Ch17_Oligopolies.pdf

Oligopolies 1. In general, game theory is the study of a. how people behave in strategic situations. b. how people behave when the possible actions of other people are irrelevant. c. oligopolistic markets. d. all types of markets, including competitive markets, monopolistic markets, and oligopolistic markets. 2. Game theory is important for understanding which of the following market types? a. perfectly competitive and oligopolistic markets b. perfectly competitive markets but not oligopolistic markets c. oligoplistic but not perfectly competitive markets d. neither oligopolistic nor perfectly competitive markets. 3. In studying oligopolistic markets, economists assume that a. there is no conflict or tension between cooperation and self-interest. b. it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly outcome. c. each oligopolist cares only about its own profit. d. strategic decisions do not play a role in such markets. 4. The simplest type of oligopoly is a. monopoly. b. duopoly. c. monopolistic competition. d. oligopolistic competition. 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. Lopes Increase the size of store and parking lot Do not increase the size of store and parking lot HomeMax Increase the size of store and parking lot Lopes = $1.0 million HomeMax = $1.5 million Lopes = $0.4 million HomeMax = $3.4 million Do not increase the size of store and parking lot Lopes = $3.2 million HomeMax = $0.6 million Lopes = $2.00 million HomeMax = $2.5 million 5. Refer to Table 17-13. Pursuing its own best interest, Lopes will a. increase the size of its store and parking lot only if HomeMax also increases the size of its store and parking lot. b. increase the size of its store and parking lot only if HomeMax does not increase the size of its store and parking lot. c. increase the size of its store and parking lot regardless of the decision made by HomeMax. d. not increase the size of its store and parking lot regardless of the decision made by HomeMax. 6. Refer to Table 17-13. Pursuing its own best interest, HomeMax will a. increase the size of its store and parking lot only if Lopes also increases the size of its store and parking lot. b. increase the size of its store and parking lot only if Lopes does not increase the size of its store and parking lot. c. increase the size of its store and parking lot regardless of the decision made by Lopes. d. not increase the size of its store and parking lot regardless of the decision made by Lopes. 7. Refer to Table 17-13. Increasing the size of its store and parking lot is a dominant strategy for a. Lopes, but not for HomeMax. b. HomeMax, but not for Lopes. c. both stores. d. neither store. 8. Refer to Table 17-13. If both stores follow a dominant strategy, HomeMax's annual profit will grow by a. $0.6 million. b. $1.5 million. c. $2.5 million. d. $3.4 million. 9. Refer to Table 17-13. If both stores follow a dominant strategy, Lopes's annual profit will grow by a. $0.4 million. b. $1.0 million. c. $2.0 million. d. $3.2 million. 10. Refer to Table 17-13. When this game reaches a Nash equilibrium, annual profit will grow by a. $1.5 million for HomeMax and by $1.0 million for Lopes. b. $3.4 million for HomeMax and by $0.4 million for Lopes. c. $0.6 million for HomeMax and by $3.2 million for Lopes. d. $2.5 million for HomeMax and by $2.0 million for Lopes. 11. Refer to Table 17-13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. They should both agree to a. increase their store and parking lot sizes. b. refrain from increasing their store and parking lot sizes. c. be more competitive in capturing market share. d. share the context of their conversation with the Federal Trade Commission. 12. Refer to Table 17-13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. If they both agree to cooperate on a strategy that maximizes their joint profits, annual profit will grow by a. $1.0 million for Lopes and by $1.5 million for HomeMax. b. $0.4 million for Lopes and by $3.4 million for HomeMax. c. $3.2 million for Lopes and by $0.6 million for HomeMax. d. $2.0 million for Lopes and by $2.5 million for HomeMax. Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. ABC's profit = $3 million ABC's profit = $2.5 million ABC's profit = $4 million ABC's profit = $3.5 million XYZ's profit = $3 million XYZ's profit = $4 million XYZ's profit = $2.5 million XYZ's profit = $3.5 million High output Low output High output Low output ABC's Decision XYZ's Decision 13.Refer to Figure 17-1. The dominant strategy for ABC is to a. produce high output, and the dominant strategy for XYZ is to produce high output. b. produce high output, and the dominant strategy for XYZ is to produce low output. c. produce low output, and the dominant strategy for XYZ is to produce high output. d. produce low output, and the dominant strategy for XYZ is to produce low output. 