Chapter 17/Oligopoly ❖ 61
141. Refer to Table 17–24. What is the Nash equilibrium?
a.
A and B both stay in business
b.
A stays in business, B sells
c.
B stays in business, A sells
d.
Both A and B sell
Table 17–25
There are just two producers of a certain product. Each is considering offering promotional discounts.
Firm A
Does not offer discount
Offers discount
Firm B
Does not offer discount
Firm A profit = $120,000
Firm B profit = $70,000
Offers discount
Firm A profit = $80,000
Firm B profit = $80,000
142. Refer to Table 17–25. The dominant strategy
a.
for both firms is to offer the discount.
b.
for both firms is to not offer the discount.
c.
for firm A is to offer the discount. The dominant strategy for firm B is to not offer the discount.
d.
for firm A is to not offer the discount. The dominant strategy for firm B is to offer the discount.
143. Refer to Table 17–25. At the Nash equilibrium, how much profit will Firm A earn?
a.
$120,000
b.
$90,000
c.
$80,000
d.
$70,000
144. Which of the following is correct? When oligopolies collude
a.
they make higher profits and consumers of the product are better off.
b.
they make higher profits but consumers of the product are worse off.
c.
they make lower profits and consumers of the product are better off.
d.
they make lower profits and consumers of the product are worse off.
62 ❖ Chapter 17/Oligopoly
Figure 17-4. Two companies, Acme and Bilco, are sellers in the same market. Each company decides whether to
charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual
profits for the two companies.
145. Refer to Figure 17-4. Suppose the outcome of the game is one in which Acme’s profit is $2 million and
Bilco’s profit is $7 million. The most likely explanation for this outcome is that
a.
each company pursued its dominant strategy.
b.
each company’s objective was to maximize the sum of the two companies’ profits.
c.
the two companies reached an agreement on what price to charge, and Acme subsequently cheated.
d.
the two companies reached an agreement on what price to charge, and Bilco subsequently cheated.
146. Refer to Figure 17-4. If the two companies make their pricing decisions independently, then it is likely that
Acme will
a.
charge a high price only if Bilco charges a high price.
b.
charge a high price only if Bilco charges a low price.
c.
charge a high price regardless of whether Bilco charges a high price or a low price.
d.
None of the above are correct.
147. Refer to Figure 17-4. If the two companies make their pricing decisions independently, then it is likely that
Bilco will
a.
charge a low price only if Acme charges a low price.
b.
charge a low price only if Acme charges a high price.
c.
charge a low price regardless of whether Acme charges a high price or a low price.
d.
None of the above are correct.
Acme‘s profit = $5 million Acme‘s profit = $7 million
Acme‘s profit = $2 million Acme‘s profit = $3.25 million
Bilco’s profit = $5 million Bilco’s profit = $2 million
Bilco’s profit = $7 million Bilco’s profit = $3.25 million
High price Low price
High price
Low price
Acme‘s Decision
Bilco’s
Decision
Chapter 17/Oligopoly ❖ 63
148. Refer to Figure 17-4. If this game is played only once, then the most likely outcome is that
a.
both firms charge a low price.
b.
Acme charges a low price and Bilco charges a high price.
c.
Acme charges a high price and Bilco charges a low price.
d.
both firms charge a high price.
149. Refer to Figure 17-4. The dominant strategy for Acme is to
a.
charge a high price, and the dominant strategy for Bilco is to charge a high price.
b.
charge a high price, and the dominant strategy for Bilco is to charge a low price.
c.
charge a low price, and the dominant strategy for Bilco is to charge a high price.
d.
charge a low price, and the dominant strategy for Bilco is to charge a low price.
150. Refer to Figure 17-4. Suppose we observe that the outcome of the game is one in which each company earns
a profit of $5 million. This outcome
a.
is the result of each company pursuing its dominant strategy.
b.
is the result of cooperation between the two companies, and we know that a cooperative outcome is
easy in a game such as this one.
c.
is the result of cooperation between the two companies, and we know that a cooperative outcome is
difficult in a game such as this one.
d.
is the most likely outcome of the game, regardless of whether the two companies cooperate.
151. Refer to Figure 17-4. The situation faced by Acme and Bilco is
a.
one in which the players, pursuing their own interests, are likely to reach an outcome that is not
particularly good for either player.
b.
one in which an agreement between the players to behave in a certain way is not likely to hold up.
c.
similar to the situation faced by Bonnie and Clyde in the prisoners’ dilemma game.
d.
All of the above are correct.
