Deck 16: Game Theory and Oligopoly

Question 1

When modeling an oligopoly as a prisoners dilemma problem the optimal strategy

A)is for the firms to collude
B)does not exist
C)is for the firms to agree to collude and then one of them cheat
D)involves one for choosing first and the other one second

Answer 1

is for the firms to collude

Question 2

Suppose the market has two firms, and market demand is p = 200 - 4y. The cost functions for all firms are C(y_i)= 600 + 30y_i. The Cournot duopoly price is:

A)46.67.
B)86.67.
C)34.67.
D)92.67.

Answer 2

86.67.

Question 3

A residual demand function represents the demand for:

A)the next firm to enter a market.
B)the least profitable firm in a market.
C)the last firm to enter a market.
D)statistical errors.

Answer 3

the next firm to enter a market.

Question 4

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant. The output that maximizes the entrant's profit is:

A)20.
B)10.
C)30.
D)15.

Question 5

The duopoly market output is:

A)lower than both the monopoly output and the perfectly competitive output.
B)greater than both the monopoly output and the perfectly competitive output.
C)greater than the monopoly output but lower than the perfectly competitive output.
D)lower than the monopoly output but greater than the perfectly competitive output.

Question 6

If two firms that are Cournot competitors merge:

A)the consumers' surplus declines.
B)the industry output will increase.
C)the market price will decrease.
D)more jobs will be created.

Question 7

Market demand is given by P = 15 - Q. There are two firms, each with TC = 0.5q_i². If one firm honors the cartel agreement while the other firm defects, the total output produced by both firms is:

A)5.
B)9.
C)3.
D)7.

Question 8

In a Shopping Mall there are two tobacco stores. They each set a high price for their cigars, they each earn $50,000 a month. If they each set a low price, they each earn $25,000 a month. If one store sets a low price while the other sets a high price, the low- price store earns $70,000 while the
High- price store earns $10. Which of the following is a Nash equilibrium?

A)Both set a high price.
B)One firm sets a low price; the other high.
C)Both set a low price.
D)A mixed- strategy equilibrium.

Question 9

In the Cournot model:

A)firms choose quantities.
B)firms minimize costs.
C)firms produce what the government tells them to.
D)firms choose prices.

Question 10

An oligopolist:

A)has an incentive to compete moderately.
B)is closely watched by the competition authority.
C)has an incentive to produce too much output.
D)has an incentive collude and then cheat on a collusive agreement.

Question 11

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40 and no fixed costs. If the Cournot model of oligopoly accurately reflects firm behaviour in this industry, then the aggregate equilibrium output of n + 1 firms can be expressed as:

A)160(n + 1)/(n + 2).
B)20(n + 1).
C)60(n + 1)/(n + 2).
D)160n/(n + 1).

Question 12

The Cournot model is attractive for all of the following reasons except:

A)quantity per firm and price are constant for all markets with two or more firms.
B)it applies to all possible market structures.
C)quantity per firm increases and price decreases with the number of firms.
D)the monopoly and perfect competition models are special cases.

Question 13

The Cournot model of oligopoly is one in which competing firms:

A)independently choose prices to maximize individual profits.
B)collusively choose prices to maximize joint profits.
C)independently choose quantities to maximize individual profit.
D)collusively choose quantities to maximize joint profits.

Question 14

Two firms share a market with demand curve Q=90-0.5P. Each has cost function C(q)=900+q². Suppose that each firm maximizes its profit taking the other firm's production choice as given. What is the market price?

A)60
B)75
C)90
D)45

Question 15

A particular market is served by two firms. The market demand curve is given by p = 200 - y. Each firm incurs a constant cost per unit of $50. The Cournot MR function for firm 1 is given by:

A)200 - 2y₁.
B)(200y₁ - y₂)/y₁ - 1.
C)200 - 2y₁ - y₂.
D)200 - y₁ - y₂.

Question 16

The difference between Bertrand and Cournot models is that:

A)quantity per firm increases and price decreases with the number of firms.
B)they apply to all possible market structures.
C)the monopoly and perfect competition models are special cases.
D)quantity per firm and price are constant for all markets with two or more firms.

Question 17

If the LAC curve of a potential entrant into an imperfectly competitive industry lies everywhere above the residual demand curve, the current level of industry output necessarily:

A)maximizes industry profit.
B)falls short of the limit output.
C)is equal to the limit output.
D)exceeds the limit output.

Question 18

Suppose the market has two firms, and market demand is p = 200 - 4y. The cost functions for all firms are C(y_i)= 600 + 30y_i. The profit for each firm if they collude is:

A)303.125.
B)103.125.
C)403.125.
D)203.125.

Question 19

The limit price may be defined as:

A)the price that consumers are willing to pay for the monopolist's profit- maximizing output.
B)the price at the tangency between a potential entrant's LAC curve and the market demand curve.
C)the maximum price permitted by law.
D)the highest price existing firms can charge to deter entry.