14.Refer to Figure 17-1. Which of the following statements is correct? a. ABC can potentially earn its highest possible profit if it produces a high level of output, and for that reason it is a dominant strategy for ABC to produce a high level of output. b. The highest possible combined profit for the two firms occurs when both produce a low level of output, and for that reason producing a low level of output is a dominant strategy for both firms. c. Regardless of the strategy pursued by ABC, XYZ?s best strategy is to produce a high level of output, and for that reason producing a high level of output is a dominant strategy for XYZ. d. Our knowledge of game theory suggests that the most likely outcome of the game, if it is played only once, is for one firm to produce a low level of output and for the other firm to produce a high level of output. 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. 15.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. 16.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. 17.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. 18.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. 19.Refer to Scenario 17-4. In 1971, Congress passed a law that banned cigarette advertising on television. If cigarette 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. 20.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 following: "If you confess to dealing drugs and testify against your partner, you will be given immunity and released 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 Table 17-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Quantity (in gallons) Price Total Revenue (and Total Profit) 0 $60 $0 100 55 5,500 200 50 10,000 300 45 13,500 400 40 16,000 500 35 17,500 600 30 18,000 700 25 17,500 800 20 16,000 900 15 13,500 1,000 10 10,000 1,100 5 5,500 1,200 0 0 21.Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, what price will they charge? a. $25 b. $30 c. $35 d. $40 22.Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, how many gallons of water will be produced and sold? a. 0 b. 500 c. 600 d. 1,200 23.Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, how much profit will each of them earn? a. $8,750 b. $9,000 c. $12,000 d. $18,000 24.Refer to Table 17-1. If the market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? a. 0 b. 600 c. 900 d. 1,200 25.Refer to Table 17-1. What is the socially efficient quantity of water? a. 0 gallons b. 600 gallons c. 900 gallons d. 1,200 gallons 26.Refer to Table 17-1. If this market for water were perfectly competitive instead of monopolistic, what price would be charged? a. $0 b. $30 c. $40 d. $60 27.Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from operating as a monopoly. What will be the price of water once Rochelle and Alec reach a Nash equilibrium? a. $15 b. $20 c. $25 d. $30 28.Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec from operating as a monopoly. How many gallons of water will be produced and sold once Rochelle and Alec reach a Nash equilibrium? a. 600 b. 700 c. 800 d. 900 1. ANS: A PTS: 1 DIF: 2 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Definitional 2. ANS: C PTS: 1 DIF: 1 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Definitional 3.ANS:C PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Cooperation MSC: Interpretive 4. ANS: B PTS: 1 DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive 5. ANS: C PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Applicative 6. ANS: C PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Applicative 7. ANS: C PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Applicative 8. ANS: B PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy MSC: Applicative 9. ANS: B PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy MSC: Applicative 10. ANS: A PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Applicative 11. ANS: B PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Applicative 12. ANS: D PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Applicative 13. ANS: A PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy MSC: Applicative 14 ANS: C PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy MSC: Applicative 15 ANS: B PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative 16. ANS: B PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative 17. ANS: A PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative 18. ANS: D PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Applicative 19. ANS: A PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative 20. ANS: A PTS: 1 DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Applicative 21. ANS: B PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Monopoly MSC: Applicative 22. ANS:C PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Monopoly MSC: Applicative 23. ANS: B PTS: 1 DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Monopoly MSC: Applicative 24. ANS: D PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Competitive markets MSC: Applicative 25. ANS: D PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Competitive markets MSC: Applicative 26.ANS:A PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Competitive markets MSC: Applicative 27. ANS: B PTS: 1 DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Analytical 28. ANS: C PTS: 1 DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Analytical