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Chapter 17/Oligopoly ❖ 41
53. Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil worth $30 mil-
lion. For each well that is drilled, the company that drills the well incurs a cost of $3 million. Each company
can drill up to two wells. What is the likely outcome of this game if each company pursues its own self-inter-
est?
a.
Each company drills one well and experiences a profit of $12 million.
b.
Each company drills one well and experiences a profit of $10 million.
c.
Each company drills two wells and experiences a profit of $9 million.
d.
One company drills two wells and experiences a profit of $14 million; the other company drills one
well and experiences a profit of $7 million.
54. We know that people tend to overuse common resources. This problem can be viewed as an example of
a.
a game in which the players succeed in reaching the cooperative outcome.
b.
the prisoners’ dilemma.
c.
a situation to which game theory does not apply because of a lack of strategic thinking.
d.
a situation to which game theory does not apply because of too many decision-makers.
55. The paradoxical nature of oligopoly can be demonstrated by the fact that, even though the monopoly outcome
is best for the oligopolists,
a.
they collude to set the output level equal to the Nash equilibrium level of output.
b.
they have incentives to increase production above the monopoly outcome.
c.
they do not behave as profit maximizers.
d.
self-interest juxtaposes the profits earned at the Nash equilibrium.
56. Hot dog vendors on the beach fail to cooperate with one another on the quantity of hot dogs they should sell to
earn monopoly profits. A consequence of their failure is that, relative to the outcome the vendors would like,
(i)
the quantity of hot dogs supplied is closer to the socially optimal level.
(ii)
the price of hot dogs is closer to marginal cost.
(iii)
the hot dog market at the beach is less competitive.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(iii) only
57. Why would lack of cooperation between criminal suspects be desirable for society as a whole?
a.
The suspects are able to choose optimal outcomes for themselves by acting in their own self
interest.
b.
The prisoners' dilemma safeguards the criminals' constitutional rights.
c.
More criminals will be convicted.
d.
None of the above is correct.
42 ❖ Chapter 17/Oligopoly
58. What happens when the prisoners' dilemma game is repeated numerous times in an oligopoly market?
(i)
The firms may well reach the monopoly outcome.
(ii)
The firms may well reach the competitive outcome.
(iii)
Buyers of the oligopolists' product will likely be worse off as a result.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
59. In game theory, a Nash equilibrium is
a.
an outcome in which each player is doing his best given the strategies chosen by the other players.
b.
an outcome in which no player wishes to change her chosen strategy given the strategies chosen by
the other players.
c.
the outcome that occurs when all players have a dominant strategy.
d.
All of the above are correct.
Scenario 17-3. Consider two countries, Muria and Zenya, that are engaged in an arms race. Each country
must decide whether to build new weapons or to disarm existing weapons. Each country prefers to have more
arms than the other because a large arsenal gives it more influence in world affairs. But each country also
prefers to live in a world safe from the other country's weapons. The following table shows the possible
outcomes for each decision combination. The numbers in each cell represent the country’s ranking of the
outcome (4 = best outcome, 1 = worst outcome).
Zenya
Build new weapons
Disarm existing weapons
Muria
Build new
weapons
Muria: 2
Zenya: 2
Muria: 4
Zenya: 1
Disarm existing
weapons
Muria: 1
Zenya: 4
Muria: 3
Zenya: 3
60. Refer to Scenario 17-3. If Zenya chooses to build new weapons, then Muria will
a.
disarm in order to prevent the loss of influence in world affairs.
b.
disarm in order to promote world peace.
c.
build new weapons in order to prevent the loss of influence in world affairs.
d.
None of the above are correct.
61. Refer to Scenario 17-3. If Zenya chooses to disarm its existing weapons, then Muria will
a.
disarm in order to increase its influence in world affairs.
b.
disarm in order to promote world peace.
c.
build new weapons in order to promote world peace.
d.
build new weapons in order to increase its influence in world affairs.
Chapter 17/Oligopoly ❖ 43
62. Refer to Scenario 17-3. Which of these statements is correct?
(i)
Muria is better off building new weapons if Zenya builds new weapons.
(ii)
Muria is better off building new weapons if Zenya disarms existing weapons.
(iii)
Building new weapons is Muria's dominant strategy.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
63. Refer to Scenario 17-3. Building new weapons is a dominant strategy for
a.
Muria, but not for Zenya.
b.
Zenya, but not for Muria.
c.
both Muria and Zenya.
d.
neither Muria nor Zenya.