Question 20

The level of output per firm under Bertrand and Cournot equilibriums are:

A)often the same.
B)seldom the same.
C)always the same.
D)never the same.

Question 21

Experimental evidence indicates that:

A)the Cournot model best explains oligopolists' behaviour.
B)the Bertrand model best explains oligopolists' behaviour.
C)there is no one best explanation of oligopolists' behaviour.
D)the Collusion model best explains oligopolists' behaviour.

Question 22

In a Bertrand equilibrium, each firm earns:

A)positive or zero economic profit.
B)zero economic profit.
C)positive economic profit.
D)negative economic profit.

Question 23

When modeling an oligopoly as a prisoners dilemma problem the Nash equilibrium

A)involves one for choosing first and the other one second
B)is for the firms to collude
C)is for the firms to agree to collude and then both of them cheat
D)does not exist

Question 24

Two firms share a market with demand curve Q=90-0.5P. Each has cost function C(q)=900+q². Suppose that each firm maximizes its profit taking the other firm's production choice as given. What is the profit of each firm?

A)618.75
B)675.50
C)600
D)900

Question 25

The level of output per firm under Nash and Cournot equilibriums are:

A)never the same.
B)often the same.
C)always the same.
D)seldom the same.

Question 26

Market demand is given by P = 15 - Q. There are two firms, each with TC = 0.5q_i². If one firm honors the cartel agreement while the other firm defects, the output produced by the defecting firm is:

A)2.
B)4.
C)8.
D)12.

Question 27

In the general version of the Cournot model, the Nash equilibrium

A)is Pareto optimal
B)produces too little output to maximize profits
C)maximizes the profits of the first mover
D)fails to maximize joint profits

Question 28

If two firms are in Bertrand competition they:

A)compete in quantities.
B)minimize cost.
C)do not maximize profit.
D)compete in prices.

Question 29

Suppose that a particular market is served by two firms. The market demand curve is given by p = 100 - y. Each firm incurs a constant cost per unit of $20. The Bertrand solution to this duopoly problem is:

A)p ^* = p ^* = 70.
B)p ^* = p ^* = 50.
C)p ^* = p ^* = 20.
D)p ^* = p ^* = 40. 1 2 1 2 1 2 1 2

Question 30

Imperfectly competitive firms may allocate resources inefficiently because they produce at a level of output where:

A)average total cost is at its lowest point.
B)price equals marginal cost.
C)marginal revenue is greater than marginal cost.
D)price is greater than marginal cost.

Question 31

Two firms share a market with demand curve Q=90-0.5P. Each has cost function C(q)=900+q². Suppose that each firm maximizes its profit taking the other firm's production choice as given. What is the quantity supplied in the market?

A)60
B)90
C)45
D)75

Question 32

Given an oligopolistic industry characterized by a collusive agreement and constant unit costs of production, which of the following statements is true?

A)As the number of firms expands, the incentive to cheat on the collusive agreement increases.
B)As the number of firms falls, aggregate output falls and aggregate profit rises.
C)As the aggregate output rises, aggregate profit does not change.
D)As the number of firms expands, aggregate output rises and aggregate profit falls.

Question 33

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant with a fixed cost of $100. The limit output is:

A)40.
B)35.
C)30.
D)25.

Question 34

Market demand is given by P = 15 - Q. There are two firms, each with TC = 0.5q_i². If the firms form a cartel the profits for a firm is:

A)20.5.
B)24.5.
C)22.5.
D)26.5.

Question 35

A best response function:

A)is a strategy that provides the most profit given the strategy of the other firm.
B)is a strategy that provides the most profit given the profit of the other firm.
C)is a strategy that punishes other firms for not cooperating.
D)is a strategy that always provides the most profit to a firm.

Question 36

The collusive solution is:

A)collectively irrational because each firm could produce more output in the Cournot solution.
B)individually irrational because each firm earns less than it could in the Cournot solution.
C)individually irrational because each firm has a private profit incentive to produce more output.
D)collectively irrational because joint profit incentives render the collusive solution unstable.

Question 37

A supergame is :

A)a game played by superfirms.
B)a one- shot game.
C)a game providing a lot of excitement to the participants.
D)a game played an infinite number of times.

Question 38

An important weakness of the Bertrand, Collusion, and Cournot models is that they assume the game is:

A)played repeatedly.
B)fair.
C)supervised by government.
D)played once only.

Question 39

In a prisoner's dilemma game:

A)the outcome most preferred by one player is also preferred by the other player.
B)the outcome that makes sense collectively is also most preferred by the players.
C)the outcome that makes sense collectively can be achieved if each player makes a self- interested decision.
D)the outcome most preferred by one player cannot be preferred by the other player.