152. Refer to Figure 17-4. In what sense is the game involving Acme and Bilco similar to the prisoners’ dilemma
game involving Bonnie and Clyde?
a.
In both games, if the players pursue their own interests, then the outcome is the best possible
outcome for each player.
b.
In both games, a dominant strategy can be identified for each player.
c.
In both games, cooperation between the players is easy to maintain.
d.
All of the above are correct.
64 ❖ Chapter 17/Oligopoly
153. A cooperative agreement among oligopolists is more likely to be maintained,
a.
the greater the number of oligopolists.
b.
the larger the number of buyers of the oligopolists’ product.
c.
the smaller the number of buyers of the oligopolists’ product.
d.
the more likely it is that the game among the oligopolists will be played over and over again.
154. A cooperative agreement among oligopolists is less likely to be maintained,
a.
the greater the number of oligopolists.
b.
the larger the number of buyers of the oligopolists’ product.
c.
the smaller the number of buyers of the oligopolists’ product.
d.
the more likely it is that the game among the oligopolists will be played over and over again.
PUBLIC POLICY TOWARD OLIGOPOLIES
1. From society’s standpoint, cooperation among oligopolists is
a.
desirable, because it leads to less conflict among firms and a wider variety of products for
consumers.
b.
desirable, because it leads to an outcome closer to the competitive outcome than what would be
observed in the absence of cooperation.
c.
undesirable, because it leads to output levels that are too low and prices that are too high.
d.
undesirable, because it leads to output levels that are too high and prices that are too high.
2. A law that encourages market competition by prohibiting firms from gaining or exercising excessive market
power is
a.
a patent.
b.
impossible to enforce.
c.
an antitrust law.
d.
an externality law.
3. The primary purpose of antitrust legislation is to
a.
protect small businesses.
b.
protect the competitiveness of U.S. markets.
c.
protect the prices of American-made products.
d.
ensure firms earn only a fair profit.
Chapter 17/Oligopoly ❖ 65
4. To move the allocation of resources closer to the social optimum, policymakers should typically try to induce
firms in an oligopoly to
a.
collude with each other.
b.
form various degrees of cartels.
c.
compete rather than cooperate with each other.
d.
cooperate rather than compete with each other.
5. Which of the following statements is true?
a.
The proper scope of antitrust laws is well defined and definite.
b.
Antitrust laws focus on granting certain firms the option to form a cartel.
c.
Policymakers have the difficult task of determining whether some firms’ decisions have legitimate
purposes even though they appear anti-competitive.
d.
There is always a need for policymakers to try to limit a firm’s pricing power, regardless of whether
the firm’s market is competitive, a monopoly, or an oligopoly.
6. Which of the following is necessarily a problem with antitrust laws?
a.
They may target a business whose practices appear to be anti-competitive but in fact have
legitimate purposes.
b.
They promote competition.
c.
They limit monopoly power.
d.
They prohibit firms from entering or exiting a market.
7. Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust laws?
a.
the U.S. Justice Department
b.
private citizens
c.
corporations
d.
All of the above are correct.
8. Which government entity is charged with investigating and enforcing antitrust laws?
a.
the U.S. Justice Department
b.
the U.S. Commerce Department
c.
the U.S. Treasury Department
d.
the Bureau of Alcohol, Tobacco, and Firearms
9. Who wrote, “People of the same trade seldom meet together, but the conversation ends in a conspiracy against
the public, or in some diversion to raise prices.”?
a.
Thomas Jefferson
b.
Adam Smith
c.
Bill Gates
d.
Robert Axelrod
66 ❖ Chapter 17/Oligopoly
10. The Sherman Antitrust Act
a.
was passed to encourage judicial leniency in the review of cooperative agreements.
b.
was concerned with self-interest dominated Nash equilibriums in prisoners’ dilemma games.
c.
enhanced the ability to enforce cartel agreements.
d.
restricted the ability of competitors to engage in cooperative agreements.
11. The Sherman Act made cooperative agreements
a.
unenforceable outside of established judicial review processes.
b.
enforceable with proper judicial review.
c.
a criminal conspiracy.
d.
a crime, but did not give direction on possible penalties.
12. The Sherman Antitrust Act was passed in
a.
1836.
b.
1890.
c.
1914.
d.
1946.
13. The Sherman Antitrust Act prohibits price-fixing in the sense that
a.
competing executives cannot even talk about fixing prices.
b.
competing executives can talk about fixing prices, but they cannot take action to fix prices.
c.
a price-fixing agreement can lead to prosecution provided the government can show that the public
was not well-served by the agreement.
d.
