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139. The theory of oligopoly provides another reason that free trade can benefit all countries because
a. increased competition leads to larger deadweight losses.
b. as the number of firms within a given market increases, the price of the good decreases.
c. as the number of firms within a given market increases, the profit of each firm increases.
d. All of the above are correct.
140. 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 types of markets?
a. oligopoly
b. duopoly
c. monopoly
d. competitive markets
4294 Oligopoly
141. If nations such as Germany, Japan, and the United States prohibited international trade in
automobiles, a likely effect would be that
a. the price effect would become a more significant consideration for each firm that makes
automobiles.
b. the excess of price over marginal cost would become less pronounced in the automobile
market.
c. all countries would become better off.
d. automobile producers in the U.S. would collude to produce a large number of cars.
142. The theory of oligopoly provides a reason why
a. perfect competition is not a useful object of study.
b. price is less than marginal cost for many firms.
c. all countries can benefit from free trade among nations.
d. firms do not want to capture larger shares of their markets.
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143. 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 duopoly market.
d. a competitive market.
144. OPEC is able to raise the price of its product by
a. tying.
b. setting production levels for each of its members.
c. increasing the supply of oil above the competitive level.
d. imposing resale price maintenance agreements on members.
4296 Oligopoly
145. The more firms an oligopoly has,
a. the more likely it is to earn monopoly profits.
b. the higher the price of the product.
c. the farther the equilibrium quantity will be from the socially efficient quantity.
d. the more likely the firms will charge a price close to the perfectly competitive price.
146. In an oligopoly, the total output produced in the market is
a. higher than the total output that would be produced if the market were a monopoly and higher
than the total output that would be produced if the market were perfectly competitive.
b. higher than the total output that would be produced if the market were a monopoly but lower
than the total output that would be produced if the market were perfectly competitive.
c. lower than the total output that would be produced if the market were a monopoly but higher
than the total output that would be produced if the market were perfectly competitive.
d. lower than the total output that would be produced if the market were a monopoly and lower
than the total output that would be produced if the market were perfectly competitive.
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147. Cartels in the United States are
a. legal if price is competitively determined.
b. legal if all firms in the industry agree to the terms of the cartel.
c. legal if all conditions of the cartel are made public.
d. illegal.
148. Which of the following would be most likely to contribute to the breakdown of a cartel in a
natural resource (e.g., bauxite) market?
a. high prices
b. low price elasticity of demand
c. high compatibility of member interests
d. unequal member ownership of the natural resource
4298 Oligopoly
149. An equilibrium in which each firm in an oligopoly maximizes profit, given the actions of its rivals,
is called
a. a general equilibrium.
b. a dominant equilibrium.
c. a Nash equilibrium.
d. an oligopoly equilibrium.
150. An oligopoly would tend to restrict output and drive up price if
a. barriers to entering the industry are negligible.
b. firms engage in informative advertising.
c. firms produce a standardized product.
d. firms collude and behave like a monopoly.
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151. If duopoly firms that are not colluding were able to successfully collude, then
a. price and quantity would rise.
b. price and quantity would fall.
c. price would rise and quantity would fall.
d. price would fall and quantity would rise.
152. If one firm left a duopoly market where the firms did not cooperate then
a. price and quantity would rise
b. price would rise and quantity would fall.
c. quantity would rise and price would fall.
d. quantity and price would fall.
153. If a market is a duopoly and additional firms enter and do not cooperate, then
a. price and quantity fall.
b. price and quantity rise.
c. price falls and quantity rises.
d. price rises and quantity falls.
4300 Oligopoly
154. Other things the same, in which case is the quantity produced the highest?
a. There is one firm.
b. There are two firms that successfully collude.
c. There are two firms in Nash equilibrium.
d. There are a very large number of firms.
155. If duopolists colluded but then stopped colluding,
a. price and quantity would rise.
b. price would rise and quantity would fall.
c. price would fall and quantity would rise
d. price and quantity would fall.
