Chapter 17 Oligopoly

MULTIPLE CHOICE

1. Which of the following statements about oligopolies is not correct?

a. An oligopolistic market has only a few sellers.
b. The actions of any one seller can have a large impact on the profits of all other sellers.
c. Oligopolistic firms are interdependent in a way that competitive firms are not.
d. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed
their marginal revenues.

1
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2 ❖ Chapter 17/Oligopoly

2. In the language of game theory, a situation in which each person must consider how others might re-
spond to his or her own actions is called a
a. quantifiable situation.
b. cooperative situation.
c. strategic situation.
d. tactical situation.

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 Chapter 17/Oligopoly ❖ 3

3. In general, game theory is the study of

a. how people behave in strategic situations.
b. how people behave when the possible actions of other people are irrelevant.
c. oligopolistic markets.
d. all types of markets, including competitive markets, monopolistic markets, and oligopolistic
markets.

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4 ❖ Chapter 17/Oligopoly

4. Which of the following statements is correct?

a. Strategic situations are more likely to arise when the number of decision-makers is very large rather
than very small.
b. Strategic situations are more likely to arise in monopolistically competitive markets than in
oligopolistic markets.
c. Game theory is useful in understanding certain business decisions, but it is not really applicable to
ordinary games such as chess or tic-tac-toe.
d. Game theory is not necessary for understanding competitive or monopoly markets.

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 Chapter 17/Oligopoly ❖ 5

5. In which of the following markets are strategic interactions among firms most likely to occur?
a. markets to which patent and copyright laws apply
b. the market for piano lessons
c. the market for tennis balls
d. the market for corn

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6 ❖ Chapter 17/Oligopoly

6. Game theory is important for understanding which of the following market types?
a. perfectly competitive and oligopolistic markets
b. perfectly competitive markets but not oligopolistic markets
c. oligoplistic but not perfectly competitive markets
d. neither oligopolistic nor perfectly competitive markets.

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 Chapter 17/Oligopoly ❖ 7

7. In choosing among alternative courses of action, Raj must consider how others might respond to the
action he takes. In the language of game theory, we say that Raj must think
a. openly.
b. strategically.
c. dominantly.
d. cooperatively.

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8 ❖ Chapter 17/Oligopoly

8. We must be knowledgeable of how people behave in strategic situations if we are to understand

a. perfectly competitive markets.
b. monopolistically competitive markets.
c. oligopolistic markets.
d. All of the above are correct.

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 Chapter 17/Oligopoly ❖ 9

9. In an oligopoly, each firm knows that its profits

a. depend only on how much output it produces.
b. depend only on how much output its rival firms produce.
c. depend on both how much output it produces and how much output its rival firms produce.
d. will be zero in the long run because of free entry.

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10 ❖ Chapter 17/Oligopoly

MARKETS WITH ONLY A FEW SELLERS

1. A distinguishing feature of an oligopolistic industry is the tension between

a. profit maximization and cost minimization.
b. cooperation and self interest.
c. producing a small amount of output and charging a price above marginal cost.
d. short-run decisions and long-run decisions.

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 Chapter 17/Oligopoly ❖ 11

2. In studying oligopolistic markets, economists assume that

a. there is no conflict or tension between cooperation and self-interest.
b. it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly outcome.
c. each oligopolist cares only about its own profit.
d. strategic decisions do not play a role in such markets.

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12 ❖ Chapter 17/Oligopoly

3. The simplest type of oligopoly is

a. monopoly.
b. duopoly.
c. monopolistic competition.
d. oligopolistic competition.

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 Chapter 17/Oligopoly ❖ 13

4. A special kind of imperfectly competitive market that has only two firms is called
a. a two-tier competitive structure.
b. an incidental monopoly.
c. a doublet.
d. a duopoly.

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14 ❖ Chapter 17/Oligopoly

5. An agreement between two duopolists to function as a monopolist usually breaks down because
a. they cannot agree on the price that a monopolist would charge.
b. they cannot agree on the output that a monopolist would produce.
c. each duopolist wants a larger share of the market in order to capture more profit.
d. each duopolist wants to charge a higher price than the monopoly price.

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 Chapter 17/Oligopoly ❖ 15

6. An agreement among firms in a market about quantities to produce or prices to charge is called
a. collusion.
b. a strategic situation.
c. excess capacity.
d. tying.

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16 ❖ Chapter 17/Oligopoly

7. Which of the following statements is correct?

a. If duopolists successfully collude, then their combined output will be equal to the output that would
be observed if the market were a monopoly.
b. Although the logic of self-interest decreases a duopoly’s price below the monopoly price, it does
not push the duopolists to reach the competitive price.
c. Although the logic of self-interest increases a duopoly’s level of output above the monopoly level,
it does not push the duopolists to reach the competitive level.
d. All of the above are correct.

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 Chapter 17/Oligopoly ❖ 17

8. Suppose that Jay-Z and Beyonce are duopolists in the music industry. In January, they agree to
work together as a monopolist, charging the monopoly price for their music and producing the mo-
nopoly quantity of songs. By February, each singer is considering breaking the agreement. What
would you expect to happen next?
a. Jay-Z and Beyonce will determine that it is in each singer’s best self interest to maintain the
agreement.
b. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will
increase, and the new equilibrium price will decrease.
c. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will
decrease, and the new equilibrium price will increase.
d. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will
increase, and the new equilibrium price also will increase.

9. As the number of firms in an oligopoly increases, the

a. price approaches marginal cost, and the quantity approaches the socially efficient level.
b. price and quantity approach the monopoly levels.
c. price effect exceeds the output effect.
d. individual firms’ profits increase.

10. If a certain market were a monopoly, then the monopolist would maximize its profit by producing
1,000 units of output. If, instead, that market were a duopoly, then which of the following outcomes
would be most likely if the duopolists successfully collude?
a. Each duopolist produces 1,000 units of output.
b. Each duopolist produces 600 units of output.
c. One duopolist produces 400 units of output and the other produces 600 units of output.
d. One duopolist produces 800 units of output and the other produces 400 units of output.
Table 17-1
Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe
drinking water. Each week Rochelle and Alec work together to decide how many gallons of water
to pump. They bring the water to town and sell it at whatever price the market will bear. To keep
things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so
that the marginal cost of water equals zero. The weekly town demand schedule and total revenue
schedule for water is shown in the table below:
Quantity Price Total Revenue
(in gallons) (and Total Profit)
0 $60 $0
100 55 5,500
200 50 10,000
300 45 13,500
400 40 16,000
500 35 17,500
600 30 18,000
700 25 17,500
800 20 16,000
900 15 13,500
1,000 10 10,000
1,100 5 5,500
1,200 0 0