None of the above is correct. The Sherman Act did not address the matter of price-fixing.
14. The Sherman Antitrust Act prohibits executives of competing companies from
a.
fixing prices, but it does not prohibit them from talking about fixing prices.
b.
even talking about fixing prices.
c.
sharing with one another their knowledge of game theory.
d.
failing to stand by agreements that they had made with one another.
15. The Sherman Antitrust Act
a.
overturned centuries-old views of English and American judges on agreements among competitors.
b.
had the effect of discouraging private lawsuits against conspiring oligopolists.
c.
strengthened the Clayton Act.
d.
elevated agreements among conspiring oligopolists from an unenforceable contract to a criminal
conspiracy.
Chapter 17/Oligopoly ❖ 67
16. Which of the following prohibits executives of competing firms from even talking about fixing prices?
a.
Sherman Act
b.
Clayton Act
c.
Federal Trade Commission
d.
U.S. Justice Department
17. Two CEOs from different firms in the same market collude to fix the price in the market. This action violates
the
a.
Clayton Act of 1914.
b.
Sherman Antitrust Act of 1890.
c.
Crandall-Putnam ruling of 1983.
d.
Jackson-Microsoft ruling of 2000.
18. The Clayton Act
a.
preceded the Sherman Act.
b.
replaced the Sherman Act.
c.
strengthened the Sherman Act.
d.
was specifically designed to reduce the ability of cartels to organize.
19. According to the Clayton Act,
a.
lawyers are given an incentive to reduce the number of cases involving cooperative arrangements.
b.
individuals can sue to recover damages from illegal cooperative agreements.
c.
the government was able to incarcerate the CEO of a firm for illegal pricing arrangements.
d.
private lawsuits are discouraged.
20. If a person can prove that she was damaged by an illegal arrangement to restrain trade, that person can sue and
recover
a.
the damages she sustained, as provided for in the Sherman Act.
b.
the damages she sustained, as provided for in the Clayton Act.
c.
three times the damages she sustained, as provided for in the Sherman Act.
d.
three times the damages she sustained, as provided for in the Clayton Act.
68 ❖ Chapter 17/Oligopoly
21. Which of the following statements is false?
a.
The Clayton Act allows triple damages in civil lawsuits in order to encourage lawsuits against
conspiring oligopolists.
b.
Many economists defend the practice of resale price maintenance on the grounds that it may help
solve a free-rider problem.
c.
Most economists agree that predatory pricing is a profitable business strategy that usually preserves
market power.
d.
The U.S. Supreme Court’s view that the practice of tying usually allows a firm to extend its market
power is not generally supported by economic theory.
22. When individuals are damaged by an illegal arrangement to restrain trade, which law allows them to pursue
civil action and recover up to three times the damages sustained?
a.
Trade Damage Act
b.
Clayton Act
c.
Sherman Act
d.
No law allows individuals to pursue civil action and recover up to three times the damages
sustained.
23. The Clayton Act of 1914 allows those harmed by illegal arrangements to restrain trade to
a.
sue for up to two times the damages they incurred.
b.
sue for up to three times the damages they incurred.
c.
sue for up to four times the damages they incurred.
d.
sue for damages, but only for the actual amount of damages they incurred.
24. Antitrust laws in general are used to
a.
prevent oligopolists from acting in ways that make markets less competitive.
b.
encourage oligopolists to pursue cooperative-interest at the expense of self-interest.
c.
encourage frivolous lawsuits among competitive firms.
d.
encourage all firms to cut production levels and cut prices.
25. The practice of selling a product to retailers and requiring the retailers to charge a specific price for the prod-
uct is called
a.
fixed retail pricing.
b.
resale price maintenance.
c.
cost plus pricing.
d.
unfair trade.
Chapter 17/Oligopoly ❖ 69
26. Economists claim that a resale price maintenance agreement is not anti-competitive because
a.
suppliers are never able to exercise noncompetitive market power.
b.
if a supplier has market power, it will be likely to exert that power through wholesale price rather
than retail price.
c.
retail markets are inherently noncompetitive.
d.
retail cartel agreements cannot increase retail profits.
27. Assume that Peach Computers has entered into a resale price maintenance agreement with Computer Super
Stores Inc. (CSS Inc.) but not with CompuMart. In this case,
a.
the wholesale price of Peach computers will be different for CSS Inc. than it is for CompuMart.
b.
Peach computers will never increase profits by having a resale price maintenance agreement with
all retail outlets that sell its products.
c.
