Deck 15: Oligopoly and Game Theory

Question 1

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.

Answer 1

a monopoly.

Question 2

Which of the following is NOT a reason why cartels tend to collapse and lose their power?

A) new entrants and demand response
B) government prosecution and regulation
C) cheating by the cartel members
D) They mistakenly raise the price too high.

Answer 2

They mistakenly raise the price too high.

Question 3

If most cartel members keep their agreement to cut back production:

A) it's not profitable in the short run for another member to increase production.
B) it's profitable in the short run for another member to increase production.
C) cheating by another member won't be detected.
D) the losses associated with cheating are internalized by the cheater.

Answer 3

it's profitable in the short run for another member to increase production.

Question 4

OPEC is a:

A) group of oligopolistic producers that try to behave like a monopoly.
B) monopoly that tries to behave oligopolistically.
C) group of perfectly competitive producers that try to behave in a monopolistically competitive manner.
D) group of monopolistically competitive producers that try to behave in a perfectly competitive manner.

Question 5

Firms operating in a cartel have a large incentive to cheat on the agreement by:

A) lowering prices and increasing production.
B) lowering both prices and production.
C) raising prices and increasing production.
D) raising prices and lowering production.

Question 6

Use the following to answer questions:
Figure: Demand 1
(Figure: Demand 1) A cartel facing the market in this diagram would try to cause industry output to:

A) increase from 5 to 10.
B) increase from 3 to 6.
C) decrease from 6 to 3.
D) decrease from 5 to 2.

Question 7

In 2011, 11 modeling agencies in Singapore were found to have acted together in raising prices of modeling services. These firms acted as a:

A) disunion.
B) cartel.
C) co-op.
D) Bertrand monopoly.

Question 8

Use the following to answer questions:
Figure: Demand 1
(Figure: Demand 1) A successful cartel facing the market in this diagram would cause the industry price to:

A) decrease from $8 to $4.
B) increase from $4 to $8.
C) increase from $7 to $8.
D) increase from $4 to $7.

Question 9

People sometimes point to similar gas prices at competing gas stations as evidence of collusion when they could just be selling at market price. If this is not good evidence of collusion, what is?

A) The profits of the companies are unusually high in the short run.
B) The station owners regularly have morning coffee together.
C) There is some kind of punishment for cheating.
D) Someone thinks they overheard their plans for collusion.

Question 10

Game theory is the study of:

A) strategic decision making.
B) strategies involved in board games, such as Monopoly.
C) theories of hunting big game.
D) strategies to play Sudoku.

Question 11

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 12

Which of the following best explains why cartel agreements are hard to maintain?

A) Each firm in the cartel has the incentive to raise prices and earn larger profits.
B) Each firm in the cartel has the incentive to increase production and earn larger profits.
C) Cartels are typically very profitable for firms in the short run, but not in the long run.
D) It is hard for each firm in the cartel to maintain a level of production equal to that of the other firms.

Question 13

Which of the following is NOT a possible way for a price-fixing scheme on potatoes to fall apart?

A) Potato farmers get arrested for anticompetitive pricing.
B) Some farmers sell more potatoes than agreed on.
C) People stop buying potatoes and switch to other foods.
D) The cost of producing potatoes falls.

Question 14

A cartel is a:

A) group of suppliers that tries to act as if they were a monopoly.
B) market that is dominated by a small number of firms.
C) market with a large number of firms selling similar but not identical products.
D) group of suppliers that tries to act as if they were a perfectly competitive market.

Question 15

Which United States President said, "Our neck is stretched over the fence and OPEC has a knife."?

A) Bill Clinton
B) Ronald Reagan
C) Gerald Ford
D) Jimmy Carter

Question 16

Cartels are:

A) extremely powerful and able to keep prices and profits high indefinitely.
B) unstable and tend to lose market power over time.
C) like monopolies that try to earn normal or competitive profits.
D) firms that face perfectly elastic demand curves and increase profits by restricting output and raising prices.

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) strategies to win at such games as Monopoly.

Question 20

If your economics class was graded on a curve and everyone agrees to study only half as much, everyone would get the same grade that they otherwise would earn. You, however, will earn an A if you study more than the others, a C if you study the same amount as others, and an F if everyone else studies more than you. You don't like studying, but you'd rather study and get an A than get a C without studying, or study and get a C than get an F without studying. If everyone else cuts back their studying, what is it in your best interest to do?

A) study and get an A
B) not study and get a C
C) drop the class
D) randomize over studying and not studying

Question 21

In April 2011, Procter & Gamble and Unilever received fines of 315 million euros by the European Commission for fixing the price of laundry detergent in eight European countries. They admitted to this cartel, which resulted in a 10 percent discount in the fines. The 3-year investigation started because of a tip-off by another competitor, Henkel, who was also part of the price-fixing scheme. Henkel received no fine because of its cooperation with investigators. Besides the fines, how did investigators make maintaining this cartel difficult to continue?