Question 40

A Bertrand model of oligopoly is one in which competing firms:

A)collusively choose price in order to maximize individual profits.
B)take a rival's output as given and subsequently choose a price that maximizes individual profits.
C)independently choose quantity in order to maximize individual profits.
D)independently choose prices in order to maximize individual profits.

Question 41

Which of the duopoly models to the parties not choose simultaneously?

A)Cournot
B)Nash
C)Bertrand
D)Stackleberg

Question 42

The merger of two firms producing goods that are complements:

A)is usually not encouraged by the competition authority.
B)the quantity produced by each firm will go down.
C)the consumer's surplus decreases.
D)each firm's profit will rise.

Question 43

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant. The monopoly output is:

A)50.
B)30.
C)40.
D)60.

Question 44

Which of the following statements is not true of oligopoly markets?

A)Significant economies of scale often exist in such industries.
B)Firms seek to avoid price competition.
C)Firms often compete through the use of advertising campaigns.
D)Firms act independently and are not worried about the actions of their competitors.

Question 45

In a Cournot model, the incentive to cheat on a collusive arrangement:

A)decreases with the number of firms.
B)is independent of the number of firms.
C)is prohibited by law.
D)increases with the number of firms.

Question 46

A self enforcing agreement is:

A)one that only requires the courts to enforce.
B)one that only exists where the parties mutually agree to the deal.
C)one that only requires the presence of a notary public.
D)one that is a Nash equilibrium.

Question 47

A particular market is served by two firms. The market demand curve is given by p = 200 - y. Each firm incurs a constant cost per unit of $50. The Cournot profit function for firm 1 in this market is given by:

A)200y₁ - y ² - 40y₁.
B)150y₁ - y_1y2 - y ² . 1 1
C)150y₁ - y₂ - y ² .
D)200y₁ - y₁y₂ - y ² . 1 1

Question 48

When modeling an oligopoly as a prisoners dilemma problem an agreement is a Nash equilibrium if

A)if it allows at least one party to cheat
B)if it is not a illegal
C)it is self enforcing
D)both parties are allowed to cheat

Question 49

The generalized no- entry condition is that potential entrants will enter as long as the inducement to entry is:

A)less than fixed cost squared.
B)greater than fixed cost squared.
C)greater than fixed cost.
D)less than fixed cost.

Question 50

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant. The residual demand is given by:

A)y = 70 - 2p.
B)y = 70 - p.
C)y = 60 - p.
D)y = 60 - 2p.

Question 51

Given an infinitely repeated duopoly game, a particular punishment strategy, imposed when a collusive agreement is breached, is more likely to be successful:

A)the lower the rate of interest.
B)the lower the gain from cheating.
C)the less severe the punishment.
D)the more difficult it is to detect cheating.

Question 52

An iso- profit curve shows all of the values of firm ones output that produce the same level of profit as a function of

A)the other firm's output
B)input prices
C)the other firm's price
D)output prices

Question 53

Given an infinitely repeated, collusive oligopoly game, all but which of the following criteria should be met when devising a successful punishment strategy to be used in the event of another player's defection?

A)credible threats of punishment
B)negative pay- offs in the non- cooperative equilibrium
C)rapid detection of cheating by a rival
D)severe penalties imposed for cheating

Question 54

Suppose the market has two firms, and market demand is p = 200 - 4y. The cost functions for all firms are C(y_i)= 600 + 30y_i. The limit output for this market is:

A)18.
B)30.
C)22.
D)26.

Question 55

The inducement to entry is:

A)the excess of revenue over fixed cost.
B)the excess of revenue over marginal cost.
C)the excess of revenue over total cost.
D)the excess of revenue over variable cost.

Question 56

Suppose the market has two firms, and market demand is p = 200 - 4y. The cost functions for all firms are C(y_i)= 600 + 30y_i. The Cournot duopoly profit for each firm is:

A)152.79.
B)72.79.
C)102.79.
D)202.79.

Question 57

In a Shopping Mall there are two tobacco stores. They each set a high price for their cigars, they each earn $50,000 a month. If they each set a low price, they each earn $25,000 a month. If one store sets a low price while the other sets a high price, the low- price store earns $70,000 while the high- price store earns $10. In this game:

A)there is no Nash equilibrium.
B)there are two Nash equilibria.
C)there is only one Nash equilibrium.
D)any combination is a Nash equilibrium.

Question 58

A particular market is served by two firms. The market demand curve is given by p = 200 - y. Each firm incurs a constant cost per unit of $50. The Cournot reaction function for firm 1 is given by:

A)p ^* = (200 - y ^* )- y₁.
B)y ^* = 75 - y ^* /2. 1 2 1 2
C)y ^* = 30 - y ^* /2.
D)p ^* = 150 - y ^* /2. 1 2 1 2

Question 59

As the number of firms in a Cournot industry increases:

A)the level of output falls.
B)the price of output approaches the competitive level.
C)the firms' incentive to collude increases.
D)the price of output gets higher.

