Subjective Short Answer
1. Why are the actions of firms interdependent in an oligopoly market but not in a monopolistically competitive market?
2. Why are the actions of the firms in an oligopoly interdependent?
3. Economists use game theory to analyze __________.
4. Why do economists use game theory to study the actions of firms in oligopoly markets but not in other markets?
5. As the number of firms in an oligopoly industry increases, the market moves closer to a __________ market.
6. Compare the equilibrium output in a duopoly to the monopoly output.
7. Suppose the market for home-grown peppers in the town of Smallville is comprised of two farmers. Explain why they
might try to collude.
8. Suppose the market for home-grown peppers in the town of Smallville is comprised of two farmers. Suppose the two
farmers try to collude. Explain why their collusion might not be successful.
price and reduce each farmer’s individual profits.
Table 17–30
Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each
week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at
whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they
want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for
water is shown in the table below:
Quantity
(in gallons)
Total Revenue
(and Total Profit)
0
$0
1
$11
2
$20
3
$27
4
$32
5
$35
6
$36
7
$35
8
$32
9
$27
10
$20
11
$11
12
$0
9. Refer to Table 17-30. Discuss the difference between the monopoly outcome and the Nash equilibrium.
equilibrium. This problem illustrates the tension between cooperation and self-interest.
10. Refer to Table 17–30. Briefly explain why each duopolist earns a lower profit at the Nash equilibrium than if they
cooperated to produce the monopoly output.
higher level of output to earn higher profits than half of the monopoly-output profits, total
quantity produced in the market increases, which lowers market price.
Table 17–31
Imagine a small town in a remote area where only two residents, Maria and Miguel, own dairies that produce milk that is
safe to drink. Each week Maria and Miguel work together to decide how many gallons of milk to produce. They bring
milk to town and sell it at whatever price the market will bear. To keep things simple, suppose that Maria and Miguel can
produce as much milk as they want without cost so that the marginal cost is zero. The weekly town demand schedule and
total revenue schedule for milk is shown in the table below:
Quantity
(in gallons)
Price
Total Revenue
(and Total Profit)
0
$24
$0
1
$22
$22
2
$20
$40
3
$18
$54
4
$16
$64
5
$14
$70
6
$12
$72
7
$10
$70
8
$8
$64
9
$6
$54
10
$4
$40
11
$2
$22
12
$0
$0
11. Refer to Table 17–31. Discuss the difference between the monopoly outcome and the Nash equilibrium.
12. Refer to Table 17–31. Briefly explain why each duopolist earns a lower profit at the Nash equilibrium than if they
cooperated to produce the monopoly output.
13. Define collusion.
14. If the members of an oligopoly could agree on a total quantity to produce and a price to charge, what quantity and
price would they choose? Will this choice represent a Nash equilibrium?
15. When a group of firms acts in unison to maximize profits as if they were a monopoly, they form a __________.
16. Give an example of a famous cartel.
17. OPEC (Organization of Petroleum Exporting Countries) is an example of a cartel in the output market for petroleum.
Major League Baseball could be considered a cartel in the __________ market for baseball players.
18. To function as a monopoly, OPEC and other cartels rely on __________ among members.
19. Some people consider the NCAA (National Collegiate Athletic Association) to be a __________ in the market for
college athletics.
20. If the output effect is larger than the price effect, an individual firm will __________ production.
21. How does free trade relate to the theory of oligopoly?
22. Reaching and enforcing an agreement between members of a cartel becomes more difficult as the size of the group
__________.
23. As the number of firms in an oligopoly industry decreases, the market moves closer to a __________ market.
Table 17–32
Suppose that Angelina and Brad own the only two professional photography stores in town. Each must choose between a
low price and a high price for senior photo packages. The annual economic profit from each strategy is indicated in the
table below:
Angelina
Low price High price
Brad
Low price
Angelina’s profit = $20,000
Brad’s profit = $20,000
Angelina’s profit = $4,000
Brad’s profit = $23,000
High price
Angelina’s profit = $25,000
Brad’s profit = $5,000
Angelina’s profit = $22,000
Brad’s profit = $22,000
24. Refer to Table 17–32. Does Angelina have a dominant strategy? If so, describe it.
strategy, $25,000 > $22,000.
25. Refer to Table 17–32. Does Brad have a dominant strategy? If so, describe it.
pricing strategy, $23,000 > $22,000.
26. Refer to Table 17–32. Is there a Nash equilibrium? If so, describe it.
the low pricing strategy.
Table 17–33
Suppose that Robert and Howard own the only two movie studios in California. Each producer must choose between a
low budget and a high budget strategy for his next film. The economic profit from each strategy is indicated in the table
below:
