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Exam 17: Oligopoly

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Question 1

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To increase their individual profits,members of a cartel have an incentive to

A) charge a higher price than the other members of the cartel.
B) increase production above the level agreed upon.
C) ignore the choices made by the other firms and act as a monopolist.
D) charge the same price a monopolist would charge.

E) A) and B)
F) A) and C)

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Question 2

Multiple Choice

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If nations such as Germany,Japan,and the United States prohibited international trade in automobiles,a likely effect would be that

A) the price effect would become a more significant consideration for each firm that makes automobiles.
B) the excess of price over marginal cost would become less pronounced in the automobile market.
C) all countries would become better off.
D) automobile producers in the U.S.would collude to produce a large number of cars.

E) B) and C)
F) A) and D)

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Question 3

Multiple Choice

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In a two-person repeated game,a tit-for-tat strategy starts with

If all of the firms in an oligopoly successfully collude and form a cartel,then total profit for the cartel is equal to what it would be if the market were a monopoly.

Which of the following statements is false?

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. -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?

The essence of an oligopolistic market is that there are only a few sellers.

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. -Refer to Table 17-22.Which of the following statements is correct?

We know that people tend to overuse common resources.This problem can be viewed as an example of

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) . -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 cooperative agreement among oligopolists is less likely to be maintained,

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. -Refer to Table 17-23.At the Nash equilibrium,how much profit will Firm B earn?

In the prisoners' dilemma game,self-interest leads

Assume oligopoly firms are profit maximizers,they do not form a cartel,and they take other firms' production levels as given.Then in equilibrium the output effect

Table 17-13 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share.Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base.The following game depicts the strategic outcomes that result from the game.Increases in annual profits of the two home-improvement stores are shown in the table below. -Refer to Table 17-13.Pursuing its own best interest,HomeMax will

All cartels are inherently reliant on

Table 17-2 Suppose that two firms determine that each could lower its costs and increase its profits if both 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 cost savings will outweigh the lost sales.The table below lists each firm's individual profits: Firm A Breaks agreement Maintains agreement and advertises and does not advertise -Refer to Table 17-2.Which of the following statements does not correctly characterize the outcome of this game?

Although the practice of predatory pricing is a common claim in antitrust suits,some economists are skeptical of this argument because they believe

When all firms choose their best strategy given the strategies that all the other firms have chosen,the result is a Nash equilibrium.

Table 17-11 Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare related expenses associated with cigarette smoking.Both cigarette firms have evidence that indicates that cigarette smoke causes lung cancer (and other related illnesses) .State prosecutors do not have access to the same data used by cigarette manufacturers and thus will have difficulty recovering full costs without the help of at least one cigarette firm study.Each firm has been presented with an opportunity to lower its liability in the suit if it cooperates with attorneys representing the states. -Refer to Table 17-11.Pursuing its own best interests,Firm A will concede that cigarette smoke causes lung cancer