Economics Chapter 14 They Are The Only Two Firms This

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Which of the following is most likely to be observed when firms engage mainly in

non-price competition?

196. Multiple Choice: Reference: Ref 14-16 (Table: Demand ...

Question

Reference: Ref 14-16

(Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water

Heaters. The marginal cost of producing solar water heaters is zero, and only two

firms, Rheem and Calefi, produce them. If they agree to produce only 50 water

heaters, with each firm producing only 25, by how much does Rheem’s profit rise if

it cheats on the agreement and produces 30 water heaters?

197. Multiple Choice: Reference: Ref 14-16 (Table: Demand ...

Question

Points: 0

Reference: Ref 14-16

(Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water

Heaters. The marginal cost of producing solar water heaters is zero, and only two

firms, Rheem and Calefi, produce them. If they agree to produce only 50 water

heaters, with each firm producing only 25 and if Rheem cheats on the agreement

and produces 30 water heaters, what is the price effect?

198. Multiple Choice: Reference: Ref 14-16 (Table: Demand ...

Question

Reference: Ref 14-16

(Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water

Heaters. The marginal cost of producing solar water heaters is zero, and only two

firms, Rheem and Calefi, produce them. If they agree to produce only 50 water

heaters, with each firm producing only 25 and if Rheem cheats on the agreement

and produces 30 water heaters, what is the quantity effect?

Points: 0

199. Multiple Choice: Reference: Ref 14-16 (Table: Demand ...

Question

Reference: Ref 14-16

(Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water

Heaters. The marginal cost of producing solar water heaters is zero, and only two

firms, Rheem and Calefi, produce them. If Rheem and Calefi get into a price war,

the equilibrium price in the market will be:

200. Multiple Choice: Reference: Ref 14-16 (Table: Demand ...

Question

Points: 0

Reference: Ref 14-16

(Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water

Heaters. The marginal cost of producing solar water heaters is zero, and only two

firms, Rheem and Calefi, produce them. If they agree to collude, what price will the

cartel charge and how many water heaters will the cartel sell?

201. Multiple Choice: Reference: Ref 14-17 (Table: Demand ...

Question

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Reference: Ref 14-17

(Table: Demand for Crude Oil) Look at the table Demand for Crude Oil. For

simplicity, assume that the cost of producing crude oil is zero—the marginal cost

of crude oil equals zero. There are only two producers of crude oil, and they cannot

cooperate. But they play this game every week, each player has a tit-for–tat

strategy, and the other player knows this. When both firms use a tit-for-tat

strategy, firm 1 will produce ________ barrels, and firm 2 will produce ________

barrels.

202. Multiple Choice: Oligopolies are industries:

Question Oligopolies are industries:

Answer dominated by one seller who shares market power equally with all other

sellers.

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203. Multiple Choice: An oligopoly may result from:

Question An oligopoly may result from:

204. Multiple Choice: If the Herfindahl–Hirschman ind...

Question If the Herfindahl–Hirschman index (HHI) for an industry is 900, this market is

considered:

205. Multiple Choice: Suppose there are 10 identical firms ...

Question Suppose there are 10 identical firms in an industry and each produces 10% of the

total market sales. The HHI for this industry would indicate that the industry is:

206. Multiple Choice: An industry is made up of five firms….

Question

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An industry is made up of five firms. Three of the firms make up 20% of the total

market sales, one firm makes up 25% of the total market sales, and the remaining

firm makes up 15% of the total market sales. What is the HHI for this industry?

207. Multiple Choice: If an industry initially has an HHI o...

Question If an industry initially has an HHI of 1,250, a merger between two of the largest (in

terms of market share) firms in the industry:

208. Multiple Choice: Maximization of joint profits is most…

Question Maximization of joint profits is most likely when firms are:

209. Multiple Choice: Cartels made up of a large number of ...

Question Cartels made up of a large number of firms are unstable because each firm in the

cartel:

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210. Multiple Choice: Both monopolists and cartel members w...

