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726 Miller Economics Today, 16th Edition
65) A game in which any gains one player makes are offset by equal losses by another player is
known as a
A) zero sum game. B) positive sum game.
C) negative sum game. D) cooperative game.
66) A game in which players collectively lose is known as a
A) zero sum game. B) positive sum game.
C) negative sum game. D) cooperative game.
67) A game in which players collectively gain is known as a
A) zero sum game. B) positive sum game.
C) negative sum game. D) cooperative game.
68) Games can be judged according to the payoffs
A) as zero sum, negative sum, and positive sum games.
B) as collusive or noncollusive games.
C) as competitive or noncompetitive games.
D) whether all companies participate or not.
69) Which of the following statements concerning the prisoner s dilemma is true?
A) The player who moves last will always win.
B) Confessing is the dominant strategy for both players.
C) Neither player will pick the dominant strategy.
D) The player who moves first will always win.
70) The prisoner s dilemma shows that
A) players are better off if they act independently.
B) monopolies are beneficial to society.
C) people will always cheat.
D) players would be better off if they cooperated.
71) An action that is the best choice under all conditions is known as the
A) profit maximizing strategy. B) prisoner s dilemma.
C) tit for tat strategy. D) dominant strategy.
72) When a cartel breaks down and its members start cheating, the behavior in the industry
becomes a
A) noncooperative game. B) zero sum game.
C) high stakes game. D) positive sum game.
73) Opportunistic behavior by oligopolies means
A) that firms cooperate in both the long run and in the short run to prevent others from
entering the industry.
B) that firms cooperate in the short run for current gains.
C) that firms refuse to cooperate in the short run.
D) that firms refuse to honor their product guarantees.
74) A dominant strategy is a
A) last move strategy.
B) losing strategy.
C) player s best strategy when he can make the first move.
D) player s best strategy regardless whatever strategies are adopted by his rivals.
75) Explain the basic operations of an economic game.
76) Firms faced with prisoners dilemma can always make more profits by engaging in
opportunistic behavior. Why is this type of behavior NOT commonly found even in oligopolistic
markets?
77) Explain how the prisoners dilemma can be used to examine pricing strategies in an oligopoly.
26.3 The Cooperative Game: A Collusive Cartel
1) A group of firms that try to work together to earn monopoly profits is called a(n)
A) patent. B) public enterprise.
C) cartel. D) natural monopoly.
2) According to game theorists, a cartel of several firms is an example of a(n)
A) zero sum game. B) uncooperative game.
C) cooperative game. D) noncooperative game.
3) An example of a cooperative game would be
A) oligopoly. B) monopolistic competition.
C) a cartel. D) perfect competition.
4) An association of producers in an industry that agree to set common prices and output quotas to
prevent competition is
A) a tariff. B) a patent.
C) economies of scale. D) a cartel.
5) Which of the following is not true about a cartel?
A) Members earn economic profits.
B) Members experience large economies to scale relative to industry demand.
C) Cartels will set common prices for their members.
D) Members of a cartel will have production quotas.
6) The main objective of the members of a cartel is to
A) earn economic profits. B) produce efficiently.
C) make the industry more competitive. D) obtain a patent.
7) A group of producers that agree to coordinate their production is called a
A) cartel. B) monopoly.
C) free market competition. D) vertical merger.
8) In a cartel, firms jointly act as
A) a monopolistic competitive firm. B) a perfectly competitive firm.
C) a monopoly firm. D) an oligopolistic firm.
9) An association of producers that fixes common prices and output quotas is known as a
A) cartel. B) common selling organization.
C)
j
oint marketing arrangement. D) trade association.
10) Which of the following is LEAST likely to be a reason for firms to form a cartel?
A) to maximize profits of the cartel
B) to raise competition among firms in the cartel
C) to cut back output of the cartel
D) to set common prices among firms in the cartel
11) Cheating in a cartel is more likely to occur if the industry
A) has a large number of firms. B) has homogeneous products.