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18 ❖ Chapter 17/Oligopoly

11. Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market
for water, what price will they charge?
a. $25
b. $30
c. $35
d. $40
12. Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market
for water, how many gallons of water will be produced and sold?
a. 0
b. 500
c. 600
d. 1,200
13. Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market
for water, how much profit will each of them earn?
a. $8,750
b. $9,000
c. $12,000
d. $18,000
14. Refer to Table 17-1. If the market for water were perfectly competitive instead of monopolistic,
how many gallons of water would be produced and sold?
a. 0
b. 600
c. 900
d. 1,200
15. Refer to Table 17-1. What is the socially efficient quantity of water?
a. 0 gallons
b. 600 gallons
c. 900 gallons
d. 1,200 gallons

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 Chapter 17/Oligopoly ❖ 19

16. Refer to Table 17-1. If this market for water were perfectly competitive instead of monopolistic,
what price would be charged?
a. $0
b. $30
c. $40
d. $60

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20 ❖ Chapter 17/Oligopoly

17. Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec
from operating as a monopoly. What will be the price of water once Rochelle and Alec reach a
Nash equilibrium?
a. $15
b. $20
c. $25
d. $30

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 Chapter 17/Oligopoly ❖ 21

18. Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Rochelle and Alec
from operating as a monopoly. How many gallons of water will be produced and sold once
Rochelle and Alec reach a Nash equilibrium?
a. 600
b. 700
c. 800
d. 900

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22 ❖ Chapter 17/Oligopoly

Table 17-2. The table shows the town of Pittsville’s demand schedule for gasoline. For simplicity,
assume the town’s gasoline seller(s) incur no costs in selling gasoline.
Quantity Total Revenue
(in gallons) Price (and total profit)
0 $10 $0
100 9 900
200 8 1,600
300 7 2,100
400 6 2,400
500 5 2,500
600 4 2,400
700 3 2,100
800 2 1,600
900 1 900
1,000 0 0
19. Refer to Table 17-2. If the market for gasoline in Pittsville is perfectly competitive, then the equi-
librium price of gasoline is
a. $8 and the equilibrium quantity is 200 gallons.
b. $5 and the equilibrium quantity is 500 gallons.
c. $2 and the equilibrium quantity is 800 gallons.
d. $0 and the equilibrium quantity is 1,000 gallons.
20. Refer to Table 17-2. If the market for gasoline in Pittsville is a monopoly, then the profit-maximiz-
ing monopolist will charge a price of
a. $8 and sell 200 gallons.
b. $5 and sell 500 gallons.
c. $2 and sell 800 gallons.
d. $0 and sell 1,000 gallons.
21. Refer to Table 17-2. If there are exactly two sellers of gasoline in Pittsville and if they collude,
then which of the following outcomes is most likely?
a. Each seller will sell 500 gallons and charge a price of $5.
b. Each seller will sell 250 gallons and charge a price of $2.50.
c. Each seller will sell 350 gallons and charge a price of $3.
d. Each seller will sell 250 gallons and charge a price of $5.
22. Refer to Table 17-2. If there are exactly three sellers of gasoline in Pittsville and if they collude,
then which of the following outcomes is most likely?
a. Each seller will sell 166.67 gallons and charge a price of $1.33.
b. Each seller will sell 166.67 gallons and charge a price of $5.
c. Each seller will sell 200 gallons and charge a price of $4.
d. Each seller will sell 233.33 gallons and charge a price of $5.
23. Refer to Table 17-2. Suppose there are exactly two sellers of gasoline in Pittsville: Exxoff and BQ.
If Exxoff sells 300 gallons and BQ sells 400 gallons, then
a. Exxoff’s profit is $900 and BQ’s profit is $1,200.
b. Exxoff’s profit is $2,100 and BQ’s profit is $2,400.
c. there is an excess demand for gasoline in Pittsville.
d. there is an excess supply of gasoline in Pittsville.

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 Chapter 17/Oligopoly ❖ 23

24. Which of the following statements is correct?

a. When duopoly firms reach a Nash equilibrium, their combined level of output is the monopoly
level of output.
b. When oligopoly firms collude, they are behaving as a cartel.
c. In an oligopoly, self-interest drives the market to the competitive outcome.
d. An oligopoly is an example of monopolistic competition.

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24 ❖ Chapter 17/Oligopoly

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

a. output effect increases.
b. output effect decreases.
c. price effect increases.
d. price effect decreases.

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 Chapter 17/Oligopoly ❖ 25

26. As the number of sellers in an oligopoly becomes very large,

a. the quantity of output approaches the socially efficient quantity.
b. the price approaches marginal cost.
c. the price effect is diminished.
d. All of the above are correct.

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26 ❖ Chapter 17/Oligopoly

27. In markets characterized by oligopoly,

a. the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
b. collusive agreements will always prevail.
c. collective profits are always lower with cartel arrangements than they are without cartel
arrangements.
d. pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the
market.

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 Chapter 17/Oligopoly ❖ 27

28. As a group, oligopolists would always be better off if they would act collectively
a. as if they were each seeking to maximize their own individual profits.
b. in a manner that would prohibit collusive agreements.
c. as a single monopolist.
d. as a single perfectly competitive firm.

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28 ❖ Chapter 17/Oligopoly

29. As a group, oligopolists would always earn the highest profit if they would
a. produce the perfectly competitive quantity of output.
b. produce more than the perfectly competitive quantity of output.
c. charge the same price that a monopolist would charge if the market were a monopoly.
d. operate according to their own individual self-interests.

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 Chapter 17/Oligopoly ❖ 29

30. Because each oligopolist cares about its own profit rather than the collective profit of all the oligop-
olists together,
a. they are unable to maintain the same degree of monopoly power enjoyed by a monopolist.
b. each firm's profit always ends up being zero.
c. society is worse off as a result.
d. Both a and c are correct.

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30 ❖ Chapter 17/Oligopoly

Table 17-3. The information in the table below shows the total demand for premium-channel digital
cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a
fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the
marginal cost of providing the premium channel service to a household is zero.
Quantity Price (per year)
0 $180
3,000 $150
6,000 $120
9,000 $ 90
12,000 $ 60
15,000 $ 30
18,000 $ 0

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 Chapter 17/Oligopoly ❖ 31

31. Refer to Table 17-3. If there is only one digital cable TV company in this market, what price would
it charge for a premium digital channel subscription to maximize its profit?
a. $30
b. $60
c. $90
d. $150

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32 ❖ Chapter 17/Oligopoly

32. Refer to Table 17-3. Assume there are two digital cable TV companies operating in this market. If
they are able to collude on the quantity of subscriptions that will be sold and on the price that will be
charged for subscriptions, then their agreement will stipulate that
a. each firm will charge a price of $90 and each firm will sell 4,500 subscriptions.
b. each firm will charge a price of $90 and each firm will sell 9,000 subscriptions.
c. each firm will charge a price of $120 and each firm will sell 3,000 subscriptions.
d. each firm will charge a price of $150 and each firm will sell 1,500 subscriptions.

