Oligopoly 4313
21. Refer to Table 17-13. Suppose the owners of Lopes and HomeMax meet for a friendly game of
golf one afternoon and happen to discuss a strategy to optimize growth related profit. If they both
agree to cooperate on a strategy that maximizes their joint profits, annual profit will grow by
a. $1.0 million for Lopes and by $1.5 million for HomeMax.
b. $0.4 million for Lopes and by $3.4 million for HomeMax.
c. $3.2 million for Lopes and by $0.6 million for HomeMax.
d. $2.0 million for Lopes and by $2.5 million for HomeMax.
Figure 17-2. Two companies, Acme and Pinnacle, each decide whether to produce a good
quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they
represent annual profits for the two companies.
4314 Oligopoly
22. Refer to Figure 17-2. The dominant strategy for Acme is to
a. produce a good quality product, and the dominant strategy for Pinnacle is to produce a good
quality product.
b. produce a good quality product, and the dominant strategy for Pinnacle is to produce a poor
quality product.
c. produce a poor quality product, and the dominant strategy for Pinnacle is to produce a good
quality product.
d. produce a poor quality product, and the dominant strategy for Pinnacle is to produce a poor
quality product.
23. Refer to Figure 17-2. Which of the following statements is correct?
a. Acme can potentially earn its highest possible profit if it produces a good quality product, and
for that reason it is a dominant strategy for Acme to produce a good quality product.
b. The highest possible combined profit for the two firms occurs when both produce a poor quality
product, and for that reason producing a poor quality product is a dominant strategy for both
firms.
c. Regardless of the strategy pursued by Acme, Pinnacle’s best strategy is to produce a good
quality product,
and for that reason producing a good quality product is a dominant strategy for Pinnacle.
d. Our knowledge of game theory suggests that the most likely outcome of the game, if it is
played only once, is for one firm to produce a poor quality product and for the other firm to
produce a good quality product.
Oligopoly 4315
24. Refer to Figure 17-2. If this game is played only once, then the most likely outcome is that
a. both firms produce a poor quality product.
b. Acme produces a poor quality product and Pinnacle produces a good quality product.
c. Acme produces a good quality product and Pinnacle produces a poor quality product.
d. both firms produce a good quality product.
25. Refer to Figure 17-2. Acme and Pinnacle agree to cooperate so as to maximize total profit. If
this game is played repeatedly and Acme uses a tit-for-tat strategy, it will choose a
a. good quality product in the first round and in subsequent rounds it will choose whatever
Pinnacle chose in the previous round.
b. poor quality product in the first round and in subsequent rounds it will choose whatever Pinnacle
chose in the previous round.
c. good quality product in all rounds, regardless of the choice made by Pinnacle.
d. poor quality product in all rounds, regardless of the choice made by Pinnacle.
4316 Oligopoly
26. Refer to Figure 17-2. The more frequently this game is played, the more likely it is that
a. both firms will produce a good quality product.
b. both firms will produce a poor quality product.
c. both firms experience a reduction in profits compared to the Nash equilibrium outcome.
d. one firm will experience an increase in profits and the other will experience a decrease in
profits.
27. Much of the research on game theory in recent decades was driven by attempts to analyze
actions of players during
a. the Great Depression of the 1930s.
b. World War II.
c. the Cold War between the United States and the Soviet Union.
d. the ascendancy of the conservative movement in the United States in the 1970s and 1980s.
Oligopoly 4317
28. Consider a game of the “Jack and Jill” type in which a market is a duopoly and each firm decides
to produce either a “high” quantity of output or a “low” quantity of output. If the two firms
successfully reach and maintain the cooperative outcome of the game, then
a. both the combined profit of the firms and total surplus are maximized.
b. the combined profit of the firms is maximized but total surplus is not maximized.
c. the combined profit of the firms is not maximized but total surplus is maximized.
d. neither the combined profit of the firms nor total surplus is maximized.
29. Games that are played more than once generally
a. lead to outcomes dominated purely by self-interest.
b. lead to outcomes that do not reflect joint rationality.
c. encourage cheating on cartel production quotas.
d. make collusive arrangements easier to enforce.
4318 Oligopoly
30. Very often, the reason that players can solve the prisoners’ dilemma and reach the most profitable
outcome is that
a. each player tries to capture a large portion of the market share.
b. the players play the game not once but many times.
c. the game becomes more competitive.
d. self interest results in the Nash equilibrium which is the best outcome for the players.
31. In a two-person repeated game, a tit-for-tat strategy starts with
a. cooperation and then each player mimics the other player’s last move.
b. cooperation and then each player is unresponsive to the strategic moves of the other player.
c. noncooperation and then each player pursues his or her own self-interest.
d. noncooperation and then each player cooperates when the other player demonstrates a desire
for the cooperative solution.
