrium in which both prisoners are made as well off as possible.
D) would have the same outcome even if the prisoners can communicate and cooperate.
E) has an equilibrium in which one prisoner is made as well off as possible and the other prisoner
is made as worse off as possible.
38) A collusive agreement to form a cartel is difficult to maintain because
A) each member firm can increase its own profits by cutting its price and selling more.
B) forming a cartel is legal but frowned upon throughout the world.
C) supply will decrease because of the high cartel price.
D) demanders will rebel once they realize a cartel has been formed.
E) each firm can increase its profit if it decreases its production even more than the decrease set
by the cartel.