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 Chapter 17/Oligopoly ❖ 33

33. Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating
in this market. Further assume that they are able to collude on the quantity of subscriptions that will
be sold and on the price that will be charged for subscriptions. How much profit will each company
earn?
a. $610,000
b. $550,000
c. $405,000
d. $205,000

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34 ❖ Chapter 17/Oligopoly

34. Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating
in this market. Further assume that they are not able to collude on the price and quantity of premium
digital channel subscriptions to sell. How many premium digital channel cable TV subscriptions will
be sold altogether when this market reaches a Nash equilibrium?
a. 6,000
b. 9,000
c. 12,000
d. 15,000

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 Chapter 17/Oligopoly ❖ 35

35. Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating
in this market. Further assume that they are not able to collude on the price and quantity of premium
digital channel subscriptions to sell. What price will premium digital channel cable TV subscriptions
be sold at when this market reaches a Nash equilibrium?
a. $30
b. $60
c. $90
d. $120

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36 ❖ Chapter 17/Oligopoly

36. Refer to Table 17-3. Assume that there are two profit-maximizing digital cable TV companies op-
erating in this market. Further assume that they are not able to collude on the price and quantity of
premium digital channel subscriptions to sell. How much profit will each firm earn when this market
reaches a Nash equilibrium?
a. $25,000
b. $90,000
c. $160,000
d. $215,000

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 Chapter 17/Oligopoly ❖ 37

Table 17-4. The information in the table below shows the total demand for high-speed Internet
subscriptions in a small urban market. Assume that each company that provides these subscriptions
incurs an annual fixed cost of $200,000 (per year) and that the marginal cost of providing an
additional subscription is always $80.
Quantity Price (per year)
0 $320
2,000 $280
4,000 $240
6,000 $200
8,000 $160
10,000 $120
12,000 $ 80
14,000 $ 40
16,000 $0

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38 ❖ Chapter 17/Oligopoly

37. Refer to Table 17-4. Suppose there is only one high-speed Internet service provider in this market
and it seeks to maximize its profit. The company will
a. sell 6,000 subscriptions and charge a price of $200 for each subscription.
b. sell 8,000 subscriptions and charge a price of $160 for each subscription.
c. sell 10,000 subscriptions and charge a price of $120 for each subscription.
d. sell 12,000 subscriptions and charge a price of $80 for each subscription.

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 Chapter 17/Oligopoly ❖ 39

38. Refer to Table 17-4. Assume there are two high-speed Internet service providers that operate in this
market. If they are able to collude on the quantity of subscriptions that will be sold and on the price
that will be charged for subscriptions, then their agreement will stipulate that
a. each firm will charge a price of $120 and each firm will sell 5,000 subscriptions.
b. each firm will charge a price of $160 and each firm will sell 4,000 subscriptions.
c. each firm will charge a price of $100 and each firm will sell 3,000 subscriptions.
d. each firm will charge a price of $200 and each firm will sell 3,000 subscriptions.

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40 ❖ Chapter 17/Oligopoly

39. Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers
operating in this market. Further assume that they are able to collude on the quantity of subscrip-
tions that will be sold and on the price that will be charged for subscriptions. How much profit will
each company earn?
a. $80,000
b. $120,000
c. $160,000
d. $210,000

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 Chapter 17/Oligopoly ❖ 41

40. Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers
operating in this market. Further assume that they are not able to collude on the price and quantity of
subscriptions to sell. How many subscriptions will be sold altogether when this market reaches a
Nash equilibrium?
a. 6,000
b. 8,000
c. 10,000
d. 12,000

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42 ❖ Chapter 17/Oligopoly

41. Refer to Table 17-4. Assume there are two high-speed Internet service providers operating in this
market. Further assume that they are not able to collude on the price and quantity of subscriptions to
sell. What price will they charge for a subscription when this market reaches a Nash equilibrium?
a. $120
b. $160
c. $200
d. $240
42. Refer to Table 17-4. Assume that there are two profit-maximizing high-speed Internet service
providers operating in this market. Further assume that they are not able to collude on the price and
quantity of subscriptions to sell. How much profit will each firm earn when this market reaches a
Nash equilibrium?
a. $120,000
b. $150,000
c. $200,000
d. $225,000
Table 17-5. Imagine a small town in which only two residents, Kunal and Naj, own wells that produce safe drinking
water. Each week Kunal and Naj work together to decide how many gallons of water to pump, to bring the
water to town, and to sell it at whatever price the market will bear. Assume Kunal and Naj can pump as much
water as they want without cost so that the marginal cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water are shown in the table
below.
Weekly Price Weekly
Quantity Total Revenue
(in gallons) (and Total Profit)
0 $12 $0
25 11 275
50 10 500
75 9 675
100 8 800
125 7 875
150 6 900
175 5 875
200 4 800
225 3 675
250 2 500
275 1 275
300 0 0

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 Chapter 17/Oligopoly ❖ 43

43. Refer to Table 17-5. Since Kunal and Naj operate as a profit-maximizing monopoly in the market
for water, what price will they charge for water?
a. $2
b. $4
c. $6
d. $7
44. Refer to Table 17-5. If the market for water were perfectly competitive instead of monopolistic,
how many gallons of water would be produced and sold?
a. 25
b. 100
c. 200
d. 300
45. Refer to Table 17-5. As long as Kunal and Naj operate as a profit-maximizing monopoly, what will
their combined weekly revenue amount to?
a. $450
b. $675
c. $875
d. $900
46. Refer to Table 17-5. The socially efficient level of water supplied to the market would be
a. 50 gallons.
b. 150 gallons.
c. 225 gallons.
d. 300 gallons.
47. Refer to Table 17-5. Suppose the town enacts new antitrust laws that prohibit Kunal and Naj from
operating as a monopolist. What will the new price of water be once the Nash equilibrium is
reached?
a. $3
b. $4
c. $5
d. $6
48. Refer to Table 17-5. Suppose the town enacts new antitrust laws that prohibit Kunal and Naj from
operating as a monopolist. What will quantity of water will each of them produce once the Nash
equilibrium is reached?
a. Each will produce 50 gallons, for a total of 100 gallons.
b. Eacb will produce 75 gallons, for a total of 150 gallons.
c. Each will produce 100 gallons, for a total of 200 gallons.
d. Each will produce 125 gallons, for a total of 250 gallons.
49. Refer to Table 17-5. Suppose the town enacts new antitrust laws that prohibit Kunal and Naj from
operating as a monopolist. Once the Nash equilibrium is reached, how much profit will each pro-
ducer earn?
a. $400.00
b. $437.50
c. $450.00
d. $800.00
Scenario 17-1. Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume
that both countries have entered into an agreement to maintain certain production levels in order to maximize
profits. In the world market for oil, the demand curve is downward sloping.

