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Exam 17: Oligopoly

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Question 101

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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. -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.

E) None of the above
F) A) and C)

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Question 102

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If duopolists individually pursue their own self-interest when deciding how much to produce, the amount they will produce collectively will

A) be less than the monopoly quantity.
B) be equal to the monopoly quantity.
C) be greater than the monopoly quantity.
D) Any of the above are possible.

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

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Question 103

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Figure 17-1 -Refer to Figure 17-1. Suppose this market is served by two firms who each face the marginal cost curve shown in the diagram and have zero fixed cost. The marginal revenue curve that a monopolist would face in this market is also shown. If the firms are able to collude successfully, each firm should earn a profit equal to

Table 17-35 Suppose that two coal mining companies - Allied and Barclay - own adjacent land suitable for excavating coal mines. The profits that each firm earns depends on both the number of mines it excavates and the number of mines excavated by the other firm. The table below lists each firm's individual profits: Allied Excavate one mine Excavate two mines -Refer to Table 17-35. Is there a Nash equilibrium? If so, describe it.

To increase their individual profits, members of a cartel have an incentive to

Which of the following would be most likely to contribute to the breakdown of a cartel in a natural resource (e.g., bauxite) market?

In a competitive market, strategic interactions among the firms are not important.

Table 17-19 Consider a small town that has two grocery stores from which residents can choose to buy a loaf of bread. The store owners each must make a decision to set a high bread price or a low bread price. The payoff table, showing profit per week, is provided below. The profit in each cell is shown as (Store 1, Store 2) . -Refer to Table 17-19. If grocery store 1 sets a low price, what price should grocery store 2 set? And what will grocery store 2's payoff equal?

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. 14. -Refer to Table 17-13. Pursuing its own best interest, Lopes will

In a duopoly if the firms have agreed to jointly maximize profits, then each firm can increase its current profits by producing more.

Table 17-21 The Chicken Game is named for a contest in which drivers test their courage by driving straight at each other. John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul) . -Refer to Table 17-21. How many Nash equilibria are there in this Chicken game?

Table 17-19 Consider a small town that has two grocery stores from which residents can choose to buy a loaf of bread. The store owners each must make a decision to set a high bread price or a low bread price. The payoff table, showing profit per week, is provided below. The profit in each cell is shown as (Store 1, Store 2) . -Refer to Table 17-19. What is grocery store 2's dominant strategy?

In the prisoners' dilemma game, one prisoner is always better off confessing, no matter what the other prisoner does.

Table 17-12 The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. -Refer to Table 17-12. If the market for gasoline in Driveaway is a monopoly, then the profit-maximizing monopolist will charge a price of

Scenario 17-2. Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a common pool of oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million in revenue - $5 million in costs) . Assume that having X percent of the total wells means that a company will collect X percent of the total revenue. -Refer to Scenario 17-2. If BQ were to drill a second well, what would its profit be if Exxoff did not drill a second well?

As the number of firms in an oligopoly industry increases, the market moves closer to a market.

Game theory is necessary for understanding

In the prisoners' dilemma game with Bonnie and Clyde as the players, the likely outcome is

As the number of firms in an oligopoly increases, the magnitude of the

Suppose that two poker players believe that they are superior players to the rest of the people at their table. Further suppose that the two players make an agreement to concede hands to each other in order to drive the other players from the game first. Economists would model such behavior as