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156. In which case do firms have some control over their price?
a. monopolistic competition and perfect competition
b. oligopoly but not perfect competition
c. perfect competition but not monopoly
d. neither monopolistic competition nor oligopoly
157. The oligopoly price will be greater than marginal cost but less than the monopoly price when
a. the oligopolists collude by jointly choosing a quantity to produce and maintaining their
agreement.
b. the oligopolists collude by jointly choosing a price to charge and maintaining their agreement.
c. each oligopolist individually chooses a quantity to produce to maximize profit.
d. each oligopolist’s objective is minimization of average total cost, rather than maximization of
profit.
4302 Oligopoly
158. In pursuing its own interest, an oligopoly firm will decide to increase production by 1 unit as long
as
a. there is no output effect.
b. there is no price effect.
c. the output effect is larger than the price effect.
d. the price effect is larger than the output effect.
159. Suppose that Barack and Michelle are duopolists. Barack is producing 300 units of output, and
Michelle is producing 400 units of output. When Michelle produces 400 units, Barack maximizes
profit by producing 300 units. When Barack produces 300 units of output, Michelle maximizes
profit by producing 400 units. Barack and Michelle are
a. in a competitive market.
b. at a Nash equilibrium.
c. producing with no deadweight loss.
d. selling at a price higher than the monopoly price.
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160. Suppose that Thierry and Abdul are duopolists. Thierry is producing 700 units of output, and
Abdul is producing 500 units of output. When Abdul produces 500 units, Thierry maximizes profit
by producing 700 units. When Thierry produces 700 units of output, Abdul maximizes profit by
producing 500 units. Thierry and Abdul are
a. pricing at the minimum of marginal cost.
b. in a competitive market.
c. at a Nash equilibrium.
d. engaging in mark–up pricing.
Multiple Choice – Section 02: The Economics of Cooperation
1. When firms are faced with making strategic choices to maximize profit, economists typically use
a. the theory of monopoly to model their behavior.
b. the theory of aggressive competition to model their behavior.
c. game theory to model their behavior.
d. cartel theory to model their behavior.
4304 Oligopoly
2. When strategic interactions are important to pricing and production decisions, a typical firm will
a. set the price of its product equal to marginal cost.
b. consider how competing firms might respond to its actions.
c. generally operate as if it is a monopolist.
d. consider exiting the market.
3. Game theory is important for the understanding of
a. competitive markets.
b. monopolies.
c. oligopolies.
d. all market structures.
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4. Game theory is necessary for understanding
a. all market structures.
b. competition and oligopoly, but it is not necessary for understanding monopoly.
c. monopoly and oligopoly, but it is not necessary for understanding competition.
d. oligopoly, but it is not necessary for understanding monopoly or competition.
5. The prisoners‘ dilemma provides insights into the
a. difficulty of maintaining cooperation.
b. benefits of avoiding cooperation.
c. benefits of government ownership of monopoly.
d. ease with which oligopoly firms maintain high prices.
6. In the prisoners‘ dilemma game, self-interest leads
a. each prisoner to confess.
b. to a breakdown of any agreement that the prisoners might have made before being questioned.
c. to an outcome that is not particularly good for either prisoner.
d. All of the above are correct.
4306 Oligopoly
7. The likely outcome of the standard prisoners’ dilemma game is that
a. neither prisoner confesses.
b. exactly one prisoner confesses.
c. both prisoners confess.
d. Not enough information is given to answer this question.
8. The prisoners‘ dilemma is an important game to study because
a. most games present zero-sum alternatives.
b. it identifies the fundamental difficulty in maintaining cooperative agreements.
c. strategic decisions faced by prisoners are identical to those faced by firms engaged in
competitive agreements.
d. all interactions among firms are represented by this game.