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44 ❖ Chapter 17/Oligopoly

50. Refer to Scenario 17-1. The fact that both countries have colluded to earn higher profit shows their
desire to keep their combined level of output
a. above the monopoly level.
b. below the Nash equilibrium level.
c. equal to the Nash equilibrium level.
d. above the Nash equilibrium level.

51. Refer to Scenario 17-1. As long as the combined level of output is less than the Nash equilibrium
level, both Irun and Urun have the individual incentive to
a. hold production constant.
b. decrease production.
c. increase production.
d. increase price.

52. Refer to Scenario 17-1. If Irun fails to live up to the production agreement and overproduces, which
of the following statements will be true of Urun's condition?
a. Urun will invariably be worse off than before the agreement was broken.
b. Urun will counter by decreasing its production in order to maintain price stability.
c. Urun's profit will be maximized by holding its production constant.
d. Urun’s profit will be unaffected by Irun’s actions.

53. Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash
equilibrium, it
a. is always in their best interest to supply more to the market.
b. is always in their best interest to supply less to the market.
c. is always in their best interest to leave their quantities supplied unchanged.
d. may be in their best interest to do any of the above, depending on market conditions.

54. A situation in which firms choose their best strategy given the strategies chosen by the other firms in
the market is called
a. a competitive equilibrium.
b. an open-market solution.
c. a socially-optimal solution.
d. a Nash equilibrium.

55. When an oligopoly market reaches a Nash equilibrium,

a. the market price will be different for each firm.
b. the firms will not have behaved as profit maximizers.
c. a firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
d. a firm will not take into account the strategies of competing firms.

56. In a duopoly situation, the logic of self-interest results in a total output level that
a. equals the output level that would prevail in a competitive market.
b. equals the output level that would prevail in a monopoly.
c. exceeds the monopoly level of output, but falls short of the competitive level of output.
d. falls short of the monopoly level of output.

57. As a group, oligopolists earn the highest profit when they

a. achieve a Nash equilibrium.
b. produce a total quantity of output that falls short of the Nash-equilibrium total quantity.
c. produce a total quantity of output that exceeds the Nash-equilibrium total quantity.
d. charge a price that falls short of the Nash-equilibrium price.

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 Chapter 17/Oligopoly ❖ 45

58. In order to be successful, a cartel must

a. find a way to encourage members to produce more than they would otherwise produce.
b. agree on the total level of production for the cartel, but they need not agree on the amount produced
by each member.
c. agree on the total level of production and on the amount produced by each member.
d. agree on the prices charged by each member, but they need not agree on amounts produced.

59. In a particular town, Comvision and Veriview are the only two providers of cable TV service.
Comvision and Veriview constitute a
a. duopoly, whether they collude or not.
b. cartel, whether they collude or not.
c. Nash industry, whether they collude or not.
d. monopolistically competitive market if they charge the same price.

60. Which of these situations produces the largest profits for oligopolists?
a. The firms reach a Nash equilibrium.
b. The firms reach the monopoly outcome.
c. The firms reach the competitive outcome.
d. The firms produce a quantity of output that lies between the competitive outcome and the
monopoly outcome.

61. When firms have agreements among themselves on the quantity to produce and the price at which to
sell output, we refer to their form of organization as a
a. Nash arrangement.
b. cartel.
c. monopolistically competitive oligopoly.
d. perfectly competitive oligopoly.

62. The equilibrium quantity in markets characterized by oligopoly is

a. higher than in monopoly markets and higher than in perfectly competitive markets.
b. higher than in monopoly markets and lower than in perfectly competitive markets.
c. lower than in monopoly markets and higher than in perfectly competitive markets.
d. lower than in monopoly markets and lower than in perfectly competitive markets.

63. The equilibrium price in a market characterized by oligopoly is

a. higher than in monopoly markets and higher than in perfectly competitive markets.
b. higher than in monopoly markets and lower than in perfectly competitive markets.
c. lower than in monopoly markets and higher than in perfectly competitive markets.
d. lower than in monopoly markets and lower than in perfectly competitive markets.

64. When oligopolistic firms interacting with one another each choose their best strategy given the
strategies chosen by other firms in the market, we have
a. a cartel.
b. a group of oligopolists behaving as a monopoly.
c. a Nash equilibrium.
d. the perfectly competitive outcome.

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46 ❖ Chapter 17/Oligopoly

65. As the number of firms in an oligopoly market

a. decreases, the price charged by firms likely decreases.
b. decreases, the market approaches the competitive market outcome.
c. increases, the market approaches the competitive market outcome.
d. increases, the market approaches the monopoly outcome.

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 Chapter 17/Oligopoly ❖ 47

66. Assume oligopoly firms are profit maximizers, they do not form a cartel, and they take other firms'
production levels as given. Then in equilibrium the output effect
a. must dominate the price effect.
b. must be smaller than the price effect.
c. must balance with the price effect.
d. can be larger or smaller than the price effect.

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48 ❖ Chapter 17/Oligopoly

67. For cartels, as the number of firms (members of the cartel) increases,
a. the monopoly outcome becomes more likely.
b. the magnitude of the price effect decreases.
c. the more concerned each seller is about its own impact on the market price.
d. the easier it becomes to observe members violating their agreements.

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 Chapter 17/Oligopoly ❖ 49

68. Suppose a market is initially perfectly competitive with many firms selling an identical product.
Over time, however, suppose the merging of firms results in the market being served by only three
or four firms selling this same product. As a result, we would expect
a. an increase in market output and an increase in the price of the product.
b. an increase in market output and an decrease in the price of the product.
c. a decrease in market output and an increase in the price of the product.
d. a decrease in market output and a decrease in the price of the product.

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50 ❖ Chapter 17/Oligopoly

69. Cartels are difficult to maintain because

a. antitrust laws are difficult to enforce.
b. cartel agreements are conducive to monopoly outcomes.
c. there is always tension between cooperation and self-interest in a cartel.
d. firms pay little attention to the decisions made by other firms.

70. There are two types of markets in which firms face some competition yet are still able to have some
control over the prices of their products. Those two types of market are
a. monopolistic competition and oligopoly.
b. duopoly and triopoly.
c. perfect competition and monopolistic competition.
d. duopoly and imperfect competition.