64. Refer to Scenario 17-3. Suppose the two countries agreed to disarm existing weapons. In reality these two
countries may have a hard time keeping this agreement due to which of the following reasons?
(i)
Even though Muria has no incentive to cheat on the agreement, Zenya has an incentive to
cheat on the agreement.
(ii)
Much like the prisoners’ dilemma, both countries are better off reneging on the agreement
and building new weapons.
(iii)
Both countries want to increase their world power by building new weapons.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
Scenario 17-4. Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the
two companies split the market and earn $50 million each. If they both advertise, they again split the market,
but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company
advertises while the other does not, the one that advertises attracts customers from the other. In this case, the
company that advertises earns $60 million while the company that does not advertise earns only $30 million.
65. Refer to Scenario 17-4. What will these two companies do if they behave as individual profit maximizers?
a.
Neither company will advertise.
b.
Both companies will advertise.
c.
One company will advertise, the other will not.
d.
There is no way of knowing without knowing how many customers are stolen through advertising.
44 ❖ Chapter 17/Oligopoly
66. Refer to Scenario 17-4. The likely outcome of this game is that PM Inc. earns
a.
$30 million and Brown Inc. earns $60 million.
b.
$40 million and Brown Inc. earns $40 million.
c.
$50 million and Brown Inc. earns $50 million.
d.
$60 million and Brown Inc. earns $30 million.
67. Refer to Scenario 17-4. If these two companies collude and agree upon the best joint strategy,
a.
neither company will advertise.
b.
both companies will advertise.
c.
PM Inc. will advertise but Brown Inc. will not.
d.
Brown Inc. will advertise but PM Inc. will not.
68. Refer to Scenario 17-4. PM Inc.'s dominant strategy is to
a.
refrain from advertising regardless of whether Brown Inc. advertises.
b.
advertise only if Brown Inc. advertises.
c.
advertise only if Brown Inc. does not advertise.
d.
advertise regardless of whether Brown Inc. advertises.
69. Refer to Scenario 17-4. In 1971, Congress passed a law that banned cigarette advertising on television. If cig-
arette companies are profit maximizers, it is likely that
a.
neither company opposed the ban on advertising.
b.
Brown Inc. sued the federal government on grounds that the ban constitutes a civil rights violation.
c.
both companies sued the federal government on grounds that the ban constitutes a civil rights
violation.
d.
both companies retaliated with black-market operations.
70. Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and
finds a small bag of marijuana and arrests the two. During the interrogation, each is separately offered the fol-
lowing: "If you confess to dealing drugs and testify against your partner, you will be given immunity and re-
leased while your partner will get 10 years in prison. If you both confess, you will each get 5 years." If neither
confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of
marijuana. If each suspected drug dealer follows a dominant strategy, what should he/she do?
a.
Confess regardless of the partner's decision
b.
Confess only if the partner confesses
c.
Don’t confess regardless of the partner's decision
d.
Don’t confess only if the partner doesn’t confess
Chapter 17/Oligopoly ❖ 45
71. A lack of cooperation by oligopolists trying to maintain monopoly profits
a.
is desirable for society as a whole.
b.
is not desirable for society as a whole.
c.
may or may not be desirable for society as a whole.
d.
is not a concern due to antitrust laws.
72. Oligopolists may well be able to reach their preferred, cooperative outcome if
a.
the number of oligopolists is large.
b.
they learn that a Nash equilibrium is in their best long-term interests.
c.
a sufficient number of firms can be persuaded to lower their prices.
d.
the game they play is repeated a sufficient number of times.
73. Martha and Oleg are competitors in a local market and each is trying to decide if it is worthwhile to advertise.
If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit
of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $15,000
and the other will earn $7,000. To earn the highest profit, Martha
a.
should advertise, and she will earn $5,000.
b.
should advertise, and she will earn $15,000.
c.
should not advertise, and she will earn $10,000.
d.
has no dominant strategy.
74. Barb and Sue are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on
radio, or not at all. If they both advertise on TV, each will earn a profit of $5,000. If they both advertise on
radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one
advertises on TV and other advertises on radio, then the one advertising on TV will earn $8,000 and the other
will earn $3,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will
earn $15,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise, then
the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant
strategy, then Barb will
a.
advertise on TV and earn $5,000.
b.
advertise on radio and earn $7,000.
c.
not advertise at all and earn $10,000.
d.
None of the above is correct. Barb and Sue do not have dominant strategies.
