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Oligopoly 4373
135. Refer to Table 17-26. If both firms follow a dominant strategy, Firm A's profits (losses) will be
a. $-12m
b. $-24m
c. $-60m
d. $-100m
136. Refer to Table 17-26. If both firms follow a dominant strategy, Firm B's profits (losses) will be
a. $-12m
b. $-24m
c. $-40m
d. $-100m
4374 Oligopoly
137. Refer to Table 17-26. When this game reaches a Nash equilibrium, profits for Firm A and Firm
B will be
a. $-12 and $-100, respectively.
b. $-24 and $-24, respectively.
c. $-60 and $-40, respectively.
d. $-100 and $-12, respectively.
138. Refer to Table 17-26. Which of the following statements is correct?
a. Neither firm A nor firm B has a dominant strategy.
b. Both firm A and firm B have a dominant strategy.
c. If this game were repeated, these firms would choose different strategies than they choose in
a one-period game.
d. This game is a typical prisoner’s dilemma in which the firms are worse off by making
decisions in their own self-interest.
Oligopoly 4375
Table 17-27
Each year the United States considers renewal of Most Favored Nation (MFN) trading status
with Farland (a mythical nation). Historically, legislators have made threats of not renewing
MFN status because of human rights abuses in Farland. The non-renewal of MFN trading status
is likely to involve some retaliatory measures by Farland. The payoff table below shows the
potential economic gains associated with a game in which Farland may impose trade sanctions
against U.S. firms and the United States may not renew MFN status with Farland. The table
contains the dollar value of all trade-flow benefits to the United States and Farland.
Farland
Impose trade sanctions
against U.S. firms
Do not impose trade sanctions
against U.S. firms
United
States
Don't renew MFN
status with Farland
U.S. trade value = $65 b
Farland trade value = $75 b
U.S. trade value = $140 b
Farland trade value = $5 b
Renew MFN status
with Farland
U.S. trade value = $35 b
Farland trade value = $285 b
U.S. trade value = $130 b
Farland trade value = $275 b
139. Refer to Table 17-27. Pursuing its own best interests, Farland will impose trade sanctions
against U.S. firms
a. only if the U.S. does not renew MFN status with Farland.
b. only if the U.S. renews MFN status with Farland.
c. regardless of whether the U.S. renews MFN status with Farland.
d. None of the above is correct. In pursuing its own best interests, Farland will in no case impose
trade sanctions against U.S. firms.
4376 Oligopoly
140. Refer to Table 17-27. Pursuing its own best interests, the U.S. will renew MFN status with
Farland
a. only if Farland does not impose trade sanctions against U.S. firms.
b. only if Farland imposes trade sanctions against U.S. firms.
c. regardless of whether Farland imposes trade sanctions against U.S. firms.
d. None of the above is correct. In pursuing its own best interests, the United States will in no
case renew MFN status with Farland.
141. Refer to Table 17-27. This particular game
a. features a dominant strategy for the U.S.
b. features a dominant strategy for Farland.
c. is a version of the prisoners' dilemma game.
d. All of the above are correct.
Oligopoly 4377
142. Refer to Table 17-27. If both countries follow a dominant strategy, the value of trade flow
benefits for Farland will be
a. $5 b.
b. $75 b.
c. $275 b.
d. $285 b.
143. Refer to Table 17-27. 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.
4378 Oligopoly
144. Refer to Table 17-27. When this game reaches a Nash equilibrium, the value of trade flow
benefits will be
a. United States $35 b and Farland $285 b.
b. United States $65 b and Farland $75 b.
c. United States $140 b and Farland $5 b.
d. United States $130 b and Farland $275 b.
145. Refer to Table 17-27. 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 countries to agree to which outcome?
a. United States $35 b and Farland $285 b
b. United States $65 b and Farland $75 b
c. United States $140 b and Farland $5 b
d. United States $130 b and Farland $275 b
Oligopoly 4379
146. Refer to Table 17-27. Assume that trade negotiators meet to discuss trade policy between the
United States and Farland. If neither party to the negotiation is able to trust the other party, then
a. each should assume that the other will choose a strategy that optimizes total value of the trade
relationship.
b. the Nash equilibrium will provide the largest possible gains to each party.
c. Farland negotiators should assume that United States negotiators will implement a policy that is
in the mutual best interest of both countries.
d. each should follow its dominant strategy.
Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company
decides whether to charge a high price or a low price. In the figure, the dollar amounts are
payoffs and they represent annual profits for the two companies.
4380 Oligopoly
147. Refer to Figure 17-5. Suppose the outcome of the game is one in which ABC’s profit is $4
million and QRS’s profit is $14 million. The most likely explanation for this outcome is that
a. each company pursued its dominant strategy.
b. each company’s objective was to maximize the sum of the two companies’ profits.
c. the two companies reached an agreement on what price to charge, and ABC subsequently
cheated.
d. the two companies reached an agreement on what price to charge, and QRS subsequently
cheated.