71. A group of firms that act in unison to maximize collective profits is called a
a. monopolistically competitive industry.
b. monopoly.
c. cartel.
d. Nash equilibrium market.

72. An agreement among firms regarding price and/or production levels is called
a. an antitrust market.
b. a free-trade arrangement.
c. collusion.
d. a Nash agreement.

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 Chapter 17/Oligopoly ❖ 51

73. 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.

74. If duopolists individually pursue their own self-interest when deciding how much to produce, the
profit-maximizing price they will charge for their product will be
a. less than the monopoly price.
b. equal to the perfectly competitive market price.
c. greater than the monopoly price.
d. possibly less than or greater than the monopoly price.

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

a. charge a higher price than the other members of the cartel.
b. increase production above the level agreed upon.
c. ignore the choices made by the other firms and act as a monopolist.
d. charge the same price a monopolist would charge.

76. Once a cartel is formed, the market is in effect served by

a. a monopoly.
b. an oligopoly.
c. imperfect competition.
d. monopolistic competition.

77. If an oligopolist is part of a cartel that is collectively producing the monopoly level of output, then
that oligopolist has the incentive to lower production with the aim of
a. lowering prices.
b. increasing profits for the group of firms as a whole.
c. increasing profits for itself, regardless of the impact on profits for the group of firms as a whole.
d. None of the above is correct.

78. When price is above marginal cost, selling one more unit at the current price will increase profit.
This concept is known as the
a. income effect.
b. price effect.
c. output effect.
d. cartel effect.

79. In imperfectly competitive markets, increasing production will decrease the price of all units sold.
This concept is known as the
a. income effect.
b. cost effect.
c. output effect.
d. price effect.

80. In a typical cartel agreement, the cartel maximizes profit when it

a. behaves as a monopolist.
b. behaves as a duopolist.
c. is flexible in enforcing production targets.
d. behaves as a perfectly competitive firm.

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52 ❖ Chapter 17/Oligopoly

81. An oligopolist will increase production if the output effect is

a. less than the price effect.
b. equal to the price effect.
c. greater than the price effect.
d. The oligopolist never has an incentive to increase production.

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 Chapter 17/Oligopoly ❖ 53

82. As the number of firms in an oligopoly increases,

a. each seller becomes more concerned about its impact on the market price.
b. the output effect decreases.
c. the total quantity of output produced by firms in the market gets closer to the socially efficient
quantity.
d. the oligopoly has more market power and firms earn a greater profit.

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54 ❖ Chapter 17/Oligopoly

83. When an oligopoly grows very large, the

a. output effect disappears.
b. price effect disappears.
c. output effect equals the price effect.
d. price of the product greatly exceeds marginal cost.

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 Chapter 17/Oligopoly ❖ 55

84. As the number of firms in an oligopoly increases, the price approaches

a. zero.
b. marginal cost.
c. infinity.
d. the monopoly price.

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56 ❖ Chapter 17/Oligopoly

85. Like monopolists, oligopolists are aware that an increase in the quantity of output always
a. reduces the price of their product.
b. reduces their profit.
c. reduces their revenue.
d. reduces productivity.

86. Oligopolies would like to act like a

a. duopoly, but self-interest often drives them closer to the perfectly competitive outcome.
b. competitive firm, but self-interest often drives them closer to the duopoly outcome.
c. monopoly, but self-interest often drives them to charge a higher price than would be charged by a
monopoly.
d. monopoly, but self-interest often drives them closer to the perfectly competitive outcome.

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 Chapter 17/Oligopoly ❖ 57

87. Oligopolies can end up looking like competitive markets if the number of firms is
a. large and they all cooperate.
b. large and they do not cooperate.
c. small and they all cooperate.
d. small and they do not cooperate.

88. The theory of oligopoly provides another reason that free trade can benefit all countries because
a. increased competition leads to larger deadweight losses.
b. as the number of firms within a given market increases, the price of the good decreases.
c. as the number of firms within a given market increases, the profit of each firm increases.
d. All of the above are correct.

89. Firms do not need to be concerned about striking a balance between the price effect and the output
effect when making production decisions in which of the following types of markets?
a. oligopoly
b. duopoly
c. monopoly
d. competitive markets

90. If nations such as Germany, Japan, and the United States prohibited international trade in automo-
biles, a likely effect would be that
a. the price effect would become a more significant consideration for each firm that makes
automobiles.
b. the excess of price over marginal cost would become less pronounced in the automobile market.
c. all countries would become better off.
d. automobile producers in the U.S. would collude to produce a large number of cars.

91. The theory of oligopoly provides a reason why

a. perfect competition is not a useful object of study.
b. price is less than marginal cost for many firms.
c. all countries can benefit from free trade among nations.
d. firms do not want to capture larger shares of their markets.

92. During the 1990s, the members of OPEC operated independently from one another, causing the
world market for crude oil to become close to
a. a monopoly market.
b. an oligopoly market.
c. a duopoly market.
d. a competitive market.
Figure 17-1

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58 ❖ Chapter 17/Oligopoly

93. Refer to Figure 17-1. Suppose this market is served by a duopoly in which each firm faces the
marginal cost curve shown in the diagram. The marginal revenue curve that a monopolist would face
in this market is also shown. Which of the following statements is true?
a. The total output in this market will likely be 2 units when the market is served by a duopoly.
b. The price in this market will likely be $6 when the market is served by a duopoly.
c. The total revenue to each firm will likely be more than $16 when the market is served by a duopoly.
d. The total output in this market will likely be less than 4 units when the market is served by a
duopoly.

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 Chapter 17/Oligopoly ❖ 59

94. Refer to Figure 17-1. Suppose this market is served by two firms who each face the marginal cost
curve shown in the diagram. The marginal revenue curve that a monopolist would face in this mar-
ket is also shown. If the firms are able to collude successfully,
a. the total output will be 2 units and the price will be $6.00 per unit.
b. the total output will be 2 units and the price will be $8.00 per unit.
c. the total output will be 4 units and the price will be $6.00 per unit.
d. there will be no deadweight loss.

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60 ❖ Chapter 17/Oligopoly

95. 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
a. $1.
b. $2.
c. $4.
d. $6.

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 Chapter 17/Oligopoly ❖ 61

96. The more firms an oligopoly has,

a. the more market power the oligopoly has. This results in higher prices and lower quantities of
output than an oligopoly with fewer firms would have.
b. the more important the price effect is, resulting in the market price being higher than when there are
fewer firms in the oligopoly.
c. the farther market price will be from marginal cost.
d. the more likely the firms will charge a price closer to the perfectly competitive price.