C) has easily observable prices D) has little variation in prices.
12) A cartel is a form of
A) collusion. B) vertical merger.
C) noncooperative competition. D) negative sum game.
13) The success of a cartel rests upon
A) inducing all members to limit their combined output and charge the same price.
B) inducing all members to differentiate their products and charge different prices.
C) making exit from the cartel as nearly costless as possible.
D) discouraging some firms in the market from joining.
14) Which of the following is LEAST likely to be an outcome of a cartel as compared to the situation
before the cartel was formed?
A) Cartel members charge higher prices.
B) Cartel members reduce production.
C) Cartel members make fewer profits.
D) Cartel members do not compete with each other in pricing decisions.
15) After participating members of a cartel form an agreement on common prices and output
quotas, then an individual firm can increase its own profits by
A) increasing production. B) increasing prices.
C) leaving the cartel. D) incurring higher input costs.
16) After participating members of a cartel form an agreement on common prices and output
quotas, then an individual firm can increase its own profits by
A) decreasing production. B) decreasing prices.
C) advertising. D) paying its employees higher wages.
17) Which of the following is a condition that helps enforce a cartel agreement?
A) a large number of firms B) relatively differentiated products
C) easily observable prices D) large variation in prices
18) Which of the following is NOT a condition that helps enforce a cartel agreement?
A) a small number of firms B) nearly homogeneous products
C) easily observable prices D) large variation in input prices
19) One of the fundamental problems a cartel faces is
A) to determine how much each producer will decrease its output.
B) to determine how much each producer will increase its output.
C) to determine how much each producer will lower it price.
D) to determine how much each producer will lower its profit.
20) Cartel agreements are more likely to break down when
A) there are few variations in market demand.
B) new firms enter the market.
C) participating firms earn huge profits.
D) none of the above
21) A cartel is likely to last longer if
A) more new firms enter the market.
B) the profits of participating members are relatively stable.
C) market prices vary more over time.
D) there are more firms in the industry.
22) The goal of a cartel is to
A) increase competition among members. B) maximize industry profits.
C) increase industry production. D) all of the above
23) A cartel most likely forms in
A) an oligopolistic market. B) a perfectly competitive market.
C) a monopolistically competitive market. D) a heavily regulated industry.
24) A member in a cartel can earn more profits by
A) charging a slightly lower price and raising production.
B) producing less than the agreed rate.
C) selling less than the agreed amount.
D) none of the above.
25) A cartel will break down more easily if
A) there are only a few members. B) industry demand is very stable.
C) market prices can be observed easily. D) there are many entrants in the industry.
26) In a cartel, participating members can cheat by
A) letting more entrants join the cartel.
B) leaving the industry.
C) producing a lower production level than the cartel quota.
D) charging a slightly lower price and raising production.
27) A cartel is
A) a group of producers that agree to set common prices and output quotas.
B) a group of consumers that bid against each other for the same product.
C) a government agency that regulates markets.
D) an arbitrator to settle disputes between consumers and producers.
28) Between 1986 and 1998 the De Beers company controlled the world diamond market. De Beers
and its affiliated association of producers restricted diamond sales to maximize profits. De Beers
and its association was the only game in town and had what is
A) a cartel. B) a duopoly.
C) monopolistic competitor. D) perfect competitor.
29) A cartel behaves like
A) a monopolistic competitive firm. B) a perfectly competitive firm.
C) a monopolist. D) an oligopolistic firm.
30) If three firms of similar sizes join to form a cartel, then it is most likely that
A) they will charge a common, higher market price.
B) they will collectively produce more than before.
C) all three firms will stop producing.
D) all three firms will earn zero profits.
31) If five firms of similar sizes join to form a cartel, then it is most likely that
A) they will charge a common, lower market price.
B) they will collectively produce less than before.
C) all five firms will earn the same profits as before.