148. Refer to Figure 17-5. If the two companies make their pricing decisions independently, then it
is likely that ABC will
a. charge a high price only if QRS charges a high price.
b. charge a high price only if QRS charges a low price.
c. charge a high price regardless of whether QRS charges a high price or a low price.
d. None of the above are correct.
Oligopoly 4381
149. Refer to Figure 17-5. If the two companies make their pricing decisions independently, then it
is likely that QRS will
a. charge a low price only if ABC charges a low price.
b. charge a low price only if ABC charges a high price.
c. charge a low price regardless of whether ABC charges a high price or a low price.
d. None of the above are correct.
150. Refer to Figure 17-5. If this game is played only once, then the most likely outcome is that
a. both firms charge a low price.
b. ABC charges a low price and QRS charges a high price.
c. ABC charges a high price and QRS charges a low price.
d. both firms charge a high price.
4382 Oligopoly
151. Refer to Figure 17-5. The dominant strategy for ABC is to
a. charge a high price, and the dominant strategy for QRS is to charge a high price.
b. charge a high price, and the dominant strategy for QRS is to charge a low price.
c. charge a low price, and the dominant strategy for QRS is to charge a high price.
d. charge a low price, and the dominant strategy for QRS is to charge a low price.
152. Refer to Figure 17-5. Suppose we observe that the outcome of the game is one in which each
company earns a profit of $10 million. This outcome
a. is the result of each company pursuing its dominant strategy.
b. is the result of cooperation between the two companies, and we know that a cooperative
outcome is easy in a game such as this one.
c. is the result of cooperation between the two companies, and we know that a cooperative
outcome is difficult in a game such as this one.
d. is the most likely outcome of the game, regardless of whether the two companies cooperate.
Oligopoly 4383
153. Refer to Figure 17-5. The situation faced by ABC and QRS is
a. one in which the players, pursuing their own interests, are likely to reach an outcome that is
not particularly good for either player.
b. one in which an agreement between the players to behave in a certain way is not likely to hold
up.
c. similar to the situation faced by Bonnie and Clyde in the prisoners’ dilemma game.
d. All of the above are correct.
154. Refer to Figure 17-5. In what sense is the game involving ABC and QRS similar to the
prisoners’ dilemma game involving Bonnie and Clyde?
a. In both games, if the players pursue their own interests, then the outcome is the best possible
outcome for each player.
b. In both games, a dominant strategy can be identified for each player.
c. In both games, cooperation between the players is easy to maintain.
d. All of the above are correct.
4384 Oligopoly
155. A cooperative agreement among oligopolists is more likely to be maintained,
a. the greater the number of oligopolists.
b. the larger the number of buyers of the oligopolists’ product.
c. the smaller the number of buyers of the oligopolists’ product.
d. the more likely it is that the game among the oligopolists will be played over and over again.
156. A cooperative agreement among oligopolists is less likely to be maintained,
a. the greater the number of oligopolists.
b. the larger the number of buyers of the oligopolists’ product.
c. the smaller the number of buyers of the oligopolists’ product.
d. the more likely it is that the game among the oligopolists will be played over and over again.
Oligopoly 4385
Table 17-28
Suppose that two firms determine that each could lower its costs and increase its profits if both
reduced their advertising budgets. But in order for the plan to work, each firm must agree to
refrain from advertising. Each firm believes that advertising works by increasing the demand for
the firm’s product, but each firm also believes that if neither firm advertises, the cost savings will
outweigh the lost sales. The table below lists each firm’s individual profits:
Firm A
Breaks agreement Maintains agreement
and advertises and does not advertise
Firm B
Breaks agreement
and advertises
Firm A’s profit = $16,000
Firm B’s profit = $6,000
Firm A’s profit = $14,000
Firm B’s profit = $10,000
Maintains agreement
and does not
advertise
Firm A’s profit = $24,000
Firm B’s profit = $5,000
Firm A’s profit = $22,000
Firm B’s profit = $9,000
157. Refer to Table 17-28. Does either Firm A or Firm B have a dominant strategy?
a. Firm A has a dominant strategy, but Firm B does not.
b. Firm A does not have a dominant strategy, but Firm B does.
c. Neither Firm A nor Firm B has a dominant strategy.
d. Both Firm A and Firm B have a dominant strategy.
158. Refer to Table 17-28. What is the outcome of this game?
a. Firm A will advertise but Firm B will not.
b. Firm A will not advertise but Firm B will.
c. Neither Firm A nor Firm B will advertise.
d. Both Firm A and Firm B will advertise.
4386 Oligopoly
159. Refer to Table 17-28. Which of the following statement(s) correctly characterizes the outcome
of this game?
a. Both Firm A and Firm B have a dominant strategy to advertise.
b. There is a Nash equilibrium when both firms advertise.
c. Although both firms collectively would earn higher profits by maintaining the agreement not to
advertise, self- interest will cause each firm to break the agreement.
d. All of the above are correct.