Oligopoly 4319
32. A tit-for-tat strategy starts out
a. conciliatory and then encourages an optimal social outcome among the other players.
b. unfriendly and then encourages friendly strategies among players.
c. friendly, then penalizes unfriendly players, and forgives them if warranted.
d. aggressive, then compensates losing players, and eventually forgives unfriendly players.
33. Individual profit earned by Dave, the oligopolist, depends on which of the following?
(i) The quantity of output that Dave produces
(ii) The quantities of output that the other firms in the market produce
(iii) The extent of collusion between Dave and the other firms in the market
a. (i) and (ii)
b. (ii) and (iii)
c. (iii) only
d. (i), (ii), and (iii)
4320 Oligopoly
34. Which of the following statements is (are) true of the prisoners’ dilemma?
(i) Rational self-interest leads neither party to confess.
(ii) Cooperation between the prisoners is difficult to maintain.
(iii) Cooperation between the prisoners is individually rational.
a. (ii) only
b. (ii) and (iii)
c. (i) and (iii)
d. (i), (ii), and (iii)
35. When the prisoners’ dilemma game is generalized to describe situations other than those that
literally involve two
prisoners, we see that cooperation between the players of the game
a. can be difficult to maintain, but only when cooperation would make at least one of the players
of the game worse off.
b. can be difficult to maintain, even when cooperation would make both players of the game
better off.
c. always works to the benefit of society as a whole.
d. always works to the detriment of society as a whole.
Oligopoly 4321
Scenario 17-2.
Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a
common pool of oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If
each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million
in revenue – $5 million in costs). Assume that having X percent of the total wells means that a
company will collect X percent of the total revenue.
36. Refer to Scenario 17-2. If BQ and Exxoff are able to successfully collude to maximize their joint
profits, BQ will
a. drill one well and Exxoff will drill one well.
b. drill one well and Exxoff will drill two wells.
c. drill two wells and Exxoff will drill one well.
d. drill two wells and Exxoff will drill two wells.
37. Refer to Scenario 17-2. If BQ and Exxoff are able to successfully collude to maximize their joint
profits, BQ will earn
a. $43 million and Exxoff will earn $86 million.
b. $62 million and Exxoff will earn $62 million.
c. $67 million and Exxoff will earn $67 million.
d. $86 million and Exxoff will earn $43 million.
4322 Oligopoly
38. Refer to Scenario 17-2. If BQ were to drill a second well, what would its profit be if Exxoff did
not drill a second well?
a. $43 million
b. $67 million
c. $86 million
d. $129 million
39. Refer to Scenario 17-2. If BQ were to drill a second well and Exxoff also drilled a second well,
what would BQ‘s profit be?
a. $31 million
b. $62 million
c. $67 million
d. $86 million
Oligopoly 4323
40. Refer to Scenario 17-2. Exxoff‘s dominant strategy would lead to what sort of well-drilling
behavior?
a. Exxoff will never drill a second well.
b. Exxoff will always drill a second well.
c. Exxoff will drill a second well only if BQ drills a well.
d. Exxoff will drill a second well only if BQ does not drill a well.
41. Refer to Scenario 17-2. If each firm is permitted to drill two wells at most, the firms are in a
Nash equilibrium when
a. BQ drills one well and Exxoff drills two wells.
b. BQ drills two wells and Exxoff drills one well.
c. both firms drill one well.
d. both firms drill two wells.
4324 Oligopoly
42. Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil
worth $60 million. For each well that is drilled, the company that drills the well incurs a cost of $4
million. Each company can drill up to two wells. What is the likely outcome of this game if each
company pursues its own self-interest?
a. Each company drills one well and experiences a profit of $26 million.
b. Each company drills one well and experiences a profit of $22 million.
c. Each company drills two wells and experiences a profit of $22 million.
d. One company drills two wells and experiences a profit of $32 million; the other company drills
one well and experiences a profit of $16 million.
43. We know that people tend to overuse common resources. This problem can be viewed as an
example of
a. a game in which the players succeed in reaching the cooperative outcome.
b. the prisoners’ dilemma.
c. a situation to which game theory does not apply because of a lack of strategic thinking.
d. a situation to which game theory does not apply because of too many decision-makers.
Oligopoly 4325
44. The paradoxical nature of oligopoly can be demonstrated by the fact that, even though the
monopoly outcome is best for the oligopolists,
a. they collude to set the output level equal to the Nash equilibrium level of output.
b. they have incentives to increase production above the monopoly outcome.
c. they do not behave as profit maximizers.
d. self-interest juxtaposes the profits earned at the Nash equilibrium.
45. Hot dog vendors on the beach fail to cooperate with one another on the quantity of hot dogs they
should sell to earn monopoly profits. A consequence of their failure is that, relative to the outcome
the vendors would like,
(i) the quantity of hot dogs supplied is closer to the socially optimal level.