D) all five firms as a group will have falling profits, but increased output.
32) When oligopolistic firms in an industry form a cartel, then it is most likely that
A)
b
oth industry output and prices will increase.
B)
b
oth industry output and prices will decrease.
C) industry output will increase while prices will decrease.
D) industry output will decrease while prices will increase.
33) An association of producers in an industry that agree to set common prices and output quotas to
prevent competition is
A) an oligopolist. B) a monopolistic competitor.
C) a constrained monopoly. D) a cartel.
34) An association of producers such as OPEC that agrees to set common pricing or output goals is
referred to as a
A) cartel. B) conglomerate. C) monopoly. D) partnership.
35) What is a cartel? Can cartels generate long term profits without the existence of barriers to
entry?
36) Why do firms form a cartel? How do cartels achieve their goals?
37) What are the main characteristics that make it more likely for a cartel to enforce agreements
among participating members?
38) Why would a member of a cartel cheat?
39) Why do cartels often break down?
26.4 Network Effects
1) When a consumer s willingness to buy a good or service is influenced by the number of people
who have purchased that good or service, this is called
A) a switching cost. B) an opportunity cost.
C) a network effect. D) an advertising gimmick.
2) For years, your neighbor insisted she had no desire to own a computer. Recently, however, she
purchased one and says she did so because all her relatives have computers and she wants to
exchange e mail with them. Your neighbor s behavior is an example of
A) a switching cost. B) the impact of negative market feedback.
C) limited pricing behavior. D) a network effect.
3) For years, your parents claimed they had no desire to join a social web site. Recently, however,
they joined one and said they did so because all their relatives have joined the same site with
them. Your parents behavior is an example of
A) a switching cost. B) a network effect.
C) the impact of positive market feedback. D) the impact of negative market feedback.
4) A network effect arises whenever
A) firms in an oligopolistic industry engage in limit pricing.
B) firms in an oligopolistic industry engage in a zero sum game.
C) a consumer s willingness to purchase a good or service is influenced by how many others
also buy or have bought the item.
D) a producer s willingness to produce a good or service is influenced by how many other
firms also produce or have produced the item.
5) When there is a tendency for a particular product to come into favor with additional consumers
because other consumers have chosen to purchase the product,
A) negative market feedback occurs. B) positive market feedback occurs.
C) there is no dominant strategy. D) a price war must result.
6) When there is a tendency for a particular product to fall out favor with additional consumers
because other consumers have chosen not to purchase the product,
A) negative market feedback occurs. B) positive market feedback occurs.
C) the tit for tat strategy will begin. D) the network effect will increase.
7) Negative market feedback refers to a tendency for
A) one or two firms in an oligopolistic industry to respond to price decreases by initiating
efforts to engage in price leadership.
B) a particular product to fall out of favor with additional consumers because other
consumers have stopped purchasing the product.
C) the dominant firm in an oligopolistic industry to react to competing firms price increases
by decreasing the price of its own product.
D) price wars to break out in oligopolistic industries in which firms produce products
possessing characteristics that make them prone to network effects.
8) Positive market feedback refers to a tendency for
A) potential entrants to an oligopolistic industry to respond to entry deterrence strategies by
contemplating setting their prices above prices established by firms already in the
industry.
B) potential entrants to an oligopolistic industry to respond to entry deterrence strategies by
contemplating producing more output than the quantities produced by firms already in
the industry.
C) a particular product to come into favor with additional consumers because other
consumers have chosen to purchase the product.
D) price leaders to respond to an increase in market demand by increasing the prices of their
products.
9) A network effect exists whenever
A) a firm s willingness to produce a particular good or service is influenced by the costs of
inputs it must utilize in order to manufacture the item.
B) a consumer s willingness to purchase a particular good or service is influenced by how
many others also buy or have bought the item.
C) a firm s willingness to purchase a particular factor of production depends on the other
types of inputs it utilizes to manufacture an item.