75. Dave and Andy are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on
radio, or not at all. If they both advertise on TV, each will earn a profit of $4,000. If they both advertise on
radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one
advertises on TV and other advertises on radio, then the one advertising on TV will earn $6,000 and the other
will earn $5,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will
earn $11,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise, then
46 ❖ Chapter 17/Oligopoly
the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant
strategy, then Dave will
a.
advertise on TV and earn $4,000.
b.
advertise on radio and earn $7,000.
c.
advertise on TV and earn $11,000.
d.
not advertise and earn $10,000.
76. George and Jerry are competitors in a local market. Each is trying to decide if it is better to advertise on TV,
on radio, or not at all. If they both advertise on TV, each will earn a profit of $3,000. If they both advertise on
radio, each will earn a profit of $5,000. If neither advertises at all, each will earn a profit of $10,000. If one
advertises on TV and the other advertises on radio, then the one advertising on TV will earn $4,000 and the
other will earn $2,000. If one advertises on TV and the other does not advertise, then the one advertising on
TV will earn $8,000 and the other will earn $5,000. If one advertises on radio and the other does not advertise,
then the one advertising on radio will earn $9,000 and the other will earn $6,000. If both follow their dominant
strategy, then George will
a.
advertise on TV and earn $3,000.
b.
advertise on radio and earn $5,000.
c.
advertise on TV and earn $8,000.
d.
not advertise and earn $10,000.
77. Laurel and Janet are competitors in a local market and each is trying to decide if it is worthwhile to advertise.
If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit
of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $12,000
and the other will earn $2,000. In this version of the prisoners' dilemma, if the game is played only once, Lau-
rel should
a.
advertise, but if the game is to be repeated many times she should probably not advertise.
b.
advertise, and if the game is to be repeated many times she should still probably advertise.
c.
not advertise, but if the game is to be repeated many times she should probably advertise.
d.
not advertise, and if the game is to be repeated many times she should still not advertise.
Table 17-14
This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff
to A, Payoff to B).
B
Right
Left
A
Up
(2, 2)
(3, 1)
Down
(1, 3)
(0, 0)
78. Refer to Table 17-14. If player A chooses his/her best strategy, player B should
a.
choose right and earn a payoff of 2.
b.
choose right and earn a payoff of 3.
c.
choose left and earn a payoff of 1.
d.
choose left and earn a payoff of 0.
Chapter 17/Oligopoly ❖ 47
79. Refer to Table 17-14. If both players choose their best strategies, player A will earn a payoff of
a.
0.
b.
1.
c.
2.
d.
3.
80. Refer to Table 17-14. Which of the following statements about this game is true?
a.
Up is a dominant strategy for A and Right is a dominant strategy for B.
b.
Up is a dominant strategy for A and Left is a dominant strategy for B.
c.
Down is a dominant strategy for A and Right is a dominant strategy for B.
d.
Down is a dominant strategy for A and Left is a dominant strategy for B.
81. Refer to Table 17-14. Which outcome is the Nash equilibrium in this game?
a.
Up-Right
b.
Up-Left
c.
Down-Right
d.
Down-Left
Table 17-15
This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff
to A, Payoff to B).
B
Left
Center
Right
Up
(1, 4)
(6, 2)
(3, 1)
A
Middle
(2, 2)
(4, 6)
(5, 7)
Down
(3, 2)
(5, 5)
(4, 3)
82. Refer to Table 17-15. If player B chooses Right, player A should choose
a.
Up and earn a payoff of 1.
b.
Middle and earn a payoff of 5.
c.
Middle and earn a payoff of 7.
d.
Down and earn a payoff of 4.
83. Refer to Table 17-15. Which of the following statements regarding this game is true?
a.
Both players have a dominant strategy.
b.
Player A has a dominant strategy, but player B does not have a dominant strategy.
c.
Player A does not have a dominant strategy, but player B does have a dominant strategy.
d.
Neither player has a dominant strategy.
48 ❖ Chapter 17/Oligopoly
84. Refer to Table 17-15. Which of the following outcomes represents a Nash equilibrium in the game?
a.
Up-Center
b.
Middle-Right
c.
Down-Left
d.
Down-Center
Table 17-16
This table shows a game played between two players, A and B. The payoffs are given in the table as (Payoff to
A, Payoff to B).
B
Left
Center
Right
Up
(8, 4)
(4, 10)
(6, 6)
A
Middle
(6, 2)
(10, 6)
(10, 4)
Down
(2, 6)
(8, 8)
(12, 2)
85. Refer to Table 17-16. Which of the following statements is true regarding this game?
a.