Howard
Low budget High budget
Low budget
Howard’s profit = $19,000
Howard’s profit = $4,000
Robert
Robert’s profit = $19,000
Robert’s profit = $24,000
High budget
Howard’s profit = $25,000
Robert’s profit = $5,000
Howard’s profit = $21,000
Robert’s profit = $21,000
27. Refer to Table 17–33. Does Howard have a dominant strategy? If so, describe it.
28. Refer to Table 17–33. Does Robert have a dominant strategy? If so, describe it.
29. Refer to Table 17–33. Is there a Nash equilibrium? If so, describe it.
Table 17–34
Suppose that two oil companies – BP and Exxon – own adjacent natural gas fields. The profits that each firm earns
depends on both the number of wells it drills and the number of wells drilled by the other firm. The table below lists each
firm’s individual profits:
Exxon
Drill one well Drill two wells
BP
Drill one well
Exxon’s profit = $10 million
BP’s profit = $10 million
Exxon’s profit = $12 million
BP’s profit = $6 million
Drill two wells
Exxon’s profit = $6 million
BP’s profit = $12 million
Exxon’s profit = $8 million
BP’s profit = $8 million
30. Refer to Table 17–34. Does Exxon have a dominant strategy? If so, describe it.
31. Refer to Table 17–34. Does BP have a dominant strategy? If so, describe it.
32. Refer to Table 17–34. Is there a Nash equilibrium? If so, describe it.
drills two wells, Exxon cannot do any better than drilling two wells. Thus, the Nash
Table 17–35
Suppose that two coal mining companies – Allied and Barclay – own adjacent land suitable for excavating coal mines.
The profits that each firm earns depends on both the number of mines it excavates and the number of mines excavated by
the other firm. The table below lists each firm’s individual profits:
Allied
Excavate one mine Excavate two mines
Barclay
Excavate one
mine
Allied’s profit = $9 million
Barclay’s profit = $9 million
Allied’s profit = $11 million
Barclay’s profit = $6 million
Excavate two
mines
Allied’s profit = $6 million
Barclay’s profit = $11 million
Allied’s profit = $7 million
Barclay’s profit = $7 million
33. Refer to Table 17–35. Does Allied have a dominant strategy? If so, describe it.
34. Refer to Table 17–35. Does Barclay have a dominant strategy? If so, describe it.
35. Refer to Table 17–35. Is there a Nash equilibrium? If so, describe it.
36. Cooperation is easier to achieve in __________.
37. Which strategy was the most successful in the prisoners’ dilemma tournament?
38. How does the prisoners’ dilemma game apply to real-life situations?
39. Antitrust laws tend to target restraint of trade as characterized by __________.
40. Before the __________, agreements between oligopolists were unenforceable contracts; afterwards, such agreements
were criminal conspiracies.
41. How did the Clayton Act of 1914 differ from the Sherman Antitrust Act of 1890?
42. The Clayton Act of 1914 allowed a person who successfully sued a company for damages caused by an illegal
arrangement to restrain trade to recover __________ damages.
43. What are the three examples of controversial business practices that antitrust laws often prohibit?
44. Briefly describe the practice of resale price maintenance.
45. Briefly describe the two arguments that economists make to defend the practice of resale price maintenance.
46. Which potentially anti-competitive business practice is often justified on the grounds that it corrects for the free rider
problem?
47. Briefly describe the business practice of tying.
Scenario 17-6
Assume that a local telecommunications company sells high speed internet access and cable television. The company’s
only two customers are Taylor and Tim. Taylor is willing to pay $50 per month for high speed internet access and $50 per
month for cable television. Tim is willing to pay only $20 per month for high speed internet access, but is willing to pay
$70 per month for cable television. Assume that the telecommunications company can provide each of these products at
zero marginal cost.
48. Refer to Scenario 17-6. If the telecommunications company is unable to use tying, what is the profit-maximizing
price to charge for high speed internet access?
49. Refer to Scenario 17-6. If the telecommunications company is unable to use tying, what is the profit-maximizing
price to charge for cable television?
50. Refer to Scenario 17-6. If the telecommunications provider is able to use tying to price high speed internet access and
cable television, what is the profit-maximizing price to charge for the “tied” good?
51. Refer to Scenario 17-6. How much additional profit can the telecommunications company earn by switching to the
use of a tying strategy to price high speed internet access and cable television rather than pricing these goods separately?
52. Briefly describe the practice of predatory pricing.
53. Government regulators might suspect a firm of engaging in predatory pricing if it charges prices that seem to be too
__________.
54. Which of the controversial business practices, resale price maintenance, predatory pricing, or tying, was a part of a
long-running antitrust lawsuit against Microsoft and why?
55. Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of the
cartel. Why?
56. What effect does the number of firms in an oligopoly have on the characteristics of the market?
price falls; the market begins to resemble a competitive one.
57. 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?
Q = 1200
b.
Q = 1600, P = 12
58. 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.
and price of crude oil.
59. 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?
by competitors’ production decisions, or it must assume competitors’ production will not
change in response to its own actions.
60. Explain how the output effect and the price effect influence the production decision of the individual oligopolist.
61. Ford and General Motors are considering expanding into the Vietnamese automobile market. Devise a simple
prisoners’ dilemma game to demonstrate the strategic considerations that are relevant to this decision.
(2, 2)
(4, 1)
(1, 4)
(3, 3)
62. Nike and Reebok (athletic shoe companies) are considering whether to advertise during the Super Bowl. Devise a
simple prisoners’ dilemma game to demonstrate the strategic considerations that are relevant to this decision. Does the
repeated game scenario differ from a single period game? Is it possible that a repeated game (without collusive
agreements) could lead to an outcome that is better than a single-period game? Explain the circumstances in which this
may be true.
63. Outline the purpose of antitrust laws. What do they accomplish?
64. Explain the practice of resale price maintenance and discuss why it is controversial.
65. Explain the practice of tying and discuss why it is controversial.