Deck 15: Oligopoly and Game Theory

Question 1

Which of the following makes a cartel short-lived?

A) stable market demand
B) few firms in the cartel
C) cheating
D) contracting

Answer 1

C

Question 2

In a competitive market, each firm earns ________ economic profits, whereas firms in a successful cartel will earn ________.

A) positive; zero economic profits
B) negative; positive economic profits
C) positive; monopoly profits
D) zero; positive economic profits

Answer 2

D

Question 3

OPEC is a ________ that has been able to maintain high oil prices for ________ periods of time.

A) cartel; long
B) monopoly; long
C) cartel; not very long
D) monopoly; not very long

Answer 3

C

Question 4

Figure: Competitive Market Reference: Ref 15-1 (Figure: Competitive Market) Refer to the figure. If all firms in the market form a successful cartel, price and output in the market would be:

A) P1 and Q1.
B) P1 and Q2.
C) P2 and Q1.
D) P2 and Q2.

Question 5

A group of suppliers who tries to act as if they are a monopoly is called a(n):

A) network.
B) oligopoly.
C) cartel.
D) dominant strategy.

Question 6

Which of the following statements is TRUE? I. A cartel is a single firm with competitive market power. II. A cartel is a group of firms that practice price discrimination in competitive markets. III. A cartel is a group of firms that attempt to reduce market output. IV. A cartel acts as if it were a monopolist in that market.

A) I only
B) II, III, and IV only
C) II only
D) III and IV only

Question 7

Reference: Ref 15-1 (Figure: Competitive Market) Refer to the figure. If the market is competitive, price and output in the market would be:

A) P1 and Q1.
B) P1 and Q2.
C) P2 and Q1.
D) P2 and Q2.

Question 8

Which of the following industries would find it easier to establish a cartel?

A) automobile manufacturing
B) retail clothing
C) agricultural products
D) book publishing

Question 9

When producers engage in cartel-like behavior, they attempt to mimic the behavior of:

A) a competitive firm.
B) a small firm in a competitive industry.
C) a monopoly.
D) buyers.

Question 10

Cartels are not always successful because:

A) their members have profit incentives to cheat on the agreement.
B) nowhere in the world are cartel agreements considered legal.
C) cartels face a lot of competition from monopolies.
D) All of the answers are correct.

Question 11

Which of the following statements is TRUE?

A) Cartels generally persist and are quite common.
B) Few cartels move an industry from competition to pure monopoly.
C) Cartels work better when there are more firms involved.
D) Cartels persist because the cartel members enforce their agreements.

Question 12

A cartel is a group of suppliers who act together in order to:

A) increase demand, raise prices, and increase profits.
B) increase supply, reduce prices, and increase profits.
C) increase demand, reduce prices, and increase profits.
D) reduce supply, increase prices, and increase profits.

Question 13

If anything, a cartel is likely to ________ and ________ power over time.

A) strengthen; gain
B) collapse; lose
C) go bankrupt; then reorganize under bankruptcy law and gain
D) operate in competitive markets; price discriminate to gain

Question 14

Game theory is the study of:

A) random decision making.
B) strategic decision making.
C) cartel decision making.
D) decision making allowing for irrational behavior.

Question 15

Which of the following is NOT a reason why cartels collapse?

A) cheating by the cartel members
B) new entrants and demand response
C) government prosecution
D) increasing production costs

Question 16

OPEC is a(n) ________ of oil exporting countries.

A) cartel
B) group
C) monopoly
D) oligopoly

Question 17

OPEC stands for:

A) the Organization of Petroleum, Energy and Consumption.
B) the Organization of Petroleum Exporting Countries.
C) the Outcome of Petroleum Energy Cooperation.
D) the Organization of Petroleum and Energy Corporation.

Question 18

A cartel is characterized by firms that act together in order to: I. increase competition. II. raise prices. III. raise profit.

A) I only
B) I and II only
C) III only
D) II and III only

Question 19

Game theory studies:

A) the choices made by agents when other agents engage in certain actions.
B) interactive decision making.
C) strategic reactions by firms.
D) All of the answers are correct.

Question 20

A(n) ________ is a group of suppliers who try to act together to reduce supply.