A) by offering a 10 percent discount on the fine if the parties admit to wrongdoing
B) by investigating the cartel for 3 years so they could prosecute
C) by reminding consumers that laundry detergent has a lot of long-run substitutes
D) by waiving the fine for just Henkel, which encouraged Henkel to cheat

Question 22

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

A) winning strategy.
B) superior strategy.
C) advanced strategy.
D) dominant strategy.

Question 23

Within OPEC, cheating is associated with:

A) holding oil reserves without reaching quota.
B) meeting quota.
C) zero production.
D) producing oil beyond quota.

Question 24

In a cartel, the most profitable outcome is achieved by:

A) cheating when others cooperate.
B) cheating when others cheat.
C) cooperating when others cooperate.
D) cooperating when others cheat.

Question 25

A cartel member has _____ incentive to increase quantity than a standard monopolist.

A) less
B) equal
C) more
D) no

Question 26

By 1985, OPEC had:

A) sustained effectiveness as a cartel.
B) largely failed as a cartel.
C) disbanded.
D) not yet formed.

Question 27

When all members of a cartel cheat, the cartel:

A) earns monopoly profits.
B) fails to earn monopoly profits.
C) cannot profit.
D) may or may not earn monopoly profits.

Question 28

Cheating in cartels is most likely to occur when actions are:

A) always observable.
B) not observable.
C) sometimes observable.
D) usually observable.

Question 29

A dominant strategy is a strategy that:

A) results in the highest payoff for all parties no matter what.
B) has a higher payoff than another strategy some of the time and lower payoff than another strategy the rest of the time.
C) has a lower payoff than any other strategy, no matter what the other player does.
D) has a higher payoff than any other strategy, no matter what the other player does.

Question 30

If your economics class was graded on a curve and everyone agrees to study only half as much, everyone would get the same grade that they otherwise would earn. You, however, will earn an A if you study more than the others, a C if you study the same amount as others, and an F if everyone else studies more than you. You don't like studying, but you'd rather study and get an A than get a C without studying, or study and get a C than get an F without studying. All the students in your class get together and agree not to study but have no way of verifying if anyone does study. What is it in your best interest to do?

A) study
B) not study
C) drop the class
D) randomize over studying and not studying

Question 31

If women conspired together and demanded that any man wishing to take them on a date must take them to a nice restaurant, why would this be unsustainable?

A) Some women will secretly allow guys to take them to cheaper restaurants.
B) Some women will cheat on their boyfriends to go out to nice restaurants.
C) Some men will cheat and take dates out to an even more expensive restaurant than is required.
D) The government will arrest all women for conspiring against the public.

Question 32

If every member of OPEC produces beyond quota, then cartel members:

A) earn monopoly profits.
B) fail to earn monopoly profits.
C) cannot profit.
D) may or may not earn monopoly profits.

Question 33

If your economics class was graded on a curve and everyone agrees to study only half as much, everyone would get the same grade that they otherwise would earn. You, however, will earn an A if you study more than the others, a C if you study the same amount as others, and an F if everyone else studies more than you. You don't like studying, but you'd rather study and get an A than get a C without studying, or study and get a C than get an F without studying. All the students in your class get together and agree not to study, but have no way of verifying if anyone does study. Do you think that this cartel will succeed?

A) Yes, everyone will probably cut back on their studying.
B) No, some (and maybe all) participants will cheat on the agreement.
C) It depends on the professor.
D) This situation is not like a cartel.

Question 34

Within a cartel, cheating is often a(n) ______ strategy.

A) dominated
B) dominant
C) unused
D) unavailable

Question 35

When a cartel member produces more output and lowers prices,:

A) the entire cartel is made more profitable.
B) it receives all the benefits of the increased sales and the other members bear the burden of lower profits.
C) it enjoys only a fraction of the benefits of selling more units.
D) it bears the entire cost of lower prices.

Question 36

What does it mean when an OPEC member cheats?

A) The country produces less oil than it agreed to.
B) The country produces lower-quality oil rather than higher-quality oil.
C) The country produces more oil than it agreed to.
D) The country closes down oil wells for routine maintenance during peak holiday seasons.

Question 37

Figure: Demand 2 Two firms in an industry act as a cartel, with each firm agreeing to charge a price of $16 and sell two units of output. If one of them cheats and produces two more units of output, the cheating firm's total revenue increases by ______ and the other firm's total revenue decreases by ______.

A) $24; $4
B) $28; $14
C) $84; $32
D) $12; $8

Question 38

If your economics class was graded on a curve and everyone agrees to study only half as much, everyone would get the same grade that they otherwise would earn. You, however, will earn an A if you study more than the others, a C if you study the same amount as others, and an F if everyone else studies more than you. You don't like studying, but you'd rather study and get an A than get a C without studying, or study and get a C than get an F without studying. If everyone else is studying, what is it in your best interest to do?