Question Both monopolists and cartel members will find that a drop in price leads to:

211. Multiple Choice: Given the large amount of interdepend...

Question Given the large amount of interdependence among them, cooperation with one‘s

competitors is the most profitable strategy for:

212. Multiple Choice: Scenario: Two Identical FirmsTwo iden...

Question Scenario: Two Identical Firms

Two identical firms make up an industry in which the market demand curve is

represented by Q = 5,000 – 4P, where Q is the quantity demanded and P is price

per unit. The marginal cost of producing the good in this industry is constant and

equal to $650.

Reference: Ref 14-20

(Scenario: Two Identical Firms) Suppose the two firms in the scenario Two Identical

Firms decide to cooperate and collude, resulting in the same amount of production

for each firm. What is the profit-maximizing price and output for the industry?

Answer P = $400; Q = 5,000 units.

Points: 0

213. Multiple Choice: Scenario: Two Identical FirmsTwo iden...

Question Scenario: Two Identical Firms

Two identical firms make up an industry in which the market demand curve is

represented by Q = 5,000 – 4P, where Q is the quantity demanded and P is price

per unit. The marginal cost of producing the good in this industry is constant and

equal to $650.

Reference: Ref 14-20

(Scenario: Two Identical Firms) When the firms in the scenario Two Identical Firms

collude and produce the profit-maximizing output, what is the profit earned by each

firm?

214. Multiple Choice: Scenario: Two Identical FirmsTwo iden...

Question Scenario: Two Identical Firms

Two identical firms make up an industry in which the market demand curve is

represented by Q = 5,000 – 4P, where Q is the quantity demanded and P is price

per unit. The marginal cost of producing the good in this industry is constant and

equal to $650.

Reference: Ref 14-20

(Scenario: Two Identical Firms) If one firm in the scenario Two Identical Firms

decides to cheat, the cheating firm will:

Points: 0

215. Multiple Choice: Scenario: Payoff Matrix for Two Firms...

Question Scenario: Payoff Matrix for Two Firms

The following table provides the payoff matrix for two firms, firm A and firm B. They

are the only two firms in the industry and can either compete or cooperate with

each other, with the following profit results reflecting their actions.

Reference: Ref 14-21

(Scenario: Payoff Matrix for Two Firms) In the scenario Payoff Matrix for Two Firms,

which of the following is the dominant strategy for firm A?

216. Multiple Choice: Scenario: Payoff Matrix for Two Firms...

Question Scenario: Payoff Matrix for Two Firms

The following table provides the payoff matrix for two firms, firm A and firm B. They

are the only two firms in the industry and can either compete or cooperate with

each other, with the following profit results reflecting their actions.

Reference: Ref 14-21

(Scenario: Payoff Matrix for Two Firms) In the scenario Payoff Matrix for Two Firms,

which of the following is the dominant strategy for firm B?

Answer Firm B is to compete.

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217. Multiple Choice: Scenario: Payoff Matrix for Two Firms...

Question Scenario: Payoff Matrix for Two Firms

The following table provides the payoff matrix for two firms, firm A and firm B. They

are the only two firms in the industry and can either compete or cooperate with

each other, with the following profit results reflecting their actions.

Reference: Ref 14-21

(Scenario: Payoff Matrix for Two Firms) In the scenario Payoff Matrix for Two Firms,

if both firms pursue their dominant strategies, they will find that:

218. Multiple Choice: If a player has an incentive to cheat...

Question If a player has an incentive to cheat whatever the other player does, and if both

players act in this manner, both players will be worse off, the situation is referred to

as a:

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219. Multiple Choice: A strategy in which players cooperate…

Question A strategy in which players cooperate initially but then mimic what the other

players do is referred to as a:

Answer prisoners‘ dilemma.