A) monopoly
B) retailer
C) oligopoly
D) cartel

Question 21

Table: Market for Oil Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total 100 MBD. The world price of oil at this quantity is $36 per barrel so each country earns $360 million a day. Reference: Ref 15-2 (Table: Market for Oil) Refer to the table. Suppose that these countries form a cartel and each country produces 8 MBD. If one of the cartel members cheats by secretly pushing its production back to 10 MBD rather than 8, total revenue for the cheating country would:

A) increase from $360 million to $500 million a day.
B) increase from $400 million to $475 million a day.
C) decrease from $380 million to $360 million a day.
D) remain unchanged at $400 million a day.

Question 22

Which of the following describes how cartel members cheat?

A) They use inferior inputs in production to save money.
B) They steal production technologies from other firms.
C) They produce more output than they promised.
D) They fail to declare profits earned in foreign countries to avoid paying taxes.

Question 23

Which of the following statements is TRUE?

A) When a cartel cheater increases quantity beyond the profit- maximizing quantity of a monopoly the cheater benefits other cartel members.
B) When a cartel cheater increases quantity beyond the profit- maximizing quantity of a monopoly the cheater benefits itself and other cartel members.
C) When a cartel cheater increases quantity beyond the profit- maximizing quantity of a monopoly the cheater hurts itself.
D) When a cartel cheater increases quantity beyond the profit- maximizing quantity of a monopoly the cheater hurts other cartel members.

Question 24

Cartels do not last because their members find them difficult to maintain since:

A) each of the member firms can attain lower costs outside the cartel.
B) each firm in the cartel can gain from secret price cuts.
C) all the firms prefer an expansion in industry supply.
D) all the firms face less elastic demand curves when outside the cartel.

Question 25

Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Suppose that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What would Country B's reaction be?

A) lower its own quantity to 200 units
B) increase its own quantity to 1,600 units
C) increase the market price to $60
D) increase its own quantity to 600 units

Question 26

Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the resultant profit earned by Country A?

A) 70,000
B) 6,000
C) 24,000
D) 30,000

Question 27

Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Suppose that the three countries have a cartel agreement where they attempt to mimic monopoly behavior. If each country has the incentive to cheat, and does cheat, what will the final market outcome be?

A) The market quantity will be 1,600 and the market price will be 40.
B) The market quantity will be 1,200 and the market price will be 60.
C) The market quantity will be 1,400 and the market price will be 50.
D) The market quantity will be 1,800 and the market price will be 30.

Question 28

Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the new quantity sold by Country A?

A) 900
B) 400
C) 1,400
D) 600

Question 29

Table: Market for Oil Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total 100 MBD. The world price of oil at this quantity is $36 per barrel so each country earns $360 million a day. Reference: Ref 15-2 (Table: Market for Oil) Refer to the table. Suppose that these countries form a cartel and each country produces 8 MBD. If one of the cartel members cheats by secretly pushing its production back to 10 MBD rather than 8, total revenue for the non-cheating countries would:

A) decrease from $400 million to $380 million a day.
B) decrease from $360 million to $288 million a day.
C) increase from $400 million to $500 million a day.
D) remain unchanged at $380 million a day.

Question 30

A firm receives the largest profit from cheating on a cartel agreement when:

A) all members of the cartel cheat.
B) none of the other cartel members cheats.
C) all cartel members expand output.
D) its demand curve is more inelastic than other cartel members.

Question 31

The more successful a cartel is in raising the profits of the firms in the cartel, the:

A) less likely there will be cheating.
B) more likely there will be cheating.
C) more competitive the cartel.
D) more likely there will be a price war.

Question 32

Compared to a competitive market, firms operating in a cartel will charge a price that is:

A) higher than the competitive price.
B) lower than the competitive price.
C) equal to their marginal cost of production.
D) equal to their average cost of production.

Question 33

Suppose that an industry consists of a two-firm cartel: Firm A and Firm B. Each firm agrees to produce and sell only 100 units of output per week. This level of output maximizes total industry profit. Which of the following is true?

A) Firm B could increase its profits by producing and selling only 90 units of output per week.
B) Both firms could increase their profit by lowering their price and expanding output.
C) Firm A could increase its profit by producing and selling a little more than 100 units of output.
D) Firm B could increase Firm A's profits by producing and selling 10 percent more output.

Question 34

Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the new market price when Country A cheats on the agreement?