Both players have a dominant strategy.
b.
Neither player has a dominant strategy.
c.
A has a dominant strategy, but B does not have a dominant strategy.
d.
B has a dominant strategy, but A does not have a dominant strategy.
86. Refer to Table 17-16. Which of the following outcomes represents a Nash equilibrium in the game?
a.
Middle-Center
b.
Down-Center
c.
Up-Left
d.
More than one of the above is a Nash equilibrium in this game.
Table 17-17
This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide
how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as (Profit for
Firm A, Profit for Firm B).
Firm B
Q=2
Q=3
Firm A
Q=2
(10, 10)
(8, 12)
Q=3
(12, 8)
(6, 6)
87. Refer to Table 17-17. In this game,
a.
neither player has a dominant strategy.
b.
both players have a dominant strategy.
c.
Firm A has a dominant strategy, but Firm B does not have a dominant strategy.
d.
Firm B has a dominant strategy, but Firm A does not have a dominant strategy.
Chapter 17/Oligopoly ❖ 49
88. Refer to Table 17-17. Which of the following outcomes represent the Nash equilibrium in this game?
a.
Q=2 for Firm A and Q=3 for Firm B.
b.
Q=3 for Firm A and Q=2 for Firm B.
c.
There is no Nash equilibrium in this game since neither player has a dominant strategy.
d.
Both a and b are correct.
Table 17-18
This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide
how much output (Q) to produce: 10 units or 12 units. The profit for each firm is given in the table as (Profit
for Firm A, Profit for Firm B).
Firm B
Q=10
Q=12
Firm A
Q=10
(48, 48)
(20, 60)
Q=12
(60, 20)
(38, 38)
89. Refer to Table 17-18. The dominant strategy For Firm A is to produce
a.
10 units and the dominant strategy for Firm B is to produce 10 units.
b.
10 units and the dominant strategy for Firm B is to produce 12 units.
c.
12 units and the dominant strategy for Firm B is to produce 10 units.
d.
12 units and the dominant strategy for Firm B is to produce 12 units.
90. Refer to Table 17-18. The Nash equilibrium for this game is
a.
10 units of output for Firm A and 10 units of output for Firm B.
b.
10 units of output for Firm A and 12 units of output for Firm B.
c.
12 units of output for Firm A and 10 units of output for Firm B.
d.
12 units of output for Firm A and 12 units of output for Firm B.
91. Refer to Table 17-18. If these two firms agree to cooperate to maximize their joint profit, the outcome of the
game will be
a.
10 units of output for Firm A and 10 units of output for Firm B.
b.
10 units of output for Firm A and 12 units of output for Firm B.
c.
12 units of output for Firm A and 10 units of output for Firm B.
d.
12 units of output for Firm A and 12 units of output for Firm B.
92. Refer to Table 17-18. If these two firms play this game repeatedly, the likely outcome will be
a.
10 units of output for Firm A and 10 units of output for Firm B.
b.
10 units of output for Firm A and 12 units of output for Firm B.
c.
12 units of output for Firm A and 10 units of output for Firm B.
d.
12 units of output for Firm A and 12 units of output for Firm B.
50 ❖ Chapter 17/Oligopoly
93. The prisoners' dilemma game
a.
is a situation in which two players both have dominant strategies which lead to the highest total
payoff for the two players.
b.
has no Nash equilibrium since players, after agreeing to play their dominant strategy, will have an
incentive to switch to another strategy.
c.
has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would
agree to if they could cooperate with each other.
d.
Both a and c are correct.
94. In a prisoners' dilemma game,
a.
the solution when playing the game once will be the same as the solution when the players play the
game repeatedly, since agreements cannot be maintained in a prisoners' dilemma.
b.
if the players play the game repeatedly, the players can achieve a higher payoff, on average, than
when they play the game only once.
c.
repeated play will always result in a better outcome for both players than when the game is played
only once.
d.
the tit-for-tat strategy in repeated play requires players to always select the opposite strategy as
their opponent.
Table 17-19
Consider a small town that has two grocery stores from which residents can choose to buy a gallon of milk.
The store owners each must make a decision to set a high milk price or a low milk price. The payoff table,
showing profit per week, is provided below. The profit in each cell is shown as (Store 1, Store 2).
Store 2
Low Price
High Price
Store 1
Low Price
(500, 500)
(800, 100)
High Price
(100, 800)
(650, 650)
95. Refer to Table 17-19. If grocery store 2 sets a low price, what price should grocery store 1 set? And what will
grocery store 1's payoff equal?
a.
