Chapter 17/Oligopoly ❖ 21
95. Refer to Figure 17-1. Suppose this market is served by two firms who each face the marginal cost curve
shown in the diagram and have zero fixed cost. The marginal revenue curve that a monopolist would face in
this market is also shown. If the firms are able to collude successfully, each firm should earn a profit equal to
a.
$1.
b.
$2.
c.
$4.
d.
$6.
96. The more firms an oligopoly has,
a.
the more market power the oligopoly has. This results in higher prices and lower quantities of
output than an oligopoly with fewer firms would have.
b.
the more important the price effect is, resulting in the market price being higher than when there are
fewer firms in the oligopoly.
c.
the farther market price will be from marginal cost.
d.
the more likely the firms will charge a price closer to the perfectly competitive price.
97. 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.
Table 17-6. The table shows the demand schedule for a particular product.
Quantity
Price
0
16
1
14
2
12
3
10
4
8
5
6
6
4
7
2
8
0
98. Refer to Table 17–6. Suppose the market for this product is served by two firms that have formed a cartel.
What price will the cartel charge in this market if the marginal cost of production is $0?
a.
$6
b.
$8
c.
$10
d.
$12
22 ❖ Chapter 17/Oligopoly
99. Refer to Table 17–6. Suppose the market for this product is served by two firms that have formed a cartel. If
the marginal cost of production is $0 and there is no fixed cost, the combined profit of the cartel will be
a.
$16
b.
$24
c.
$30
d.
$32
100. Refer to Table 17–6. Suppose the market for this product is served by two firms that have formed a cartel.
What price will the cartel charge in this market if the marginal cost of production is $4?
a.
$6
b.
$8
c.
$10
d.
$12
101. Refer to Table 17–6. Suppose the market for this product is served by two firms that have formed a cartel. If
the marginal cost of production is $4 and the fixed cost is $6, the combined profit of the cartel will be
a.
$6
b.
$12
c.
$24
d.
$32
Table 17–7. The table shows the demand schedule for a particular product.
Quantity
Price
0
10
5
9
10
8
15
7
20
6
25
5
30
4
35
3
40
2
45
1
50
0
102. Refer to Table 17–7. If this market is perfectly competitive and the marginal cost is constant at $2 per unit,
then how much output will be produced?
a.
20
b.
30
c.
35
d.
40
Chapter 17/Oligopoly ❖ 23
103. Refer to Table 17–7. Suppose the market for this product is served by two firms who have formed a cartel
and are colluding to set the price and quantity in this market. If the marginal cost to produce this product is
constant at $2 per unit, then what price will the cartel set in this market?
a.
$4
b.
$5
c.
$6
d.
$7
104. Refer to Table 17–7. Suppose the market for this product is served by two firms who have formed a cartel
and are colluding to set the price and quantity in this market. If the marginal cost to produce this product is
constant at $2 per unit and there is no fixed cost, then what will the combined profit of the cartel be?
a.
$40
b.
$60
c.
$80
d.
$120
Table 17–8. For a certain small town, the table shows the demand schedule for water. Assume the marginal cost of
supplying water is constant at $4 per bottle.
Price
Quantity
(bottles)
$9
200
$8
400
$7
600
$6
800
$5
1000
$4
1200
$3
1400
$2
1600
105. Refer to Table 17-8. If there were many suppliers of bottled water, what would be the price and quantity?
a.
The price would be $6 per gallon and the quantity would be 800 gallons.
b.
The price would be $5 per gallon and the quantity would be 1000 gallons.
c.
The price would be $4 per gallon and the quantity would be 1200 gallons.
d.
The price would be $3 per gallon and the quantity would be 1400 gallons.
106. Refer to Table 17-8. If there were only one supplier of water, what would be the price and quantity?
a.
The price would be $7 per gallon and the quantity would be 600 gallons.
b.
The price would be $6 per gallon and the quantity would be 800 gallons.
c.
The price would be $5 per gallon and the quantity would be 1000 gallons.
d.