A) 60
B) 50
C) 20
D) 40

Question 35

Table: Market for Oil Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total 100 MBD. The world price of oil at this quantity is $36 per barrel so each country earns $360 million a day. Reference: Ref 15-2 (Table: Market for Oil) Refer to the table. Suppose that these countries form a cartel and each country produces 8 MBD. If 9 of the cartel members cheat and produce 10 MBD while one country keeps its promise and maintains production at 8 MBD each cheater would earn revenue of:

A) $375 million a day, while the non-cheating country would earn $300 million a day.
B) $375 million a day, while the non-cheating country would earn $360 million a day.
C) $400 million a day, while the non-cheating country would earn $300 million a day.
D) $400 million a day, while the non-cheating country would earn $360 million a day.

Question 36

Cheaters in cartels make ________ profit when the other cartel members ________ their promise.

A) more; break
B) less; keep
C) zero; break
D) more; keep

Question 37

Table: Market for Oil Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total 100 MBD. The world price of oil at this quantity is $36 per barrel so each country earns $360 million a day. Reference: Ref 15-2 (Table: Market for Oil) Refer to the table. Suppose that these countries form a cartel and they each cut back production to 8 MBD. Each country's revenue would:

A) increase by $72 million a day.
B) increase by $40 million a day.
C) decrease by $72 million a day.
D) decrease by $40 million a day.

Question 38

Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the resultant profit earned by each of the other two countries?

A) 20,000
B) 30,000
C) 70,000
D) 24,000

Question 39

Cheating pays when other firms ________ their promise.

A) either keep or break
B) break
C) keep
D) withhold

Question 40

Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. If the countries create a cartel and agree to mimic monopoly- like behavior, what level of output would each firm produce?

A) 1,200
B) 400
C) 200
D) 700

Question 41

Reference: Ref 15-7 (Table: Oil Output) Refer to the table. The situation between Iraq and Iran is similar to a:

A) calibration cramp.
B) prisoner's dilemma.
C) flippant switch.
D) cooperative equilibrium.

Question 42

Cartel agreements tend to fail: I. if they produce manufactured rather than natural goods. II. if they produce natural rather than manufactured goods. III. in the long run as demand curves become more elastic.

A) I only
B) I and III only
C) II and III only
D) III only

Question 43

Reference: Ref 15-7 (Table: Oil Output) Refer to the table. If both countries abide by the cartel agreement (i.e., not cheat):

A) each country earns $78.
B) each country earns $65.
C) Iraq earns $89 and Iran earns $60.
D) Iraq earns $60 and Iran earns $89.

Question 44

Reference: Ref 15-4 (Table: Payoff Matrix) Refer to the table. What is Player 2's strategy in this game?

A) always cooperate
B) always cheat
C) cooperate when Player 1 cooperates; cheat when Player 1 cheats
D) cheat when Player 1 cooperates; cooperate when Player 1 cheats

Question 45

A strategy that has a higher payoff than any other strategy no matter what the other player does is called a:

A) cartel strategy.
B) maximizing strategy.
C) valuable strategy.
D) dominant strategy.

Question 46

Reference: Ref 15-8 (Table: Mary, Silvia Payoff Table) Refer to the table. Mary and Silvia are producers. If Mary cheats, what is Silvia's dominant strategy?

A) to cheat and earn 40
B) to cheat and earn 15
C) to cooperate and earn 20
D) to cooperate and earn 40

Question 47

Table: Payoff Matrix The following shows a payoff matrix with two players and two strategies. The payoffs are listed in the order of (Player 1's payoffs, Player 2's payoffs). Reference: Ref 15-4 (Table: Payoff Matrix) Refer to the table. What type of "game" does this payoff matrix represent?

A) cartel game
B) coordination game
C) prisoners' dilemma
D) cheating game

Question 48

Reference: Ref 15-5 (Table: Russia, Saudi Payoff Table) Refer to the table. What is Saudi Arabia's best strategy and associated payoff if Russia cheats?

A) cooperate; $400
B) cheat; $600
C) cooperate; $800
D) cheat; $800

Question 49

It is easier to maintain a cartel in a market for a(n) ________ than in a market for a(n) ________.

A) intermediate good; final good
B) final good; intermediate good
C) natural resource; manufactured good
D) manufactured good; natural resource

Question 50

Reference: Ref 15-5 (Table: Russia, Saudi Payoff Table) Refer to the table. What is Saudi Arabia's best strategy and associated payoff if Russia cooperates?