Low price, $500
b.
High price, $800
c.
Low price, $100
d.
High price, $100
96. Refer to Table 17-19. If grocery store 2 sets a high price, what price should grocery store 1 set? And what
will grocery store 1's payoff equal?
a.
Low price, $800
b.
High price, $650
c.
Low price, $100
d.
High price, $800
Chapter 17/Oligopoly ❖ 51
97. Refer to Table 17-19. If grocery store 1 sets a low price, what price should grocery store 2 set? And what will
grocery store 2's payoff equal?
a.
Low price, $500
b.
High price, $800
c.
Low price, $100
d.
High price, $650
98. Refer to Table 17-19. If grocery store 1 sets a high price, what price should grocery store 2 set? And what
will grocery store 2's payoff equal?
a.
Low price, $800
b.
High price, $100
c.
Low price, $500
d.
High price, $650
99. Refer to Table 17-19. What is grocery store 1's dominant strategy?
a.
Grocery store 1 does not have a dominant strategy.
b.
Grocery store 1 should always set a low price.
c.
Grocery store 1 should always set a high price.
d.
Grocery store 1 should set a low price when grocery store 2 sets a low price, and grocery store 1
should set a high price when grocery store 2 sets a high price.
100. Refer to Table 17-19. What is grocery store 2's dominant strategy?
a.
Grocery store 2 does not have a dominant strategy.
b.
Grocery store 2 should always set a low price.
c.
Grocery store 2 should always set a high price.
d.
Grocery store 2 should set a low price when grocery store 1 sets a low price, and grocery store 2
should set a high price when grocery store 1 sets a high price.
101. Refer to Table 17-19. What is the Nash Equilibrium of this price-setting game?
a.
Grocery store 1: Low price
Grocery store 2: Low price
b.
Grocery store 1: Low price
Grocery store 2: High price
c.
Grocery store 1: High price
Grocery store 2: How price
d.
Grocery store 1: High price
Grocery store 2: High price
52 ❖ Chapter 17/Oligopoly
Table 17-20
Nadia and Maddie are two college roommates who both prefer a clean common space in their dorm room, but
neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm
room's common space. The payoff table for this situation is provided below, where the higher a player’s
payoff number, the better off that player is. The payoffs in each cell are shown as (payoff for Nadia, payoff for
Maddie).
Maddie
Clean
Don’t Clean
Nadia
Clean
(30, 30)
(7, 50)
Don’t Clean
(50, 7)
(10, 10)
102. Refer to Table 17-20. If Maddie chooses to clean, then Nadia will
a.
clean and Maddie’s payoff will be 30.
b.
not clean and Maddie’s payoff will be 7.
c.
clean and Maddie’s payoff will be 50.
d.
not clean and Maddie’s payoff will be 10.
103. Refer to Table 17-20. If Maddie chooses not to clean, then Nadia will
a.
clean, and Nadia’s payoff will be 50.
b.
not clean, and Nadia’s payoff will be 10.
c.
clean, and Nadia’s payoff will be 7.
d.
not clean, and Nadia’s payoff will be 30.
104. Refer to Table 17-20. If Nadia chooses to clean, then Maddie will
a.
clean, and Maddie’s payoff will be 30.
b.
not clean, and Maddie’s payoff will be 50.
c.
clean, and Maddie’s payoff will be 7.
d.
not clean, and Maddie’s payoff will be 10.
105. Refer to Table 17-20. If Nadia chooses to not clean, then Maddie will
a.
clean, and Maddie’s payoff will be 10.
b.
not clean, and Maddie’s payoff will be 50.
c.
clean, and Maddie’s payoff will be 30.
d.
not clean, and Maddie’s payoff will be 10.
106. Refer to Table 17-20. What is Nadia's dominant strategy?
a.
Nadia has no dominant strategy.
b.
Nadia should always choose Clean.
c.
Nadia should always choose Don’t Clean.
d.
Nadia has two dominant strategies, Clean and Don’t Clean, depending on the choice Maddie
makes.
Chapter 17/Oligopoly ❖ 53
107. Refer to Table 17-20. What is Maddie's dominant strategy?
a.
Maddie has no dominant strategy.
b.
Maddie should always choose Clean.
c.
Maddie should always choose Don’t Clean.
d.
Maddie has two dominant strategies, Clean and Don’t Clean, depending on the choice Nadia
makes.
108. Refer to Table 17-20. What is the Nash Equilibrium in this dorm room cleaning game?
a.