The price would be $4 per gallon and the quantity would be 1200 gallons.
24 ❖ Chapter 17/Oligopoly
107. Refer to Table 17-8. If there are two suppliers of water, Victor and Sami, and if they have successfully
formed a cartel, then what would be the price and the market quantity?
a.
The price would be $7 per bottle and the market quantity would be 600 bottles.
b.
The price would be $6 per bottle and the market quantity would be 800 bottles.
c.
The price would be $5 per bottle and the market quantity would be 1000 bottles.
d.
The price would be $4 per bottle and the market quantity would be 1200 bottles.
108. Refer to Table 17-8. If there are two suppliers of water, Victor and Sami, and if they have successfully
formed a cartel and split the market evenly, then how many bottles will Sami supply?
a.
100
b.
200
c.
300
d.
400
Table 17-9
Only two firms, Acme and Pinnacle, sell a particular product. The table below shows the demand curve for
their product. Each firm has the same constant marginal cost of $10 and zero fixed cost.
Price
Quantity
70
0
65
100
60
200
55
300
50
400
45
500
40
600
35
700
30
800
25
900
20
1000
15
1100
10
1200
5
1300
0
1400
109. Refer to Table 17–9. If Acme and Pinnacle operate to jointly maximize profits, then what is the price?
a.
$45
b.
$40
c.
$35
d.
$30
Chapter 17/Oligopoly ❖ 25
110. Refer to Table 17–9. If Acme and Pinnacle operate to jointly maximize profits, then what quantity is sold?
a.
800
b.
700
c.
600
d.
500
111. Refer to Table 17–9. If Acme and Pinnacle operate to jointly maximize profits and agree to share the profit
equally, then how much profit will each of them earn?
a.
$9,000
b.
$8,750
c.
$8,000
d.
$6,750
112. Refer to Table 17–9. Acme and Pinnacle agree to maximize joint profits. However, while Acme produces the
agreed upon amount, Pinnacle breaks the agreement and produces 100 more than agreed, how much profit
does Pinnacle make?
a.
$10,000
b.
$9,000
c.
$8,750
d.
$7500
113. Refer to Table 17–9. Acme and Pinnacle agree to jointly maximize profits. If Acme and Pinnacle each break
the agreement and each produce 100 more than agreed upon, how much less profit does each make?
a.
$250
b.
$750
c.
$1,000
d.
$2,000
114. Refer to Table 17–9. If this market were perfectly competitive instead of oligopolistic, what quantity would
be produced?
a.
1400
b.
1300
c.
1200
d.
1100
115. Refer to Table 17–9. If this market were perfectly competitive instead of oligopolistic, what would the price
be?
a.
$15
b.
$10
c.
$5
d.
$0
26 ❖ Chapter 17/Oligopoly
116. Refer to Table 17–9. What is the socially efficient quantity of the product?
a.
700
b.
1000
c.
1200
d.
1400
117. Refer to Table 17–9. How much less do each of these firms earn in the Nash equilibrium than if they jointly
maximize profits?
a.
$250
b.
$500
c.
$750
d.
$1000
Table 17–10
The table shows the town of Driveaway’s demand schedule for gasoline. Assume the town’s gasoline seller(s)
incurs a cost of $2 for each gallon sold, with no fixed cost.
Quantity (in gallons)
Price
Total Revenue
0
$8
$0
50
7
350
100
6
600
150
5
750
200
4
800
250
3
750
300
2
600
350
1
350
400
0
0
118. Refer to Table 17–10. If the market for gasoline in Driveaway is perfectly competitive, then the equilibrium
price of gasoline is
a.
$0 and the equilibrium quantity is 400 gallons.
b.
$1 and the equilibrium quantity is 350 gallons.
c.
$2 and the equilibrium quantity is 300 gallons.
d.
$4 and the equilibrium quantity is 200 gallons.