A) cooperate; $800
B) cheat; $600
C) cooperate; $1,000
D) cheat; $1,000

Question 51

Reference: Ref 15-6 (Table: Ozzie, Manny's Payoff Table) Refer to the table. Which of the following statements is true?

A) Manny and Ozzie do not have dominant strategies.
B) Manny's dominant strategy is low price, and Ozzie's dominant strategy is high price.
C) Manny's dominant strategy is high price, and Ozzie's dominant strategy is high price.
D) Manny's dominant strategy is low price, and Ozzie's dominant strategy is low price.

Question 52

Reference: Ref 15-6 (Table: Ozzie, Manny's Payoff Table) Refer to the table. The equilibrium outcome is:

A) undefined in this game.
B) $80, $80.
C) $60, $60.
D) ($20, $130) or ($130, $20).

Question 53

One reason cartels have limited power is that demand curves become:

A) less elastic over time.
B) more elastic over time.
C) fragmented over time.
D) stable once the cartel is established.

Question 54

The prisoner's dilemma describes situations where the pursuit of:

A) all interests lead to a group outcome that is in the interest of no one.
B) all interests lead to a group outcome that is in the interest of everyone.
C) individual interest leads to a group outcome that is in the interest of no one.
D) individual interest leads to a group outcome that is in the interest of everyone.

Question 55

Table: Russia, Saudi Payoff Table Suppose that the oil market is dominated by two large firms, Saudi Arabia and Russia. Both Saudi Arabia and Russia have two choices or strategies: cooperate by cutting back production or cheat by increasing production. The payoff table below shows the potential revenues associated with each firm's strategies. For instance, if Saudi Arabia cheats and Russia cooperates then the payoff to Saudi Arabia is $1,000 and the payoff to Russia is $400. Reference: Ref 15-5 (Table: Russia, Saudi Payoff Table) Refer to the table. The dominant strategies are:

A) cheat for both Russia and Saudi Arabia.
B) cooperate for both Russia and Saudi Arabia.
C) cheat for Russia and cooperate for Saudi Arabia.
D) cooperate for Russia and cheat for Saudi Arabia.

Question 56

Reference: Ref 15-7 (Table: Oil Output) Refer to the table. The equilibrium outcome is:

A) $78, $78.
B) $65, $65.
C) $89, $60.
D) $60, $89.

Question 57

A dominant strategy is a strategy that:

A) all players must follow.
B) has a higher payoff than any other strategy no matter what the other player does.
C) leads to one player's interests dominating the interests of the other players.
D) a player follows regardless of the strategies followed by other players.

Question 58

Reference: Ref 15-4 (Table: Payoff Matrix) Refer to the table. What is Player 1's strategy in this game?

A) always cooperate
B) always cheat
C) cooperate when Player 2 cooperates; cheat when Player 2 cheats
D) cheat when Player 2 cooperates; cooperate when Player 2 cheats

Question 59

The prisoner's dilemma:

A) explains why cartels fail.
B) describes how producers can lock themselves into a suboptimal outcome by pursuing their own self- interest.
C) shows a dominant strategy for each of the players.
D) All of the answers are correct.

Question 60

Reference: Ref 15-8 (Table: Mary, Silvia Payoff Table) Refer to the table. Mary and Silvia are producers. If Silvia cooperates, what is Mary's dominant strategy?

A) to cheat and earn 40
B) to cheat and earn 15
C) to cooperate and earn 20
D) to cooperate and earn 40

Question 61

Which of the following explains why the NBA cartel is sustainable?

A) Team owners make more money but players make less money.
B) Access to the NBA league is the good that the cartel controls to keep its members from cheating.
C) NBA games compete against other professional and collegiate sports.
D) Consumers benefit from the salary cap that prevents rich teams from buying up all the great players.

Question 62

The high prices charged by cartels:

A) serve as a barrier to entry, allowing the cartel to earn above-normal profits.
B) give an incentive for new firms to enter the industry, causing an expansion of industry output and lower prices.
C) reduce the incentive for increased conservation.
D) All of the answers are correct.

Question 63

Which of the following statements is TRUE?

A) Cartels are an important source of economic growth in developing countries.
B) Economists are not opposed to government-created cartels since they usually provide high-quality products and service.
C) One cost of government-sponsored cartels is that people spend resources trying to obtain or maintain a cartel rather than produce better products.
D) All of the answers are correct.