Question 60

A particular market is served by two firms. The market demand curve is given by p = 200 - y. Each firm incurs a constant cost per unit of $50. The Cournot equilibrium solution is:

A)p ^* = p ^* = 70.
B)y ^* = y ^* = 20.
C)y ^* = y ^* = 50.
D)p ^* = p ^* = 50. 1 2 1 2 1 2 1 2

Question 61

The level of output per firm under Nash and Bertrand equilibriums are:

A)often the same.
B)seldom the same.
C)never the same.
D)always the same.

Question 62

An industry's market structure is determined in part by:

A)the aggressiveness of the firms.
B)demand conditions.
C)the magnitude of barriers to entry.
D)the magnitude of set- up costs.

Question 63

True/False. Cournot duopolists necessarily produce the same quantity in equilibrium.

Question 64

The Limit- Output model depends on all of the following except:

A)a natural monopoly.
B)a natural barrier to entry.
C)the entrant's residual demand.
D)the Sylos postulate.

Question 65

Two firms share a market with demand curve Q=90-0.5P. Each has cost function C(q)=900+q². Suppose that each firm maximizes its profit taking the other firm's production choice as given. Suppose that firm 2 produces 20 units of output. How much should firm 1 produce in order to maximize profits, given that q₂= 20?

A)45/3
B)23/3
C)23/2
D)45/2

Question 66

Existing firms may seek to inhibit potential entrants by:

A)reacting before entry and positioning after.
B)reducing fixed costs.
C)positioning before entry and reacting after.
D)adopting the Cheerios defense.

Question 67

Market demand is given by P = 15 - Q. There are two firms, each with TC = 0.5q_i². If one firm honors the cartel agreement while the other firm defects, the market price is:

A)16.
B)8.
C)12.
D)10.

Question 68

A penalty shot in soccer ( football in most of the world)requires that the keeper remain stationary until the shot is made. During a penalty shot in hockey, the goalie is permitted to move as soon as the offensive player touches the puck. Explain how this could be modeled using economic duopoly models and predict which penalty shot results in more goals.

Question 69

Given constant unit costs of production, which of the following solutions to the duopoly problem generates the greatest benefits to consumers?

A)Collusive equilibrium
B)Nash equilibrium in quantities
C)Cournot equilibrium
D)Bertrand equilibrium

Question 70

Under a Cournot equilibrium, each firm will produce:

A)the same output as a monopolist.
B)as much output as possible.
C)as little output as possible.
D)the same output as each other firm.

Question 71

A particular market is served by three firms. The market demand curve is given by p = 200 - y. Each firm incurs a constant cost per unit of $40. Firm 3's Cournot reaction function is given by:

A)y ^* = (160 - y₁ - y₃)/2.
B)p ^* = 130 - (p₂ + p₃)/2. 3 3
C)y ^* = (160 - y₁ - y₂)/2.
D)y ^* = 200 - p₃ - y₂ - y₁. 3 3

Question 72

Two firms in a collusive duopoly that have an identical and constant MC will each produce:

A)one- half of the competitive output.
B)the competitive output.
C)the monopoly output.
D)one- half of the monopoly output.

Question 73

Oligopolists have clear incentives to:

A)merge with their competitors.
B)collude and cheat on collusive agreements.
C)collude.
D)cheat on collusive agreements.

Question 74

In a Cournot oligopoly, each firm:

A)maximizes profit subject to its competitor's output.
B)is caught in a prisoner's dilemma.
C)maximizes profit without regard to its competitors.
D)maximizes profit subject to its competitor's price.

Question 75

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant. The inducement to entry is:

A)225.
B)275.
C)250.
D)200.

Question 76

When all firms in the industry charge the same price, this is evidence of collusion. Explain.

Question 77

Suppose the market has two firms, and market demand is p = 200 - 4y. The cost functions for all firms are C(y_i)= 600 + 30y_i. The equilibrium number of firms this market can support under Cournot is:

A)2.
B)5.
C)3.
D)4.

Question 78

In a repeated game with a credible punishment a collusive equilibrium may revert to a Cournot equilibrium if

A)marginal costs increase
B)interest rates rise
C)output prices decrease
D)taxes increase

Question 79

The best collusive outcome occurs when the sum of the firms' output is:

A)a Nash equilibrium.
B)equal to the competitive outcome.
C)equally divided among the firms.
D)equal to the monopoly outcome.

Question 80

Market demand is given by P = 15 - Q. There are two firms, each with TC = 0.5q_i². If one firm honors the cartel agreement while the other firm defects, the profits to the defecting firm are:

A)20..
B)26.
C)22.
D)24.