CompuMart might benefit from customers who go to CSS Inc. for information about different
computers.
d.
CSS Inc. will sell Peach computers at a lower price than CompuMart.
28. Assume that Apple Computer has entered into an enforceable resale price maintenance agreement with Com-
puter Super Stores Inc. (CSS Inc.) and Wal-Mart. Which of the following will always be true?
a.
The wholesale price of Apple computers will be different for CSS Inc. than it is for Wal-Mart.
b.
Wal-Mart will benefit from customers who go to CSS Inc. for information about different
computers.
c.
CSS Inc. will sell Apple computers at a lower price than Wal-Mart.
d.
Wal-Mart and CSS Inc. will always sell Apple Computers for exactly the same price.
29. A firm that practices resale price maintenance
a.
has incentive to reduce competition between its retailers. Resale price maintenance can lead to
more service.
b.
has incentive to reduce competition between its retailers. Resale price maintenance cannot lead to
more service.
c.
has no incentive to reduce competition between its retailers. Resale price maintenance can lead to
more service.
d.
has no incentive to reduce competition between its retailers. Resale price maintenance cannot lead
to more service.
30. Resale price maintenance involves a firm
a.
colluding with another firm to restrict output and raise prices.
b.
selling two individual products together for a single price rather than selling each product
individually at separate prices.
c.
temporarily cutting the price of its product to drive a competitor out of the market.
d.
requiring that the firm reselling its product do so at a specified price.
70 ❖ Chapter 17/Oligopoly
31. The manufacturer of Bozz Radios sells radios to retail stores for $500 each, and it requires the retail stores to
charge customers $550 per radio. Any retailer that charges less than $550 would violate its contract with Bozz
Radios. What do economists call this business practice?
a.
predatory pricing
b.
resale price maintenance
c.
tying
d.
leverage
32. If Levi Strauss & Co. were to require every retailer that carried its clothing to charge customers $42 for each
pair of jeans, Levi Strauss & Co. would be practicing
a.
resale price maintenance.
b.
fixed retail pricing.
c.
tying.
d.
cost plus pricing.
33. Acme Computer Co. sells computers to retail stores for $400. If Acme requires the retailers to charge custom-
ers $500 for the computers, then it is engaging in
a.
resale price maintenance.
b.
predatory pricing.
c.
tying.
d.
monopolistic competition.
34. Predatory pricing refers to
a.
a firm selling certain products together rather than separately.
b.
a monopoly firm reducing its price in an attempt to maintain its monopoly.
c.
firms colluding to set prices.
d.
All of the above are examples of predatory pricing.
35. Predatory pricing occurs when a firm
a.
exercises its oligopoly power by raising its price through the formation of a cartel.
b.
exercises its monopoly power by raising its price.
c.
cuts its prices in order make itself more competitive.
d.
cuts its prices temporarily in order to drive out any competition.
Chapter 17/Oligopoly ❖ 71
36. Although the practice of predatory pricing is a common claim in antitrust suits, some economists are skeptical
of this argument because they believe
a.
the evidence of its practice is nearly impossible to collect.
b.
predatory pricing is not a profitable business strategy.
c.
even though predatory pricing is a profitable business strategy, it is on balance beneficial to society.
d.
predatory pricing actually attracts new firms to the industry.
37. Consider a market served by a monopolist, Firm A. A new firm, Firm B, enters the market and, as a result,
Firm A lowers its price to try to drive Firm B out of the market. This practice is known as
a.
resale price maintenance.
b.
predatory tying.
c.
tying.
d.
predatory pricing.
38. Which of the following questions about predatory pricing remains unresolved?
a.
Are the courts capable of determining which price cuts are competitive and which are predatory?
b.
Are the courts capable of determining which price cuts are good for consumers?
c.
Is predatory pricing ever a profitable business strategy?
d.
All of the above questions about predatory pricing are unresolved.
39. Predatory pricing occurs when
a.
firms collude to set prices. Economists are certain this practice is profitable.
b.
firms collude to set prices. Economists are skeptical that this practice is profitable.
c.
A monopolist decreases its prices to maintain its monopoly. Economists are certain this practice is
profitable.
d.
A monopolist decreases its prices to maintain its monopoly. Economists are skeptical that this
practice is profitable.
40. Predatory pricing involves a firm
a.
colluding with another firm to restrict output and raise prices.
b.
selling two individual products together for a single price rather than selling each product
individually at separate prices.
c.
temporarily cutting the price of its product to drive a competitor out of the market.
d.
requiring that the firm reselling its product do so at a specified price.