119. Refer to Table 17–10. Suppose we observe that the price of a gallon of gasoline in Driveaway is $2. Given
this observation, which of the following scenarios is most likely?
a.
There is one seller of gasoline in Driveaway.
b.
There are two sellers of gasoline in Driveaway.
c.
There are a few sellers of gasoline in Driveaway, but the number of sellers exceeds two.
d.
There are many sellers of gasoline in Driveaway.
Chapter 17/Oligopoly ❖ 27
120. Refer to Table 17-10. If the market for gasoline in Driveaway is a monopoly, then the profit-maximizing mo-
nopolist will charge a price of
a.
$6 and sell 100 gallons.
b.
$5 and sell 150 gallons.
c.
$4 and sell 200 gallons.
d.
$3 and sell 250 gallons.
121. Refer to Table 17-10. If the market for gasoline in Driveaway is a monopoly, then the monopolist’s maxi-
mum profit is
a.
$350.
b.
$400.
c.
$450.
d.
$500.
122. Refer to Table 17-10. Suppose we observe that the price of a gallon of gasoline in Driveaway is $5; we ob-
serve as well that a particular seller’s profit is $150. Given this observation, which of the following scenarios
is most likely?
a.
The market for gasoline in Driveaway is a monopoly.
b.
There are two identical sellers of gasoline in Driveaway, and the sellers collude.
c.
There are two identical sellers of gasoline in Driveaway, and the sellers do not collude.
d.
There are three identical sellers of gasoline in Driveaway, and the sellers collude.
123. Refer to Table 17-10. If there are exactly two sellers of gasoline in Driveaway and if they collude, then
which of the following outcomes is most likely?
a.
Each seller will sell 50 gallons and charge a price of $7.
b.
Each seller will sell 75 gallons and charge a price of $2.50.
c.
Each seller will sell 75 gallons and charge a price of $5.
d.
Each seller will sell 100 gallons and charge a price of $4.
124. Refer to Table 17-10. If there are exactly five sellers of gasoline in Driveaway and if they collude, then
which of the following outcomes is most likely?
a.
Each seller will sell 50 gallons and charge a price of $3.
b.
Each seller will sell 40 gallons and charge a price of $4.
c.
Each seller will sell 30 gallons and charge a price of $4.
d.
Each seller will sell 30 gallons and charge a price of $5.
125. Refer to Table 17-10. If there are exactly five sellers of gasoline in Driveaway and if they collude, then
which of the following outcomes is most likely?
a.
Each seller will sell 20 gallons, charge a price of $6, and earn a profit of $80.
b.
Each seller will sell 30 gallons, charge a price of $5, and earn a profit of $90.
c.
Each seller will sell 40 gallons, charge a price of $4, and earn a profit of $120.
d.
Each seller will sell 50 gallons, charge a price of $3, and earn a profit of $50.
28 ❖ Chapter 17/Oligopoly
126. Refer to Table 17-10. Suppose there are exactly two sellers of gasoline in Driveaway: Amogo and Spilmer-
ica. If Amogo sells 150 gallons and Spilmerica sells 100 gallons, then
a.
Amogo’s profit is $150 and Spilmerica’s profit is $100.
b.
Amogo’s profit is $100 and Spilmerica’s profit is $66.67.
c.
Amogo’s profit is $75 and Spilmerica’s profit is $50.
d.
there is an excess supply of gasoline in Driveaway.
127. 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.
128. 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
129. 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.
130. 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.
131. 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.
Chapter 17/Oligopoly ❖ 29
132. 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.
133. 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.
134. 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.
135. 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.
136. In which case do firms have some control over their price?
a.
oligopoly and perfect competition
b.
oligopoly but not perfect competition
c.
perfect competition but not oligopoly
d.
neither perfect competition nor oligopoly
137. 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.
30 ❖ Chapter 17/Oligopoly
138. In pursing 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.
THE ECONOMICS OF COOPERATION
1. When firms are faced with making strategic choices in order 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.
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.
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.
Chapter 17/Oligopoly ❖ 31
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.