220. Multiple Choice: Firms will choose a tit-for-tat strat…

Question Firms will choose a tit-for-tat strategy if they:

Answer expect that price wars will ultimately provide benefits for the dominant firm.

221. Multiple Choice: When countries spend increasingly lar...

Question When countries spend increasingly large amounts of funds on military production

as a means of impressing an equally powerful antagonistic neighbor with possible

military superiority, a prisoners‘ dilemma evolves, since both countries would be

better off if they did not pursue such a strategy. This is an example of:

Answer a tacit agreement.

222. Multiple Choice: Scenario: Payoff Matrix for Firms X a...

Question

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Scenario: Payoff Matrix for Firms X and Y

The following payoff matrix depicts the profits for firms X and Y, which are trying to

decide whether to choose a high or low price in their competitive strategy with each

other. They are the only two firms in this oligopolistic industry.

Reference: Ref 14-22

(Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms

X and Y, if Firm Y were to choose its dominant strategy, it would:

223. Multiple Choice: Scenario: Payoff Matrix for Firms X a...

Question Scenario: Payoff Matrix for Firms X and Y

The following payoff matrix depicts the profits for firms X and Y, which are trying to

decide whether to choose a high or low price in their competitive strategy with each

other. They are the only two firms in this oligopolistic industry.

Reference: Ref 14-22

(Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms

X and Y, if firm X were to choose its dominant strategy, it would:

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224. Multiple Choice: Scenario: Payoff Matrix for Firms X a...

Question Scenario: Payoff Matrix for Firms X and Y

The following payoff matrix depicts the profits for firms X and Y, which are trying to

decide whether to choose a high or low price in their competitive strategy with each

other. They are the only two firms in this oligopolistic industry.

Reference: Ref 14-22

(Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms

X and Y, if firms such as firm X and firm Y wish to maximize joint profits, they

should:

225. Multiple Choice: The Sherman Antitrust Act:

Question The Sherman Antitrust Act:

226. Multiple Choice: The existence of a buyer with signifi...

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Question The existence of a buyer with significant buying power in an industry would:

227. Multiple Choice: Product differentiation is most likel...

Question Product differentiation is most likely to occur when firms:

228. Essay: Suppose an industry is composed of se…

Question Suppose an industry is composed of seven producers with market shares given in

the table that follows. Compute the Herfindahl–Hirschman index (HHI) for this

market. If firms B and C were to merge, how would this affect the HHI? Instead, if

firm A were to split into two equal-sized competing firms, how would this affect the

HHI? Support your answers with specific calculations. Do your results make

sense?

Points: 0

229. Essay: Reference: Ref 14-18 (Table: Demand ...

Question

Reference: Ref 14-18

(Table: Demand for Breakfast Cereal) The table shows the market demand

schedule for breakfast cereal. Suppose that the marginal cost of producing boxes

of cereal is $0.

a) If General Mills is the sole producer of breakfast cereal, how many boxes of

cereal will the firm produce, what price will be charged, and how much revenue will

be earned?

b) Now assume that Kellogg enters the market for breakfast cereal, and the

breakfast cereal industry is now a duopoly with two equal-sized firms. If these firms

agree to split the monopoly output equally, how much revenue will each firm earn

under the agreement?

c) If General Mills can cheat on this agreement by producing 50 million more boxes

of cereal without punishment, will it? Analyze the price effect and quantity effect of

producing 1 million more boxes to justify your conclusion.

230. Essay: Reference: Ref 14-19 (Table: Demand ...

Question

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Reference: Ref 14-19

(Table: Demand Schedule for Gadgets) The market for gadgets is dominated by

two producers, Margaret and Ray. Each firm can produce gadgets at marginal

costs of approximately $0 and has no fixed cost. The table shows the market

demand schedule for gadgets.

a) If these firms form a cartel to maximize joint profits, what output level will be

produced and at what price? If the output is shared evenly, how much profit will

each firm earn?

b) Suppose that Margaret decides to increase production by 100 gadgets and Ray

leaves output constant. What will be the new market price and output? How much

profit will each firm earn?