Nadia: Clean
Maddie: Clean
b.
Nadia: Don't Clean
Maddie: Clean
c.
Nadia: Clean
Maddie: Don't Clean
d.
Nadia: Don't Clean
Maddie: Don't Clean
Figure 17-2. Hector and Bart are roommates. On a particular day, their apartment needs to be cleaned. Each
person has to decide whether to take part in cleaning. At the end of the day, either the apartment will be
completely clean (if one or both roommates take part in cleaning), or it will remain dirty (if neither roommate
cleans). With happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes
are as follows:
109. Refer to Figure 17-2. The dominant strategy for Hector is to
a.
clean, and the dominant strategy for Bart is to clean.
b.
clean, and the dominant strategy for Bart is to refrain from cleaning.
c.
refrain from cleaning, and the dominant strategy for Bart is to clean.
d.
refrain from cleaning, and the dominant strategy for Bart is to refrain from cleaning.
Hector's happiness = 6 Hector's happiness = 10
Hector's happiness = 2 Hector's happiness = 5
Bart's happiness = 7 Bart's happiness = 2
Bart's happiness = 10 Bart's happiness = 4
Clean Don't clean
Clean
Don't clean
Hector's Decision
Bart's
Decision
54 ❖ Chapter 17/Oligopoly
110. Refer to Figure 17-2. In pursuing his own self-interest, Bart will
a.
refrain from cleaning whether or not Hector cleans.
b.
clean only if Hector cleans.
c.
clean only if Hector refrains from cleaning.
d.
clean whether or not Hector cleans.
111. Refer to Figure 17-2. If this game is played only once, then the most likely outcome is that
a.
Hector and Bart both clean.
b.
Hector cleans and Bart does not clean.
c.
Bart cleans and Hector does not clean.
d.
neither Hector nor Bart cleans.
112. Refer to Figure 17-2. In pursuing his own self-interest, Hector will
a.
refrain from cleaning whether or not Bart cleans.
b.
clean only if Bart cleans.
c.
clean only if Bart refrains from cleaning.
d.
clean whether or not Bart cleans.
113. Refer to Figure 17-2. The possible outcome in which both Hector and Bart clean is analogous to which of the
following outcomes of the duopoly game?
a.
The duopolists collude to achieve the monopoly outcome.
b.
The duopolists collude to achieve the monopolistically-competitive outcome.
c.
The outcome is the one that is most preferable for consumers of the duopolists’ product.
d.
The outcome is the one that is least preferable for both the duopolists and for the consumers of their
product.
Chapter 17/Oligopoly ❖ 55
Figure 17-3. Katie and Taylor are roommates. On a particular day, their lawn needs to be mowed. Each person has
to decide whether to take part in mowing the lawn. At the end of the day, either the lawn will be mowed (if
one or both roommates take part in mowing), or it will remain unmowed (if neither roommate mows). With
happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as follows:
114. Refer to Figure 17-3. The dominant strategy for Taylor is to
a.
mow, and the dominant strategy for Katie is to mow.
b.
mow, and the dominant strategy for Katie is to refrain from mowing.
c.
refrain from mowing, and the dominant strategy for Katie is to mow.
d.
refrain from mowing, and there is no dominant strategy for Katie.
115. Refer to Figure 17-3. If this game is played only once, then which of the following outcomes is the most
likely one?
a.
Katie and Taylor both mow.
b.
Katie mows and Taylor does not mow.
c.
Taylor mows and Katie does not mow.
d.
All of the above outcomes are equally likely.
116. Refer to Figure 17-3. In pursuing her own self-interest, Taylor will
a.
refrain from mowing whether or not Katie mows.
b.
mow only if Katie mows.
c.
mow only if Katie refrains from mowing.
d.
mow whether or not Katie mows.
Katie's happiness = 7 Katie's happiness = 10
Katie's happiness = 5 Katie's happiness = 4
Taylor's happiness = 7 Taylor's happiness = 2
Taylor's happiness = 8 Taylor's happiness = 4
Mow Don't mow
Mow
Don't mow
Katie's Decision
Taylor's
Decision
56 ❖ Chapter 17/Oligopoly
117. Refer to Figure 17-3. In pursuing her own self-interest, Katie will
a.
refrain from mowing whether or not Taylor mows.
b.
mow only if Taylor mows.
c.
mow only if Taylor refrains from mowing.
d.
mow whether or not Taylor mows.
Table 17-21
The Chicken Game is named for a contest in which drivers test their courage by driving straight at each other.
