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CHAPTER 14
1.1 (a), (c), and (d) are probably oligopolies dominated by a few firms: (b) and (e) are not oligopolies
1.2 The most obvious reason that brand-name pharmaceutical manufacturers would want to enter into
such agreements is to limit competition. By entering into these agreements with generic
manufacturers, the brand-name manufacturers keep a tighter control on the available substitutes
1.3 Coal mining and wind farms: not contestable. Both require large investments of land and capital
2.1 (a, b)
2.2 Answers to this problem will vary, based on the particular lawsuit chosen by the student.
303
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Solutions to Problems 304
Digital music: In 2008, a case filed against record companies alleging conspiracy to inflate the
Eggs: In 2008, a group of restaurants and food processing companies filed suit claiming that egg
producers conspired to fix egg prices by reducing production. In the spring of 2010, defendant
2.3 You should agree with this statement. Collusion occurs when price- and quantity-fixing
2.4 The Cournot model is a model of a two-firm industry (duopoly) in which both firms produce
2.5 Answers will vary because the policies of the other carriers are constantly changing. From 2011
3.1 Both A and B’s potential losses are minimized by cheating. To minimize the maximum loss, A
3.2 (a) Both have dominant strategies in Game 1—charge the low price. Neither has a dominant
strategy in Game 2.
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Leona
Confess
Confess
Do not confess
Bernie: free
Bernie: 10 yrs
Solutions to Problems 305
3.3 Both firms are making profits on their current customers. With a per-unit profit of $15 ($20 − $5),
3.4 (a)
(b) The dominant strategy for both Bernie and Leona is to confess. If Bernie confesses, either he
goes free (if Leona does not confess) or he is sentenced to 10 years (if Leona also confesses).
If Bernie does not confess he will be sentenced to either 2 years (if Leona also does not
(c) If each confesses, they will each receive a 10-year prison sentence.
4.1 (a)Disagree. Although increasing output would create value that exceeds the social cost of the
(b) Disagree, With the exception of contestable markets, barriers to entry prevent new capital and
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Solutions to Problems 306
5.1 (a) The four-firm concentration ratio is 15 + 12 + 20 + 19 = 66.
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