160. Refer to Table 17-28. Which of the following statements does not correctly characterize the
outcome of this game?
a. There is a Nash equilibrium.
b. Both firms collectively would earn the highest joint profits by maintaining the agreement not to
advertise.
c. Only one firm has a dominant strategy.
d. The game is an example of the Prisoners’ Dilemma.
Oligopoly 4387
Table 17-29
Suppose that two firms, Wild Willy’s Wonderdrink (Firm W) and Hyper Hank’s Hydration (Firm
H), comprise the market for energy drinks. Each firm determines that it could lower its costs and
increase its profits if both firms reduced their advertising budgets. But for the plan to work, each
firm must agree to refrain from advertising. Each firm believes that advertising works by
increasing the demand for the firm’s energy drinks, but each firm also believes that if neither
firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm’s
individual profits:
Firm W
Breaks agreement Maintains agreement
and advertises and does not advertise
Firm H
Breaks agreement
and advertises
Firm W’s profit = $16,500
Firm H’s profit = $5,000
Firm W’s profit = $14,000
Firm H’s profit = $11,000
Maintains agreement
and does not advertise
Firm W’s profit = $24,000
Firm H’s profit = $4,000
Firm W’s profit = $22,500
Firm H’s profit = $10,000
161. Refer to Table 17-29 Does either Firm W or Firm H have a dominant strategy?
a. Both Firm W and Firm H have a dominant strategy.
b. Neither Firm W nor Firm H has a dominant strategy.
c. Firm W has a dominant strategy, but Firm H does not.
d. Firm W does not have a dominant strategy, but Firm H does.
162. Refer to Table 17-29. What is the outcome of this game?
a. Neither Firm W nor Firm H will advertise.
b. Both Firm W and Firm H will advertise.
c. Firm W will advertise but Firm H will not.
d. Firm W will not advertise but Firm H will.
4388 Oligopoly
163. Refer to Table 17-29. Which of the following statement(s) correctly characterizes the outcome
of this game?
a. There is a Nash equilibrium when both firms advertise.
b. Both Firm W and Firm H have a dominant strategy to advertise.
c. Although both firms collectively would earn higher profits by maintaining the agreement not to
advertise, self- interest will cause each firm to break the agreement.
d. All of the above are correct.
164. Refer to Table 17-29. Which of the following statements does not correctly characterize the
outcome of this game?
a. There is a Nash equilibrium.
b. Only one firm has a dominant strategy.
c. The game is an example of the Prisoners’ Dilemma.
d. Both firms collectively would earn the highest joint profits by maintaining the agreement not to
advertise.
Oligopoly 4389
Multiple Choice – Section 03: Public Policy toward Oligopolies
1. From society’s standpoint, cooperation among oligopolists is
a. desirable, because it leads to less conflict among firms and a wider variety of products for
consumers.
b. desirable, because it leads to an outcome closer to the competitive outcome than what would be
observed in the absence of cooperation.
c. undesirable, because it leads to output levels that are too low and prices that are too high.
d. undesirable, because it leads to output levels that are too high and prices that are too high.
2. A law that encourages market competition by prohibiting firms from gaining or exercising excessive
market power is
a. a patent.
b. impossible to enforce.
c. an antitrust law.
d. an externality law.
4390 Oligopoly
3. The primary purpose of antitrust legislation is to
a. protect small businesses.
b. protect the competitiveness of U.S. markets.
c. protect the prices of American-made products.
d. ensure firms earn only a fair profit.
4. Suppose that antitrust laws were successful in moving the allocation of resources in the computer
software industry closer to the social optimum. This situation would illustrate which of the following
Ten Principles of Economics?
a. Trade can make everyone better off.
b. The cost of something is what you give up to get it.
c. Governments can sometimes improve market outcomes.
d. A country’s standard of living depends on its ability to produce goods and services.
Oligopoly 4391
5. To move the allocation of resources closer to the social optimum, policymakers should typically try
to induce firms in an oligopoly to
a. collude with each other.
b. form various degrees of cartels.
c. compete rather than cooperate with each other.
d. cooperate rather than compete with each other.
6. Which of the following statements is true?
a. The proper scope of antitrust laws is well defined and definite.
b. Antitrust laws focus on granting certain firms the option to form a cartel.
c. Policymakers have the difficult task of determining whether some firms' decisions have
legitimate purposes even though they appear anti-competitive.
d. There is always a need for policymakers to try to limit a firm's pricing power, regardless of
whether the firm's market is competitive, a monopoly, or an oligopoly.
4392 Oligopoly
7. Which of the following is necessarily a problem with antitrust laws?
a. They may target a business whose practices appear to be anti-competitive but in fact have
legitimate purposes.
b. They may encourage firms to collude and reduce social welfare compared to the unregulated
market.
c. They reduce the effectiveness of the market to self-regulate.
d. They are enforced by agencies whose self-interest contradicts the interests of society as a
whole.
8. Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust
laws?
a. the U.S. Justice Department
b. private citizens
c. corporations
d. All of the above are correct.