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62 ❖ Chapter 17/Oligopoly

97. In an oligopoly, the total output produced in the market is

a. higher than the total output that would be produced if the market were a monopoly and higher than
the total output that would be produced if the market were perfectly competitive.
b. higher than the total output that would be produced if the market were a monopoly but lower than
the total output that would be produced if the market were perfectly competitive.
c. lower than the total output that would be produced if the market were a monopoly but higher than
the total output that would be produced if the market were perfectly competitive.
d. lower than the total output that would be produced if the market were a monopoly and lower than
the total output that would be produced if the market were perfectly competitive.

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 Chapter 17/Oligopoly ❖ 63

Table 17-6. The table shows the demand schedule for a particular product.
Quantity Price
0 16
1 14
2 12
3 10
4 8
5 6
6 4
7 2
8 0

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64 ❖ Chapter 17/Oligopoly

98. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a
cartel. What price will the cartel charge in this market if the marginal cost of production is $0?
a. $6
b. $8
c. $10
d. $12

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 Chapter 17/Oligopoly ❖ 65

99. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a
cartel. If the marginal cost of production is $0 and there is no fixed cost, the combined profit of the
cartel will be
a. $16
b. $24
c. $30
d. $32

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66 ❖ Chapter 17/Oligopoly

100. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a
cartel. What price will the cartel charge in this market if the marginal cost of production is $4?
a. $6
b. $8
c. $10
d. $12

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 Chapter 17/Oligopoly ❖ 67

101. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a
cartel. If the marginal cost of production is $4 and the fixed cost is $6, the combined profit of the
cartel will be
a. $6
b. $12
c. $24
d. $32
Table 17-7. The table shows the demand schedule for a particular product.
Quantity Price
0 10
5 9
10 8
15 7
20 6
25 5
30 4
35 3
40 2
45 1
50 0
102. Refer to Table 17-7. If this market is perfectly competitive and the marginal cost is constant at $2
per unit, then how much output will be produced?
a. 20
b. 30
c. 35
d. 40

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68 ❖ Chapter 17/Oligopoly

103. Refer to Table 17-7. Suppose the market for this product is served by two firms who have formed
a cartel and are colluding to set the price and quantity in this market. If the marginal cost to produce
this product is constant at $2 per unit, then what price will the cartel set in this market?
a. $4
b. $5
c. $6
d. $7
104. Refer to Table 17-7. Suppose the market for this product is served by two firms who have formed
a cartel and are colluding to set the price and quantity in this market. If the marginal cost to produce
this product is constant at $2 per unit and there is no fixed cost, then what will the combined profit
of the cartel be?
a. $40
b. $60
c. $80
d. $120
Table 17-8. For a certain small town, the table shows the demand schedule for water. Assume the
marginal cost of supplying water is constant at $4 per bottle.
Price Quantity
(bottles)
$9 200
$8 400
$7 600
$6 800
$5 1000
$4 1200
$3 1400
$2 1600
105. Refer to Table 17-8. If there were many suppliers of bottled water, what would be the price and
quantity?
a. The price would be $6 per gallon and the quantity would be 800 gallons.
b. The price would be $5 per gallon and the quantity would be 1000 gallons.
c. The price would be $4 per gallon and the quantity would be 1200 gallons.
d. The price would be $3 per gallon and the quantity would be 1400 gallons.
106. Refer to Table 17-8. If there were only one supplier of water, what would be the price and quantity?
a. The price would be $7 per gallon and the quantity would be 600 gallons.
b. The price would be $6 per gallon and the quantity would be 800 gallons.
c. The price would be $5 per gallon and the quantity would be 1000 gallons.
d. The price would be $4 per gallon and the quantity would be 1200 gallons.
107. Refer to Table 17-8. If there are two suppliers of water, Victor and Sami, and if they have success-
fully formed a cartel, then what would be the price and the market quantity?
a. The price would be $7 per bottle and the market quantity would be 600 bottles.
b. The price would be $6 per bottle and the market quantity would be 800 bottles.
c. The price would be $5 per bottle and the market quantity would be 1000 bottles.
d. The price would be $4 per bottle and the market quantity would be 1200 bottles.
108. Refer to Table 17-8. If there are two suppliers of water, Victor and Sami, and if they have success-
fully formed a cartel and split the market evenly, then how many bottles will Sami supply?
a. 100
b. 200
c. 300
d. 400

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 Chapter 17/Oligopoly ❖ 69

Table 17-9
Only two firms, Acme and Pinnacle, sell a particular product. The table below shows the demand
curve for their product. Each firm has the same constant marginal cost of $10 and zero fixed cost.
Price Quantity Total
Revenues
70 0 0
65 100 6500
60 200 12000
55 300 16500
50 400 20000
45 500 22500
40 600 24000
35 700 24500
30 800 24000
25 900 22500
20 1000 20000
15 1100 16500
10 1200 12000
5 1300 6500
0 1400 0

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70 ❖ Chapter 17/Oligopoly

109. Refer to Table 17-9. If Acme and Pinnacle operate to jointly maximize profits, then what is the
price?
a. $45
b. $40
c. $35
d. $30

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 Chapter 17/Oligopoly ❖ 71

110. Refer to Table 17-9. If Acme and Pinnacle operate to jointly maximize profits, then what quantity
is sold?
a. 800
b. 700
c. 600
d. 500

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72 ❖ Chapter 17/Oligopoly

111. Refer to Table 17-9. If Acme and Pinnacle operate to jointly maximize profits and agree to share
the profit equally, then how much profit will each of them earn?
a. $9,000
b. $8,750
c. $8,000
d. $6,750

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 Chapter 17/Oligopoly ❖ 73

112. Refer to Table 17-9. Acme and Pinnacle agree to maximize joint profits. However, while Acme
produces the agreed upon amount, Pinnacle breaks the agreement and produces 100 more than
agreed, how much profit does Pinnacle make?
a. $10,000
b. $9,000
c. $8,750
d. $7500

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74 ❖ Chapter 17/Oligopoly

113. Refer to Table 17-9. Acme and Pinnacle agree to jointly maximize profits. If Acme and Pinnacle
each break the agreement and each produce 100 more than agreed upon, how much less profit does
each make?
a. $250
b. $750
c. $1,000
d. $2,000

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 Chapter 17/Oligopoly ❖ 75

114. Refer to Table 17-9. If this market were perfectly competitive instead of oligopolistic, what quan-
tity would be produced?
a. 1400
b. 1300
c. 1200
d. 1100

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76 ❖ Chapter 17/Oligopoly

115. Refer to Table 17-9. If this market were perfectly competitive instead of oligopolistic, what would
the price be?
a. $15
b. $10
c. $5
d. $0

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 Chapter 17/Oligopoly ❖ 77

116. Refer to Table 17-9. What is the socially efficient quantity of the product?
a. 700
b. 1000
c. 1200
d. 1400

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78 ❖ Chapter 17/Oligopoly

117. Refer to Table 17-9. How much less do each of these firms earn in the Nash equilibrium than if
they jointly maximize profits?
a. $250
b. $500
c. $750
d. $1000

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 Chapter 17/Oligopoly ❖ 79

Table 17-10
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.