John and Paul have a common interest to avoid crashing into each other, but they also have a personal,
competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff
table for this situation is provided below. The payoffs are shown as (John, Paul).
Paul
Turn
Drive Straight
John
Turn
(10, 10)
(5, 20)
Drive Straight
(20, 5)
(0, 0)
118. Refer to Table 17-21. If Paul chooses Turn, what will John choose to do and what will John’s payoff equal?
a.
Turn, 10
b.
Drive Straight, 20
c.
Turn, 5
d.
Drive Straight, 0
119. Refer to Table 17-21. If Paul chooses Drive Straight, what will John choose to do and what will John’s payoff
equal?
a.
Turn, 5
b.
Drive Straight, 0
c.
Turn, 20
d.
Drive Straight, 5
120. Refer to Table 17-21. If John chooses Turn, what will Paul choose to do and what will Paul's payoff equal?
a.
Turn, 10
b.
Drive Straight, 20
c.
Turn, 5
d.
Drive Straight, 0
121. Refer to Table 17-21. If John chooses Drive Straight, what will Paul choose to do and what will Paul's payoff
equal?
a.
Turn, 5
b.
Drive Straight, 0
c.
Turn, 10
d.
Drive Straight, 200
Chapter 17/Oligopoly ❖ 57
122. Refer to Table 17-21. What is Paul's dominant strategy?
a.
Paul has no dominant strategy.
b.
Paul should always choose Turn.
c.
Paul should always choose Drive Straight.
d.
Paul has more than one dominant strategy.
123. Refer to Table 17-21. What is John's dominant strategy?
a.
John has no dominant strategy.
b.
John should always choose Turn.
c.
John should always choose Drive Straight.
d.
John has two dominant strategies.
124. Refer to Table 17-21. How many Nash equilibria are there in this Chicken game?
a.
0
b.
1
c.
2
d.
3
125. Refer to Table 17-21. What is (are) the Nash equilibrium (equilibria) in this Chicken game?
a.
John: Turn
Paul: Turn
b.
John: Turn
Paul: Drive Straight
c.
John: Drive Straight
Paul: Turn
d.
Both b and c are Nash equilibria
126. In the prisoners’ dilemma,
a.
the prisoners easily collude in order to achieve the best possible payoff for both.
b.
only one player has a dominant strategy.
c.
when each player chooses his dominant strategy the players achieve the best joint outcome.
d.
when each player chooses his dominant strategy the players reach a Nash equilibrium.
127. In the game in which two oil companies own adjacent oil fields, the companies will not use the oil efficiently
because
a.
neither company has a dominant strategy in the game.
b.
the companies collude and produce a quantity of oil that is less than the socially-efficient quantity.
c.
the pool from which they recover the oil is a common resource.
d.
the pool from which they recover the oil is not large enough to allow both companies to earn a
positive profit.
58 ❖ Chapter 17/Oligopoly
128. An equilibrium occurs in a game when
a.
price equals marginal cost.
b.
quantity supplied equals quantity demanded.
c.
all independent strategies counterbalance all dominant strategies.
d.
all players follow a strategy that they have no incentive to change.
129. The players in a two-person game are choosing between Strategy X and Strategy Y. If the second player
chooses Strategy X, the first player's best outcome is to select X. If the second player chooses Strategy Y, the
first player's best outcome is to select X. For the first player, Strategy X is called a
a.
dominant strategy.
b.
collusive strategy.
c.
repeated-trial strategy.
d.
cartel strategy.
130. Suppose that two poker players believe that they are superior players to the rest of the people at their table.
Further suppose that the two players make an agreement to concede hands to each other in order to drive the
other players from the game first. Economists would model such behavior as
a.
monopolistic competition.
b.
game theory.
c.
predatory pricing.
d.
a dominant strategy.
131. After initial success, the OPEC cartel saw the price of oil and the revenues of its members decline due, in part,
to
a.
the low elasticity of demand for oil in the short run.
b.
the large number of buyers from each member nation.
c.
surging demand for oil in the early 1980s.
d.
OPEC members failing to produce their agreed-upon production levels.
Table 17-22
Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for
repair work and a high price. The annual economic profit from each strategy is indicated in the table. The
profits are shown as (Matt, Brian) in each cell.
Brian
Low Price
High Price
Matt
Low Price
(1500, 1500)
(5000, 200)
High Price
(200, 3000)
(4000, 4000)
132. Refer to Table 17-22. Which of the following statements is correct?
a.
Matt's dominant strategy is to charge a low price.
b.