(ii) the price of hot dogs is closer to marginal cost.
(iii) the hot dog market at the beach is less competitive.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (iii) only
4326 Oligopoly
46. Why would lack of cooperation between criminal suspects be desirable for society as a whole?
a. The suspects are able to choose optimal outcomes for themselves by acting in their own self
interest.
b. The prisoners‘ dilemma safeguards the criminals‘ constitutional rights.
c. More criminals will be convicted.
d. None of the above is correct.
47. What happens when the prisoners’ dilemma game is repeated numerous times in an oligopoly
market?
(i) The firms may well reach the monopoly outcome.
(ii) The firms may well reach the competitive outcome.
(iii) Buyers of the oligopolists‘ product will likely be worse off as a result.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (i), (ii), and (iii)
Oligopoly 4327
48. In game theory, a Nash equilibrium is
a. an outcome in which each player is doing his best given the strategies chosen by the other
players.
b. an outcome in which no player wishes to change her chosen strategy given the strategies
chosen by the other players.
c. the outcome that occurs when all players have a dominant strategy.
d. All of the above are correct.
4328 Oligopoly
Scenario 17-3.
Consider two countries, Kinglandia and Rovinastan, that are engaged in an arms race. Each
country must decide 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 table shows the possible outcomes for each decision combination. The numbers in
each cell represent the country’s ranking of the outcome (10 = best outcome, 1 = worst outcome).
Rovinastan
Build new weapons
Disarm existing weapons
Kinglandia
Build new
weapons
Kinglandia: 4
Rovinastan: 4
Disarm existing
weapons
Kinglandia: 1
Rovinastan: 10
49. Refer to Scenario 17-3. If each country only makes a choice of whether to build or disarm one
time and Rovinastan chooses to build new weapons, then Kinglandia will
a. disarm to signal its willingness to cooperate.
b. disarm to promote world peace.
c. build new weapons to prevent the loss of influence in world affairs.
d. None of the above are correct.
Oligopoly 4329
50. Refer to Scenario 17-3. If Rovinastan chooses to disarm its existing weapons, then Kinglandia
will
a. disarm to increase its influence in world affairs.
b. disarm to promote world peace.
c. build new weapons to promote world peace.
d. build new weapons to increase its influence in world affairs.
51. Refer to Scenario 17-3. Which of these statements is correct?
(i) Kinglandia is better off building new weapons if Rovinastan builds new weapons.
(ii) Kinglandia is better off building new weapons if Rovinastan disarms existing weapons.
(iii) Rovinastan is only better off building new weapons if Kinglandia builds new weapons.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (i), (ii), and (iii)
4330 Oligopoly
52. Refer to Scenario 17-3. Building new weapons is a dominant strategy for
a. Kinglandia, but not for Rovinastan.
b. Rovinastan, but not for Kinglandia.
c. both Kinglandia and Rovinastan.
d. neither Kinglandia nor Rovinastan.
53. Refer to Scenario 17-3. Suppose the two countries agreed to disarm existing weapons. In
reality these two countries may have a hard time keeping this agreement due to which of the
following reasons?
(i) Even though Kinglandia has no incentive to cheat on the agreement, Rovinastan has an
incentive to cheat on the agreement.
(ii) Much like the prisoners’ dilemma, both countries are better off reneging on the
agreement and building new weapons.
(iii) Both countries want to increase their world power by building new weapons.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (i), (ii), and (iii)
Oligopoly 4331
Scenario 17-4.
Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the
two companies split the market and earn $50 million each. If they both advertise, they again split
the market, but profits are lower by $10 million 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. In this case, the company that advertises earns $60 million
while the company that does not advertise earns only $30 million.
54. Refer to Scenario 17-4. What will these two companies do if they behave as individual profit
maximizers?
a. Neither company will advertise.
b. Both companies will advertise.
c. One company will advertise, the other will not.
d. There is no way of knowing without knowing how many customers are stolen through
advertising.
55. Refer to Scenario 17-4. The likely outcome of this game is that PM Inc. earns
a. $30 million and Brown Inc. earns $60 million.
b. $40 million and Brown Inc. earns $40 million.
c. $50 million and Brown Inc. earns $50 million.
d. $60 million and Brown Inc. earns $30 million.
4332 Oligopoly
56. Refer to Scenario 17-4. If these two companies collude and agree upon the best joint strategy,
a. neither company will advertise.
b. both companies will advertise.
c. PM Inc. will advertise but Brown Inc. will not.
d. Brown Inc. will advertise but PM Inc. will not.
57. Refer to Scenario 17-4. PM Inc.’s dominant strategy is to
a. refrain from advertising regardless of whether Brown Inc. advertises.
b. advertise only if Brown Inc. advertises.
c. advertise only if Brown Inc. does not advertise.
d. advertise regardless of whether Brown Inc. advertises.