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.
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.
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.
32 ❖ Chapter 17/Oligopoly
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.
Table 17–11
Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare
related expenses associated with cigarette smoking. Both cigarette firms have evidence that indicates that
cigarette smoke causes lung cancer (and other related illnesses). State prosecutors do not have access to the
same data used by cigarette manufacturers and thus will have difficulty recovering full costs without the help
of at least one cigarette firm study. Each firm has been presented with an opportunity to lower its liability in
the suit if it cooperates with attorneys representing the states.
Firm B
Concede that cigarette
smoke causes lung cancer
Argue that there is no evidence
that smoke causes cancer
Firm A
Concede that cigarette
smoke causes lung cancer
Firm A profit = $–20
Firm B profit = $–15
Firm A profit = $–50
Firm B profit = $–5
Argue that there is no
evidence that smoke causes
cancer
Firm A profit = $–5
Firm B profit = $–50
Firm A profit = $–10
Firm B profit = $–10
14. Refer to Table 17–11. Pursuing its own best interests, Firm A will concede that cigarette smoke causes lung
cancer
a.
only if Firm B concedes that cigarette smoke causes lung cancer.
b.
only if Firm B does not concede that cigarette smoke causes lung cancer.
c.
regardless of whether Firm B concedes that cigarette smoke causes lung cancer.
d.
None of the above. In pursuing its own best interests, Firm A will in no case concede that cigarette
smoke causes lung cancer.
15. Refer to Table 17–11. Pursuing its own best interests, Firm B will concede that cigarette smoke causes lung
cancer
a.
only if Firm A concedes that cigarette smoke causes lung cancer.
b.
only if Firm A does not concede that cigarette smoke causes lung cancer.
c.
regardless of whether Firm A concedes that cigarette smoke causes lung cancer.
d.
None of the above; in pursuing its own best interests, Firm B will in no case concede that cigarette
smoke causes lung cancer.
Chapter 17/Oligopoly ❖ 33
16. Refer to Table 17–11. If both firms follow a dominant strategy, Firm A’s profits (losses) will be
a.
$-50
b.
$-20
c.
$-10
d.
$-5
17. Refer to Table 17–11. If both firms follow a dominant strategy, Firm B’s profits (losses) will be
a.
$-50
b.
$-15
c.
$-10
d.
$-5
18. Refer to Table 17–11. When this game reaches a Nash equilibrium, profits for Firm A and Firm B will be
a.
$-5 and $-50, respectively.
b.
$-10 and $-10, respectively.
c.
$-20 and $-15, respectively.
d.
$-50 and $-5, respectively.
Table 17–12
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
19. Refer to Table 17–12. 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.
34 ❖ Chapter 17/Oligopoly
20. Refer to Table 17–12. 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.
21. Refer to Table 17–12. 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.
22. Refer to Table 17–12. If both countries follow a dominant strategy, the value of trade flow benefits for Far-
land will be
a.
$5 b.
b.
$75 b.
c.
$275 b.
d.
$285 b.
23. Refer to Table 17–12. 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.
24. Refer to Table 17–12. 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.
25. Refer to Table 17–12. If trade negotiators are able to communicate effectively about the consequences of vari-
ous 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
Chapter 17/Oligopoly ❖ 35
26. Refer to Table 17–12. 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.
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 = $2.00 million
HomeMax = $2.5 million
27. 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.
28. 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.
29. 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.
36 ❖ Chapter 17/Oligopoly
30. 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.
31. 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.
32. 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.
33. Refer to Table 17–13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one af-
ternoon 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.
34. Refer to Table 17–13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one af-
ternoon 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.
Chapter 17/Oligopoly ❖ 37
Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low
level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two
companies.
35. Refer to Figure 17-1. The dominant strategy for ABC is to
a.
produce high output, and the dominant strategy for XYZ is to produce high output.
b.
produce high output, and the dominant strategy for XYZ is to produce low output.
c.
produce low output, and the dominant strategy for XYZ is to produce high output.
d.
produce low output, and the dominant strategy for XYZ is to produce low output.