A) study and get a C
B) not study and get an F
C) drop the class
D) randomize over studying and not studying

Question 39

A 2006 paper by Margeret Levenstein and Valerie Suslow ("What Determines Cartel Success?") found that although cheating is a common cause of why cartels broke down, the following causes are even more common: entering firms, the nature of the demand curve, growth of the industry, and difficulty of bargaining between conspirators. What other cause is also associated with bargaining difficulties?

A) cheating
B) exiting firms
C) the nature of the industry
D) the nature of the supply curve

Question 40

Cheating in cartels is most likely to occur if members are:

A) very friendly.
B) not friendly.
C) somewhat friendly.
D) socially neutral toward one another.

Question 41

Use the following to answer questions:
Figure: Competitive Market
(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 42

_____ cartels can move an industry from competition to pure monopoly.

A) All
B) Most
C) Many
D) Very few

Question 43

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 44

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 45

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 46

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

Question 47

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 48

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 49

In forming a cartel:

A) all firms will cooperate.
B) there are no incentives to cheat.
C) there are no incentives to cooperate.
D) there are incentives to cheat.

Question 50

There was a dramatic increase in the price of oil in:

A) the early 1970s.
B) the early 1980s.
C) the early 1990s.
D) the late 1990s.

Question 51

Which of the following makes a cartel short-lived?

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

Question 52

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 53

There was a dramatic fall in the price of oil in:

A) the early 1970s.
B) the early 1980s.
C) the early 1990s.
D) the late 1990s.

Question 54

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

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

Question 55

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 56

OPEC is a cartel that:

A) could not keep the price of oil high for very long.
B) is able to keep the price of oil high.
C) controls all the world's oil.
D) a U.S. government agency created to control the price of oil.

Question 57

In game theory, a dominant strategy ______ exists.

A) always
B) never
C) sometimes
D) evades determining whether it even

Question 58

Use the following to answer questions:
Figure: Competitive Market
(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 59

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 60

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

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

Question 61

The NBA and NCAA are examples of:

A) a buyer's cartel, keeping the salaries of players lower than they would be in a competitive market.
B) monopolistically competitive markets.
C) natural resource monopolies.
D) markets with low barriers to entry.

Question 62

Which of the following factors is NOT significant in leading to the collapse of a cartel?

A) cheating by cartel members
B) new entrants and demand response
C) transparency of action among members
D) government prosecution and regulation

Question 63

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 64

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 65

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 66

When cartels are successful at driving up prices,:

A) production of substitute goods will decrease.
B) new firms will begin to enter the market.
C) competition among firms will decrease.
D) cheating will be eliminated.

Question 67

Scientists are working on techniques to create bacteria that excrete oil as waste. How might OPEC have contributed to this research?

A) OPEC donated money to fund this research.
B) The high price of oil charged by OPEC made it profitable to invest in such research.
C) Several members of the Saudi royal family personally worked on this research.
D) OPEC is offering a prize to whoever can develop a substitute for oil.

Question 68

Cartels will tend to be more successful when there are ______ for the cartelized good.

A) more substitutes
B) fewer substitutes
C) more producers
D) fewer consumers

Question 69

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

Question 70

Cheating pays when other firms ________ their promise.

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

Question 71

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 72

Another possible source of why cartels break down is the growth potential of the industry. Although industries with a lot of potential are more willing to invest in the time to form a collusive agreement, such growth potential also deters them from making this investment. Why would that be?

A) High-growth industries are more likely to be monitored by the government.
B) High-growth industries are less likely to face an inelastic demand curve.
C) High-growth industries are more likely to have lots of entrants.
D) High-growth industries are less likely to have the support of the government.

Question 73

Cartels tend to be more successful when:

A) there are a large number of firms in the market.
B) the cartel is producing a good that can be produced anywhere in the world.
C) the cartel is producing a good for which there are few substitutes.
D) demand for the good is more elastic.

Question 74

If a television factory wanted to conspire with its competitors to raise the price of televisions, which of the following would help stabilize the long-term viability of such a cartel?

A) prevent co-conspirators from differentiating their product in trivial ways
B) create an advertising campaign that depicts watching TV shows on a computer as a negative experience
C) secure a government subsidy that goes to all TV manufacturers
D) cut everyone's marginal cost of production

Question 75

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 76

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 77

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 78

Which of the following statements is TRUE?

A) It is easier to establish a cartel for a manufactured good than for a natural resource.
B) Cartels are more successful when there are many substitutes for the cartel's good.
C) The high prices charged by a cartel might lead to new firms entering the industry, reducing the cartel's market power.
D) OPEC's high oil prices encourage countries like Mexico, Great Britain, and the Netherlands to cut back on oil production.

Question 79

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 80

As the price of oil goes up, what happens to the incentive to develop alternative fuels?

A) It increases.
B) It decreases.
C) Nothing happens.
D) It is impossible to say without more information.