231. Essay: There are only two gas stations in a …

Question There are only two gas stations in a small town, Swifty Gas and Speedy Gas.

Each firm can set either a high price or a low price; customers view these two firms

as nearly perfect substitutes. The table shows the payoff matrix of daily profits that

each firm would receive from their pricing decision, given the pricing decision of

their rival. Profits in each cell of the payoff matrix are given as (Swifty, Speedy). If

this game is played only once and each firm sets the price of gas independently,

what is the Nash equilibrium of this pricing game? Is this game an example of a

prisoners‘ dilemma? Explain your conclusions.

Answer

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232. Essay: Two large electronic retailers, Bigge…

Question Two large electronic retailers, Biggest Buy and Connection City, are considering

entering a small town. Each firm can either enter the market or not. The table

shows the payoff matrix of daily profits that each firm would receive from its entry

decision, given the entry decision of its rival. Profits in each cell of the payoff matrix

are given as (Biggest Buy, Connection City). Are there any dominant strategies in

the game? If this game is played only once and each firm makes the entry decision

independently, what is the Nash equilibrium of this game? Explain your

conclusions.

233. Essay: Two electronic retailers, Biggest Buy...

Question Two electronic retailers, Biggest Buy and Connection City, are considering entering

a small town. Biggest Buy is the larger and more profitable of the two rivals. Each

firm can either enter the market or not. The table shows the payoff matrix of daily

profits that each firm would receive from its entry decision, given the entry decision

of its rival. Profits in each cell of the payoff matrix are given as (Biggest Buy,

Connection City). Are there any dominant strategies in the game? If this game is

played only once and each firm makes the entry decision independently, what is

the Nash equilibrium of this game? Explain your conclusions.

Answer

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234. Essay: Dell and Gateway are close competitor…

Question Dell and Gateway are close competitors in the personal computer market.

Suppose that each year Dell and Gateway have to decide whether to spend money

on costly research and development (R&D). If both spend money on R&D, each

firm will earn $30 million. If neither spends money on R&D, each firm will earn $40

million. If one firm spends money on R&D and the other does not, the firm that

engaged in R&D would earn $45 million and the firm that did not would earn $25

million.

a) Use a payoff matrix to depict this problem.

b) What is the noncooperative solution to this game?

235. Essay: Two large universities, Humongous Sta...

Question Two large universities, Humongous State (HSU) and Behemoth State (BSU),

dominate college basketball. Each basketball program aggressively recruits the

best athletes to attend the university, but the best athletes can skip college and

jump immediately to pro basketball. Each school could choose to illegally pay top

players to attend their schools and thus increase the winning percentage of the

team, or each program can follow the rules and not pay top athletes to play college

basketball, thus losing them to the pro ranks. The table shows the payoff matrix of

winning percentages that each school would receive from their recruiting decision,

given the recruiting decision of their rival. Winning percentages in each cell of the

payoff matrix are given as (HSU, BSU).

a) What is the noncooperative Nash equilibrium?

b) Suppose that each school considers the future and devises a tit–for-tat strategy.

Neither school will pay players to play basketball so long as the other does the

same. If one school breaks the agreement and pays players, the other school will

do the same and continue to do so until the first school stops paying players. If

both schools adopt the tit-for-tat strategy, what are the winning percentages every

year? Will this be effective at eliminating the illegal practice of paying college

athletes to play basketball?

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236. Essay: Why do the United States and many oth…

Question Why do the United States and many other countries have antitrust laws on the

books? What‘s so harmful about oligopoly that warrants an entire body of law?

237. Essay: Suppose two gas stations operate at t…

Question Suppose two gas stations operate at the same busy intersection. You notice that

the posted prices are almost always the same. Assuming that these firms are

engaged in tacit price collusion, can we automatically conclude that there is no

competition for customers between the two stations?

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