Oligopoly 4413
50. Refer to Scenario 17-5. If the restaurant is unable to use tying, what is the profit-maximizing
price to charge for a salad?
a. $16
b. $14
c. $12
d. $7
51. Refer to Scenario 17-5. If the restaurant is able to use tying to price salads and steaks, what is
the profit– maximizing price to charge for the “tied” good?
a. $27
b. $20
c. $19
d. $15
4414 Oligopoly
52. Refer to Scenario 17-5. How much additional profit can the restaurant earn by switching to the
use of a tying strategy to price salads and steaks rather than pricing these goods separately?
a. $20
b. $12
c. $7
d. $6
53. A particular cable TV company requires a household to subscribe to its high-speed Internet
service if it subscribes to cable TV, and vice versa. This practice
a. is referred to as tying.
b. is regarded by some economists as a form of price discrimination.
c. is controversial among economists because they disagree on whether it has adverse effects for
society as a whole.
d. All of the above are correct.
Oligopoly 4415
54. Suppose that Makemoney Movies produces two new films — The Hulk and The Piano.
Makemoney offers theaters the two films together at a single price but will not supply the movies
separately. What do economists call this business practice?
a. predatory pricing
b. resale price maintenance
c. tying
d. leverage
Multiple Choice – Section 04: Conclusion
1. The story of the prisoners’ dilemma shows why
a. predatory pricing is clearly not in society’s best interest.
b. economists are unanimous in condemning resale price maintenance, since it inevitably reduces
competition.
c. oligopolies can fail to act independently, even when independent decision–making is in their best
interest.
d. oligopolies can fail to cooperate, even when cooperation is in their best interest.
4416 Oligopoly
True/False and Short Answer
1. The essence of an oligopolistic market is that there are only a few sellers.
a. True
b. False
2. Game theory is just as necessary for understanding competitive or monopoly markets as it is for
understanding oligopolistic markets.
a. True
b. False
3. In a competitive market, strategic interactions among the firms are not important.
a. True
b. False
Oligopoly 4417
4. For a firm, strategic interactions with other firms in the market become more important as the
number of firms in the market becomes larger.
a. True
b. False
5. Suppose three firms form a cartel and agree to charge a specific price for their output. Each
individual firm has an incentive to maintain the agreement because the firm’s individual profits will
be the greatest under the cartel arrangement.
a. True
b. False
6. When all firms choose their best strategy given the strategies that all the other firms have chosen,
the result is a Nash equilibrium.
a. True
b. False
4418 Oligopoly
7. If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the
same level of output as they would produce in a Nash equilibrium.
a. True
b. False
8. Any market that is served by an oligopoly is in effect served by a monopoly.
a. True
b. False
9. Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same.
a. True
b. False
Oligopoly 4419
10. A group of firms that collude is called a cartel.
a. True
b. False
11. Oligopolies produce more when they collude then when they do not.
a. True
b. False
12. Cartels with a small number of firms have a greater probability of reaching the monopoly
outcome than do cartels with a larger number of firms.
a. True
b. False
4420 Oligopoly
13. As the number of firms in an oligopoly becomes very large, the price effect disappears.
a. True
b. False
14. The problems faced by oligopolies with three or more members are entirely different from the
problems faced by duopolies.
a. True
b. False
15. If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the
cartel is equal to what it would be if the market were a monopoly.
a. True
b. False
Oligopoly 4421
16. In a duopoly if the firms have agreed to jointly maximize profits, then each firm can increase its
current profits by producing more.
a. True
b. False
17. As the number of firms in an oligopoly increases, the magnitude of the price effect increases.
a. True
b. False
18. If the output effect from increased production is larger than the price effect, then an oligopolist
would increase production.
a. True
b. False
4422 Oligopoly
19. All examples of the prisoner’s dilemma game are characterized by one and only one Nash
equilibrium.
a. True
b. False
20. If two players engaged in a prisoner’s dilemma game are likely to repeat the game, they are more
likely to cooperate than if they play the game only once.
a. True
b. False
21. The story of the prisoners‘ dilemma contains a general lesson that applies to any group trying to
maintain cooperation among its members.
a. True
b. False
Oligopoly 4423
22. In the prisoners’ dilemma game, one prisoner is always better off confessing, no matter what the
other prisoner does.
a. True
b. False
23. A dominant strategy is a strategy that is best for a player in a game regardless of the strategies
chosen by the other players.
a. True
b. False
24. In the prisoners’ dilemma game, confessing is a dominant strategy for each of the two prisoners.
a. True
b. False
4424 Oligopoly
25. The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that
the two prisoners play in the prisoners’ dilemma.
a. True
b. False
26. In the case of oligopolistic markets, self–interest makes cooperation difficult and it often leads to
an undesirable outcome for the firms that are involved.
a. True
b. False
27. The decisions of the US and Soviet Union to build nuclear weapons is much like the prisoners’
dilemma.
a. True
b. False
Oligopoly 4425
28. In some games, the noncooperative equilibrium is bad for the players and bad for society.
a. True
b. False
29. When prisoners‘ dilemma games are repeated over and over, sometimes the threat of penalty
causes both parties to cooperate.
a. True
b. False
30. A tit-for-tat strategy, in a repeated game, is one in which a player starts by cooperating and then
does whatever the other player did last time.
a. True
b. False
4426 Oligopoly
31. The notion of a tit-for-tat strategy applies to a prisoners’ dilemma game that is played repeatedly,
but it does not apply if the game is played only once.
a. True
b. False
32. One way that public policy encourages cooperation among oligopolists is through antitrust law.
a. True
b. False
33. The Sherman Antitrust Act prohibits competing firms from even talking about fixing prices.
a. True
b. False
Oligopoly 4427
34. The Sherman Antitrust Act states that if a person can prove that he was damaged by an illegal
arrangement to restrain trade, he could sue and recover three times the damages he sustained.
a. True
b. False
35. Resale price maintenance prevents retailers from competing on price.
a. True
b. False
36. A manufacturer of light bulbs sells its products to retail stores and requires the stores to sell the
bulbs to customers for $2 per bulb. This practice is known as tying.
a. True
b. False
4428 Oligopoly
37. Some business practices that appear to reduce competition, such as resale price maintenance,
may have legitimate economic purposes.
a. True
b. False
38. Tying can be thought of as a form of price discrimination.
a. True
b. False
39. Tying is always profitable for a monopoly.
a. True
b. False
Oligopoly 4429
40. Policymakers should be aggressive in using their powers to place limits on firm behavior, because
business practices that appear to reduce competition never have any legitimate purposes.
a. True
b. False
41. Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements
with the rest of the cartel. Why?
42. What effect does the number of firms in an oligopoly have on the characteristics of the market?
4430 Oligopoly
43. 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 Nash equilibrium?
Oligopoly 4431
44. 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.
4432 Oligopoly
45. Describe the output and price effects that 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?
46. Explain how the output effect and the price effect influence the production decision of the
individual oligopolist.