D) a consumer s willingness to purchase a particular good or service is influenced by the
prices of other complementary or substitute items.
10) A situation where a consumer s willingness to use an item depends on how many others use it is
A) a positive sum game. B) a network effect.
C) price leadership. D) a vertical merger.
11) When network effects are important, then an industry can experience
A) positive market feedback. B) prince leadership.
C) a zero sum game. D) a vertical merger.
12) When a new product is introduced in the market, Lenny always wants to see how popular the
item becomes before he purchases it. Lenny s behavior is known as
A) overt collusion. B) limit pricing.
C) a network effect. D) price leadership.
13) When a falloff in usage of a product by some consumers causes others to stop purchasing the
item there is
A) price leadership. B) negative sum game.
C) positive market feedback. D) negative market feedback.
14) A tendency for a good to come into favor with consumers because other consumers have chosen
to buy the item is
A) price leadership. B) negative sum game.
C) positive market feedback. D) negative market feedback.
15)
J
ane purchases snickle dees only because her friends do. This is
A) price leadership. B) negative sum game.
C) positive market feedback. D) negative market feedback.
16) Stephanie listens to punk rock because her friends do. This is
A) a positive sum game. B) collusion.
C) positive market feedback. D) negative market feedback.
17) Sunil has decided not to purchase another can of Stosh because his friends laughed at him the
last time he purchased some. Stosh is no longer a popular item. Sunil s action is known as
A) price leadership. B) negative sum game.
C) positive market feedback. D) negative market feedback.
18) Because all of his friends stopped exclusively wearing black clothes, Doug wears anything but
black clothes. This is known as
A) a negative sum game. B) collusion.
C) positive market feedback. D) negative market feedback.
19) In an industry with network effects and differentiated products, it is possible for the industry to
become an oligopoly if
A) they engage in a zero sum game.
B) they use a price leadership model.
C) they use a kinked demand curve model.
D) a few firms reap most of the sales gains resulting from positive market feedback.
20) The idea that if enough consumers cut back on their use of a product it induces other consumers
to do the same is referred to as
A) positive market feedback. B) non dynamic market feedback.
C) negative market feedback. D) elicit market feedback.
21) People s willingness to buy the PC or Mac format of computer software depends on how
popular the software format is among other consumers. This is an example of
A) a cartel. B) an opportunity cost.
C) a network effect. D) the prisoners dilemma.
22) Which of the following is NOT subject to a network effect?
A) the layout of the keys on your keyboard
B) rotating your tires every six months
C) using a fax machine
D) purchasing a new high definition DVD player
23) An example of a positive market feedback is
A) the emergence of the iPod.
B) routine maintenance on a car.
C) the declining use of land line telephones for long distance calls.
D) the use of telegraph services in the twenty first century.
24) How can network effects lead an industry to become an oligopoly?
742 Miller Economics Today, 16th Edition
26.5 Product Compatibility in Multiproduct Oligopolies Facing Network Effects
1) Product compatibility is
A) the capability of a product sold by one firm to compete with another firm s product.
B) the capability of a product sold by one firm to function together with another firm s
complementary product.
C) the sensitivity of the price of one product is to the change of the price of another product.
D) how much one product can be substituted for another product.
2) Product compatibility applies to products of different firms that
A) are complementary. B) are substitutable.
C) have no network effects. D) none of the above
3) Beta videocassettes had the highest degree of product compatibility with
A) VHS videocassettes. B) audiocassettes.
C) videocassette players. D) CD players.
4) The situation in which firms choose incompatible product formats is called
A) the prisoners dilemma. B) a Tweedle Dee Tweedle Dum game.
C) Battle of the Sexes. D) a cartel.
5) A Tweedle Dee Tweedle Dum outcome occurs when
A) firms earn highest profits by adopting different product formats.
B) firms earn highest profits by adopting the same product format.
C) firms cheat after forming a cartel.
D) firms earn highest profits by cooperation.