Question 64

In cases where a cartel controls access to a key production input, firms in the cartel:

A) will always have an incentive to cheat on the agreement as cheating increases profits.
B) have less incentive to cheat for fear that they will be cut off from the key input.
C) are typically good at finding ways to access the key input outside the cartel.
D) will never cheat on the cartel agreement.

Question 65

The National Basketball Association is a:

A) natural resource cartel.
B) fixed-cost cartel.
C) buyer's cartel.
D) player's cartel.

Question 66

Which of the following statements regarding cartels is FALSE?

A) Cheating by cartel members is less profitable and easier to detect if there are fewer firms in the industry.
B) New entrants can be prevented when the cartel-controlled good is limited in supply.
C) Cartels should control natural resources that are rare and more valuable.
D) Cartels are more successful if they are backed by government and the power of the law.

Question 67

A government-supported cartel usually means:

A) lower prices.
B) higher quality of service.
C) more innovation.
D) None of the answers is correct.

Question 68

High prices maintained by a cartel usually make the cartel less successful because high price of the good:

A) leads to more conservation.
B) motivates demand to switch to substitutes of the goods
C) encourages a search for new supplies.
D) All of the answers are correct.

Question 69

Which of the following is the best example of a firm operating in an oligopoly market?

A) Walmart, a large retailer
B) ExxonMobil, one of the seven major refiners of oil
C) McDonald's, a fast-food restaurant chain
D) a corn farmer in Oklahoma

Question 70

The NBA is a like a cartel because:

A) the owners use the NBA league structure to collectively restrict the salaries of players.
B) it is the most popular professional sport.
C) ticket prices are high.
D) teams use average cost pricing.

Question 71

Which of the following statements is TRUE? I. It is easier to form a cartel for a product with few substitutes. II. Cartels that are backed and supported by the government tend to have less power. III. Cartels are more likely to collapse the more firms there are in an industry.

A) I only
B) II only
C) I and III only
D) II and III only

Question 72

The Sherman Antitrust Act of 1890:

A) limits cartel-like behavior in the United States.
B) serves to limit anticompetitive behavior by foreign firms that the U.S. trades with.
C) has illegalized all cartels in the United States.
D) All of the answers are correct.

Question 73

Which of the following explains why it is typically easier to maintain a cartel in a natural resource than in a manufactured good?

A) Natural resources are usually more valuable than manufacturing goods.
B) Natural resources are only found in certain places.
C) Manufacturing goods are hard to replace.
D) Supply of natural resources tends to be more elastic than supply of manufacturing goods.

Question 74

In some cases cartels are successful because:

A) the cartel produces a manufactured good with many substitutes.
B) the marginal costs of production are high.
C) the barriers to entry in the market are low.
D) the cartel controls access to a key input.

Question 75

Which federal law makes most cartels in the United States illegal?

A) Interstate Commerce Act of 1901
B) Federal Reserve Act of 1914
C) Supreme Court case Johnson v. J. P. Morgan
D) Sherman Antitrust Act of 1890

Question 76

Which of the following is TRUE?

A) The more substitutes a resource has, the more likely a cartel controlling such a resource will succeed.
B) The more widespread a resource, the more likely a cartel controlling such a resource will succeed.
C) Oil and diamond cartels tend to be more successful than copper and plumbing cartels.
D) Oil and diamond cartels have never been successful.

Question 77

It is easier to maintain a cartel for ________ than for ________.

A) services; natural resources
B) natural resources; manufactured goods
C) products with lots of substitutes; products without substitutes
D) copper; nutmeg

Question 78

Major league basketball, the NBA, is cartelized to:

A) maintain high ticket price of the games.
B) keep down players' salaries.
C) reduce the competition of the teams.
D) prevent teams from exploiting players.

Question 79

The milk cartel in the United States:

A) ended when the government prosecuted the owners of four major milk producers who conspired to raise prices.
B) is made legal and enforced by the government, and any firm that breaks the cartel is fined.
C) frequently breaks down because of firm cheating.
D) was put out of business because of new entrants.

Question 80

Which of the following laws makes cartel behavior illegal?

A) Monopoly Act of 1897
B) Sherman Antitrust Act of 1890
C) Sewon Act of 1955
D) Frame Act of 1910