36. Refer to Figure 17-1. Which of the following statements is correct?
a.
ABC can potentially earn its highest possible profit if it produces a high level of output, and for that
reason it is a dominant strategy for ABC to produce a high level of output.
b.
The highest possible combined profit for the two firms occurs when both produce a low level of
output, and for that reason producing a low level of output is a dominant strategy for both firms.
c.
Regardless of the strategy pursued by ABC, XYZ’s best strategy is to produce a high level of
output, and for that reason producing a high level of output is a dominant strategy for XYZ.
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 low level of output and for the other firm to produce a high
level of output.
37. Refer to Figure 17-1. If this game is played only once, then the most likely outcome is that
a.
both firms produce a low level of output.
b.
ABC produces a low level of output and XYZ produces a high level of output.
c.
ABC produces a high level of output and XYZ produces a low level of output.
d.
both firms produce a high level of output.
ABC’s profit = $3 million ABC’s profit = $2.5 million
ABC’s profit = $4 million ABC’s profit = $3.5 million
XYZ‘s profit = $3 million XYZ‘s profit = $4 million
XYZ‘s profit = $2.5 million XYZ‘s profit = $3.5 million
High output Low output
High output
Low output
ABC‘s Decision
XYZ‘s
Decision
38 ❖ Chapter 17/Oligopoly
38. Refer to Figure 17-1. If this game is played repeatedly and ABC uses a tit-for-tat strategy, it will choose a
a.
high level of output in the first round and in subsequent rounds it will choose whatever XYZ chose
in the previous round.
b.
low level of output in the first round and in subsequent rounds it will choose whatever XYZ chose
in the previous round.
c.
high level of output in all rounds, regardless of the choice made by XYZ.
d.
high level of output in all rounds, regardless of the choice made by XYZ.
39. 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.
40. 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 main-
tain 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.
41. 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.
42. 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.
Chapter 17/Oligopoly ❖ 39
43. 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.
44. 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.
45. 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)
46. 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)
47. 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.
40 ❖ Chapter 17/Oligopoly
Scenario 17-2. Imagine that two oil companies, Mobile and Cargo, own adjacent oil fields. Under the fields is
a common pool of oil worth $96 million. Drilling a well to recover oil costs $3 million per well. If each
company drills one well, each will get half of the oil and earn a $45 million profit ($48 million in revenue – $3
million in costs). Assume that having X percent of the total wells means that a company will collect X percent
of the total revenue.
48. Refer to Scenario 17-2. If Mobile and Cargo are able to successfully collude to maximize their joint profits,
Mobile will
a.
drill one well and Cargo will drill one well.
b.
drill one well and Cargo will drill two wells.
c.
drill two wells and Cargo will drill one well.
d.
drill two wells and Cargo will drill two wells.
49. Refer to Scenario 17-2. If Mobile and Cargo are able to successfully collude to maximize their joint profits,
Mobile will earn
a.
$29 million and Cargo will earn $58 million.
b.
$42 million and Cargo will earn $42 million.
c.
$45 million and Cargo will earn $45 million.
d.
$58 million and Cargo will earn $29 million.
50. Refer to Scenario 17-2. If Mobile were to drill a second well, what would its profit be if Cargo did not drill a
second well?
a.
$29 million
b.
$58 million
c.
$61 million
d.
$64 million
51. Refer to Scenario 17-2. If Mobile were to drill a second well and Cargo also drilled a second well, what
would Mobile’s profit be?
a.
$24 million
b.
$42 million
c.
$45 million
d.
$48 million
52. Refer to Scenario 17-2. Cargo’s dominant strategy would lead to what sort of well-drilling behavior?
a.
Cargo will never drill a second well.
b.
Cargo will always drill a second well.
c.
Cargo will drill a second well only if Mobile drills a well.
d.
Cargo will drill a second well only if Mobile does not drill a well.