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9. The prisoners’ dilemma game
a. provides insight into why cooperation is individually rational.
b. provides insight into why cooperation is difficult.
c. is a game in which neither player has a dominant strategy.
d. is a game in which exactly one of the two players has a dominant strategy.
10. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is one
a. in which neither Bonnie nor Clyde confesses.
b. in which both Bonnie and Clyde confess.
c. that involves neither Bonnie nor Clyde pursuing a dominant strategy.
d. that is ideal in terms of Bonnie’s self-interest and in terms of Clyde’s self-interest.
4308 Oligopoly
11. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is
a. a very good outcome for both players.
b. a very good outcome for Bonnie, but a bad outcome for Clyde.
c. a very good outcome for Clyde, but a bad outcome for Bonnie.
d. a bad outcome for both players.
12. In a game, a dominant strategy is
a. the best strategy for a player to follow only if other players are cooperative.
b. the best strategy for a player to follow, regardless of the strategies followed by other players.
c. a strategy that must appear in every game.
d. a strategy that leads to one player’s interests dominating the interests of the other players.
13. A dominant strategy is one that
a. makes every player better off.
b. makes at least one player better off without hurting the competitiveness of any other player.
c. increases the total payoff for the player.
d. is best for the player, regardless of what strategies other players follow.
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Table 17–13
Two home-improvement stores (Lopes and HomeMax) 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. Increases in annual profits of the two home–
improvement stores are shown in the table below.
Lopes
Increase the size of store
and parking lot
Do not increase the size of
store and parking lot
HomeMax
Increase the size
of store and
parking lot
Lopes = $1.0 million
HomeMax = $1.5 million
Lopes = $0.4 million
HomeMax = $3.4 million
Do not increase
the size of store
and parking lot
Lopes = $3.2 million
HomeMax = $0.6 million
Lopes = $2.0 million
HomeMax = $2.5 million
14. Refer to Table 17-13. Pursuing its own best interest, Lopes will
a. increase the size of its store and parking lot only if HomeMax also increases the size of its store
and parking lot.
b. increase the size of its store and parking lot only if HomeMax does not increase the size of its
store and parking lot.
c. increase the size of its store and parking lot regardless of the decision made by HomeMax.
d. not increase the size of its store and parking lot regardless of the decision made by HomeMax.
4310 Oligopoly
15. Refer to Table 17-13. Pursuing its own best interest, HomeMax will
a. increase the size of its store and parking lot only if Lopes also increases the size of its store and
parking lot.
b. increase the size of its store and parking lot only if Lopes does not increase the size of its store
and parking lot.
c. increase the size of its store and parking lot regardless of the decision made by Lopes.
d. not increase the size of its store and parking lot regardless of the decision made by Lopes.
16. Refer to Table 17-13. Increasing the size of its store and parking lot is a dominant strategy for
a. Lopes, but not for HomeMax.
b. HomeMax, but not for Lopes.
c. both stores.
d. neither store.
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17. Refer to Table 17-13. If both stores follow a dominant strategy, HomeMax’s annual profit will
grow by
a. $0.6 million.
b. $1.5 million.
c. $2.5 million.
d. $3.4 million.
18. Refer to Table 17-13. If both stores follow a dominant strategy, Lopes’s annual profit will grow
by
a. $0.4 million.
b. $1.0 million.
c. $2.0 million.
d. $3.2 million.
4312 Oligopoly
19. Refer to Table 17-13. When this game reaches a Nash equilibrium, annual profit will grow by
a. $1.5 million for HomeMax and by $1.0 million for Lopes.
b. $3.4 million for HomeMax and by $0.4 million for Lopes.
c. $0.6 million for HomeMax and by $3.2 million for Lopes.
d. $2.5 million for HomeMax and by $2.0 million for Lopes.
20. 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. They should
both agree to
a. increase their store and parking lot sizes.
b. refrain from increasing their store and parking lot sizes.
c. be more competitive in capturing market share.
d. share the context of their conversation with the Federal Trade Commission.