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Exam 14: Oligopoly

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Question 1

Multiple Choice

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In the classic prisoners' dilemma with two accomplices in crime, the Nash equilibrium is for:

A) neither to confess.
B) both to confess.
C) one to confess and the other not to confess.
D) This game does not have a Nash equilibrium.

E) All of the above
F) B) and C)

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Question 2

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Use the following to answer questions: -(Table: Demand for Crude Oil) Look at the table Demand for Crude Oil. Assume that the crude oil industry is a duopoly and the marginal and fixed cost of producing crude oil equals zero. Suppose that the two firms are maximizing industry profit and splitting the profit evenly. If firm 1 decides to cheat and increase production by 10 more barrels, it will earn profits of:

A) $6,400.
B) $6,300.
C) $3,500.
D) $2,800.

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

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Question 3

Multiple Choice

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Firms will choose a tit-for-tat strategy if they:

Both monopolists and cartel members will find that a drop in price leads to:

Use the following to answer questions: Scenario: Two Identical Firms Two identical firms make up an industry in which the market demand curve is represented by Q = 5,000 - 4P, where Q is the quantity demanded and P is price per unit. The marginal cost of producing the good in this industry is constant and equal to $650. Fixed cost is zero. -(Scenario: Two Identical Firms) When the firms in the scenario Two Identical Firms collude and produce the profit-maximizing output, what is the profit earned by each firm?

Use the following to answer questions: -(Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water Heaters. The marginal cost of producing solar water heaters is zero, and only two firms, Rheem and Calefi, produce them. If Rheem and Calefi get into a price war, the equilibrium price in the market will be:

Use the following to answer questions: -(Table: Demand for Crude Oil) Look at the table Demand for Crude Oil. Assume that the crude oil industry is a duopoly and the marginal cost and fixed cost of producing crude oil equal zero. Suppose that the two firms are maximizing industry profit and splitting the profit evenly. If both firms decide to cheat and produce 10 more barrels each, industry output will be _____ barrels.

Price leadership is an attempt by a firm to convince buyers that its product is different from the products of other firms in the industry.

A trust is a government agency that enforces laws limiting the power of oligopolies.

In an oligopoly:

Unwritten or unspoken understandings through which firms restrict competition are called:

The largest Herfindahl-Hirschman index possible is _____, and the industry is a(n) _____.

Use the following to answer questions: Figure: Monopoly Profits in Duopoly -(Figure: Monopoly Profits in Duopoly) The efficient solution in the figure Monopoly Profits in Duopoly is found where price is _____ and quantity is _____.

Each firm in a cartel has an incentive to break its word and produce more than the agreed quantity.

There are only two gas stations, Swifty Gas and Speedy Gas, in a small town. Each firm can set either a high price or a low price; customers view these two firms as nearly perfect substitutes. The table shows the payoff matrix. Profits in each cell of the payoff matrix are given as (Swifty, Speedy). If this game is played only once and each firm sets the price of gas independently, what is the Nash equilibrium? Is this game an example of a prisoners' dilemma? Explain your conclusions.

Given the large amount of interdependence among them, cooperation with one's competitors is the most profitable strategy for:

A formal agreement to limit production and raise prices leads to:

Use the following to answer questions: -(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. If these two producers formed a cartel, agreed to split production of output evenly, and acted to maximize total industry profits, total industry output would be _____ and the price would be _____.

An attempt by a firm to convince buyers that its product is different from the products of other firms in the industry is:

Use the following to answer questions: -(Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets at a marginal cost of $2 and no fixed cost. If the industry were perfectly competitive, the output would be _____ gadgets, and the price would be _____.