Quantity (in gallons) Price Total Revenue

0 $8 $0
50 7 350
100 6 600
150 5 750
200 4 800
250 3 750
300 2 600
350 1 350
400 0 0

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80 ❖ Chapter 17/Oligopoly

118. Refer to Table 17-10. If the market for gasoline in Driveaway is perfectly competitive, then the
equilibrium price of gasoline is
a. $0 and the equilibrium quantity is 400 gallons.
b. $1 and the equilibrium quantity is 350 gallons.
c. $2 and the equilibrium quantity is 300 gallons.
d. $4 and the equilibrium quantity is 200 gallons.

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 Chapter 17/Oligopoly ❖ 81

119. Refer to Table 17-10. Suppose we observe that the price of a gallon of gasoline in Driveaway is
$2. Given this observation, which of the following scenarios is most likely?
a. There is one seller of gasoline in Driveaway.
b. There are two sellers of gasoline in Driveaway.
c. There are a few sellers of gasoline in Driveaway, but the number of sellers exceeds two.
d. There are many sellers of gasoline in Driveaway.
120. Refer to Table 17-10. If the market for gasoline in Driveaway is a monopoly, then the profit-maxi-
mizing monopolist will charge a price of
a. $6 and sell 100 gallons.
b. $5 and sell 150 gallons.
c. $4 and sell 200 gallons.
d. $3 and sell 250 gallons.
121. Refer to Table 17-10. If the market for gasoline in Driveaway is a monopoly, then the monopo-
list’s maximum profit is
a. $350.
b. $400.
c. $450.
d. $500.
122. Refer to Table 17-10. Suppose we observe that the price of a gallon of gasoline in Driveaway is
$5; we observe as well that a particular seller’s profit is $150. Given this observation, which of the
following scenarios is most likely?
a. The market for gasoline in Driveaway is a monopoly.
b. There are two identical sellers of gasoline in Driveaway, and the sellers collude.
c. There are two identical sellers of gasoline in Driveaway, and the sellers do not collude.
d. There are three identical sellers of gasoline in Driveaway, and the sellers collude.
123. Refer to Table 17-10. If there are exactly two sellers of gasoline in Driveaway and if they collude,
then which of the following outcomes is most likely?
a. Each seller will sell 50 gallons and charge a price of $7.
b. Each seller will sell 75 gallons and charge a price of $2.50.
c. Each seller will sell 75 gallons and charge a price of $5.
d. Each seller will sell 100 gallons and charge a price of $4.
124. Refer to Table 17-10. If there are exactly five sellers of gasoline in Driveaway and if they collude,
then which of the following outcomes is most likely?
a. Each seller will sell 50 gallons and charge a price of $3.
b. Each seller will sell 40 gallons and charge a price of $4.
c. Each seller will sell 30 gallons and charge a price of $4.
d. Each seller will sell 30 gallons and charge a price of $5.
125. Refer to Table 17-10. If there are exactly five sellers of gasoline in Driveaway and if they collude,
then which of the following outcomes is most likely?
a. Each seller will sell 20 gallons, charge a price of $6, and earn a profit of $80.
b. Each seller will sell 30 gallons, charge a price of $5, and earn a profit of $90.
c. Each seller will sell 40 gallons, charge a price of $4, and earn a profit of $120.
d. Each seller will sell 50 gallons, charge a price of $3, and earn a profit of $50.
126. Refer to Table 17-10. Suppose there are exactly two sellers of gasoline in Driveaway: Amogo and
Spilmerica. If Amogo sells 150 gallons and Spilmerica sells 100 gallons, then
a. Amogo’s profit is $150 and Spilmerica’s profit is $100.
b. Amogo’s profit is $100 and Spilmerica’s profit is $66.67.
c. Amogo’s profit is $75 and Spilmerica’s profit is $50.
d. there is an excess supply of gasoline in Driveaway.

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82 ❖ Chapter 17/Oligopoly

127. Cartels in the United States are

a. legal if price is competitively determined.
b. legal if all firms in the industry agree to the terms of the cartel.
c. legal if all conditions of the cartel are made public.
d. illegal.

128. Which of the following would be most likely to contribute to the breakdown of a cartel in a natural
resource (e.g., bauxite) market?
a. high prices
b. low price elasticity of demand
c. high compatibility of member interests
d. unequal member ownership of the natural resource

129. An equilibrium in which each firm in an oligopoly maximizes profit, given the actions of its rivals,
is called
a. a general equilibrium.
b. a dominant equilibrium.
c. a Nash equilibrium.
d. an oligopoly equilibrium.

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 Chapter 17/Oligopoly ❖ 83

130. An oligopoly would tend to restrict output and drive up price if

a. barriers to entering the industry are negligible.
b. firms engage in informative advertising.
c. firms produce a standardized product.
d. firms collude and behave like a monopoly.

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84 ❖ Chapter 17/Oligopoly

131. If duopoly firms that are not colluding were able to successfully collude, then
a. price and quantity would rise.
b. price and quantity would fall.
c. price would rise and quantity would fall.
d. price would fall and quantity would rise.

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 Chapter 17/Oligopoly ❖ 85

132. If one firm left a duopoly market where the firms did not cooperate then
a. price and quantity would rise
b. price would rise and quantity would fall.
c. quantity would rise and price would fall.
d. quantity and price would fall.

133. If a market is a duopoly and additional firms enter and do not cooperate, then
a. price and quantity fall.
b. price and quantity rise.
c. price falls and quantity rises.
d. price rises and quantity falls.

134. Other things the same, in which case is the quantity produced the highest?
a. There is one firm.
b. There are two firms that successfully collude.
c. There are two firms in Nash equilibrium.
d. There are a very large number of firms.

135. If duopolies colluded but then stopped colluding,

a. price and quantity would rise.
b. price would rise and quantity would fall.
c. price would fall and quantity would rise
d. price and quantity would fall.