Brian's dominant strategy is to charge a high price.
c.
The dominant strategy for both Brian and Matt is to charge a low price.
d.
Matt's dominant strategy is to charge a high price.
Chapter 17/Oligopoly ❖ 59
133. Refer to Table 17-22. Which of the following statements is correct if Brian and Matt will play this game only
once?
a.
The Nash equilibrium is the high price.
b.
A Nash equilibrium cannot be established unless Brian and Matt collude.
c.
A Nash equilibrium cannot be established without the players repeating the game.
d.
The Nash equilibrium price is the low price.
Table 17-23
Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs, and
thus increase their profits, if they 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 costs savings will
outweigh the lost sales. Listed in the table below are the individual profits for each firm.
Firm A
Breaks the agreement
and advertises
Maintains the agreement and
does not advertise
Firm B
Breaks the agreement
and advertises
Firm A profit = $9,000
Firm B profit = $4,000
Firm A profit = $8,000
Firm B profit = $6,000
Maintains the agreement
and does not advertise
Firm A profit = $11,000
Firm B profit = $3,500
Firm A profit = $10,000
Firm B profit = $5,000
134. Refer to Table 17-23. Suppose that the two firms, A and B, make an agreement to withhold any
advertising for one month in order to lower each firm’s costs and raise each firm’s profits. If the firms reach
the Nash equilibrium,
a.
both firms will choose not to advertise.
b.
firm A will choose not to advertise, but firm B will break the agreement and choose to advertise.
c.
firm B will choose not to advertise, but firm A will break the agreement and choose to advertise.
d.
both firms will break the agreement and choose to advertise.
135. Refer to Table 17-23. At the Nash equilibrium, how much profit will Firm A earn?
a.
$8,000 because firm A will maintain the agreement not to advertise, but firm B will break the
agreement and choose to advertise.
b.
$9,000 because each firm will break the agreement and choose to advertise.
c.
$10,000 because each firm will maintain the agreement and choose not to advertise.
d.
$11,000 because firm B will maintain the agreement not to advertise, but firm A will break the
agreement and choose to advertise.
136. Refer to Table 17-23. At the Nash equilibrium, how much profit will Firm B earn?
a.
$3,500 because firm B will maintain the agreement not to advertise, but firm A will break the
agreement and choose to advertise.
b.
$4,000 because each firm will break the agreement and choose to advertise.
c.
$5,000 because each firm will maintain the agreement and choose not to advertise.
d.
$6,000 because firm A will maintain the agreement not to advertise, but firm B will break the
agreement and choose to advertise.
60 ❖ Chapter 17/Oligopoly
137. In which of the following games is it clearly the case that the cooperative outcome of the game is good for the
two players and good for society?
a.
Two guilty criminals have been captured by the police, and each prisoner decides whether to
confess or to remain silent.
b.
Two airlines dominate air travel between City A and City B, and each airline decides whether to
charge a “high” airfare or a “low” airfare.
c.
Two duopoly firms account for all of the production in a market, and each firm decides whether to
produce a “high” amount of output or a “low” amount of output.
d.
Two oil companies own adjacent oil fields over a common pool of oil, and each company decides
whether to drill one well or two wells.
138. In which of the following games is it clearly the case that the cooperative outcome of the game is good for the
two players and bad for society?
a.
Two oil companies own adjacent oil fields over a common pool of oil, and each company decides
whether to drill one well or two wells.
b.
Two airlines dominate air travel between City A and City B, and each airline decides whether to
charge a “high” airfare or a “low” airfare on flights between those two cities.
c.
Two superpowers decide whether to build new weapons or to disarm.
d.
In all of the above cases, the cooperative outcome of the game is good for the two players and bad
Table 17-24
Two firms are considering going out of business and selling their assets. Each considers what happens if the
other goes out of business. The payoff matrix below shows the net gain or loss to each firm.
Firm A
Stays in business
Sells business
Firm B
Stays in business
A gains $9 million
B gains $7million
A gains $7 million
B gains $15 million
Sells business
A gains $15 million
B gains $8 million
A gains $1 million
B gains $3 million
139. Refer to Table 17-24. Which firm’s dominant strategy is to sell?
a.
firm A’s and firm B’s
b.
firm A’s but not firm B’s
c.
firm B’s but not firm A’s
d.
neither firm A’s nor firm B’s
140. Refer to Table 17-24. Which firms have a dominant strategy?
a.
A and B
b.
Neither A nor B
c.
A but not B
d.
B but not A