136. In which case do firms have some control over their price?
a. oligopoly and perfect competition
b. oligopoly but not perfect competition
c. perfect competition but not oligopoly
d. neither perfect competition nor oligopoly

137. The oligopoly price will be greater than marginal cost but less than the monopoly price when
a. the oligopolists collude by jointly choosing a quantity to produce and maintaining their agreement.
b. the oligopolists collude by jointly choosing a price to charge and maintaining their agreement.
c. each oligopolist individually chooses a quantity to produce to maximize profit.
d. each oligopolist’s objective is minimization of average total cost, rather than maximization of
profit.

138. In pursing its own interest, an oligopoly firm will decide to increase production by 1 unit as long as
a. there is no output effect.
b. there is no price effect.
c. the output effect is larger than the price effect.
d. the price effect is larger than the output effect.
THE ECONOMICS OF COOPERATION

1. When firms are faced with making strategic choices in order to maximize profit, economists typi-
cally use
a. the theory of monopoly to model their behavior.
b. the theory of aggressive competition to model their behavior.
c. game theory to model their behavior.
d. cartel theory to model their behavior.

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86 ❖ Chapter 17/Oligopoly

2. When strategic interactions are important to pricing and production decisions, a typical firm will
a. set the price of its product equal to marginal cost.
b. consider how competing firms might respond to its actions.
c. generally operate as if it is a monopolist.
d. consider exiting the market.

3. Game theory is important for the understanding of

a. competitive markets.
b. monopolies.
c. oligopolies.
d. all market structures.

4. Game theory is necessary for understanding

a. all market structures.
b. competition and oligopoly, but it is not necessary for understanding monopoly.
c. monopoly and oligopoly, but it is not necessary for understanding competition.
d. oligopoly, but it is not necessary for understanding monopoly or competition.

5. The prisoners' dilemma provides insights into the

a. difficulty of maintaining cooperation.
b. benefits of avoiding cooperation.
c. benefits of government ownership of monopoly.
d. ease with which oligopoly firms maintain high prices.

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 Chapter 17/Oligopoly ❖ 87

6. In the prisoners' dilemma game, self-interest leads

a. each prisoner to confess.
b. to a breakdown of any agreement that the prisoners might have made before being questioned.
c. to an outcome that is not particularly good for either prisoner.
d. All of the above are correct.

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88 ❖ Chapter 17/Oligopoly

7. The likely outcome of the standard prisoners' dilemma game is that

a. neither prisoner confesses.
b. exactly one prisoner confesses.
c. both prisoners confess.
d. Not enough information is given to answer this question.

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 Chapter 17/Oligopoly ❖ 89

8. The prisoners' dilemma is an important game to study because

a. most games present zero-sum alternatives.
b. it identifies the fundamental difficulty in maintaining cooperative agreements.
c. strategic decisions faced by prisoners are identical to those faced by firms engaged in competitive
agreements.
d. all interactions among firms are represented by this game.

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90 ❖ Chapter 17/Oligopoly

9. The prisoners’ dilemma game

a. provides insight into why cooperation is individually rational.
b. provides insight into why cooperation is difficult.
c. is a game in which neither player has a dominant strategy.
d. is a game in which exactly one of the two players has a dominant strategy.

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 Chapter 17/Oligopoly ❖ 91

10. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is one
a. in which neither Bonnie nor Clyde confesses.
b. in which both Bonnie and Clyde confess.
c. that involves neither Bonnie nor Clyde pursuing a dominant strategy.
d. that is ideal in terms of Bonnie’s self-interest and in terms of Clyde’s self-interest.

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92 ❖ Chapter 17/Oligopoly

11. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is
a. a very good outcome for both players.
b. a very good outcome for Bonnie, but a bad outcome for Clyde.
c. a very good outcome for Clyde, but a bad outcome for Bonnie.
d. a bad outcome for both players.

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 Chapter 17/Oligopoly ❖ 93

12. In a game, a dominant strategy is

a. the best strategy for a player to follow only if other players are cooperative.
b. the best strategy for a player to follow, regardless of the strategies followed by other players.
c. a strategy that must appear in every game.
d. a strategy that leads to one player's interests dominating the interests of the other players.

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94 ❖ Chapter 17/Oligopoly

13. A dominant strategy is one that

a. makes every player better off.
b. makes at least one player better off without hurting the competitiveness of any other player.
c. increases the total payoff for the player.
d. is best for the player, regardless of what strategies other players follow.

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 Chapter 17/Oligopoly ❖ 95

Table 17-11
Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the
healthcare related expenses associated with cigarette smoking. Both cigarette firms have evidence
that indicates that cigarette smoke causes lung cancer (and other related illnesses). State prosecutors
do not have access to the same data used by cigarette manufacturers and thus will have difficulty
recovering full costs without the help of at least one cigarette firm study. Each firm has been
presented with an opportunity to lower its liability in the suit if it cooperates with attorneys
representing the states.
Firm B
Concede that cigarette Argue that there is no evidence
smoke causes lung cancer that smoke causes cancer
Concede that cigarette Firm A profit = $–20 Firm A profit = $–50
smoke causes lung cancer Firm B profit = $–15 Firm B profit = $–5
Firm A Argue that there is no
Firm A profit = $–5 Firm A profit = $–10
evidence that smoke causes
Firm B profit = $–50 Firm B profit = $–10
cancer

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96 ❖ Chapter 17/Oligopoly

14. Refer to Table 17-11. Pursuing its own best interests, Firm A will concede that cigarette smoke
causes lung cancer
a. only if Firm B concedes that cigarette smoke causes lung cancer.
b. only if Firm B does not concede that cigarette smoke causes lung cancer.
c. regardless of whether Firm B concedes that cigarette smoke causes lung cancer.
d. None of the above. In pursuing its own best interests, Firm A will in no case concede that cigarette
smoke causes lung cancer.

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 Chapter 17/Oligopoly ❖ 97

15. Refer to Table 17-11. Pursuing its own best interests, Firm B will concede that cigarette smoke
causes lung cancer
a. only if Firm A concedes that cigarette smoke causes lung cancer.
b. only if Firm A does not concede that cigarette smoke causes lung cancer.
c. regardless of whether Firm A concedes that cigarette smoke causes lung cancer.
d. None of the above; in pursuing its own best interests, Firm B will in no case concede that cigarette
smoke causes lung cancer.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
98 ❖ Chapter 17/Oligopoly

16. Refer to Table 17-11. If both firms follow a dominant strategy, Firm A's profits (losses) will be
a. $-50
b. $-20
c. $-10
d. $-5
17. Refer to Table 17-11. If both firms follow a dominant strategy, Firm B's profits (losses) will be
a. $-50
b. $-15
c. $-10
d. $-5
18. Refer to Table 17-11. When this game reaches a Nash equilibrium, profits for Firm A and Firm B
will be
a. $-5 and $-50, respectively.
b. $-10 and $-10, respectively.
c. $-20 and $-15, respectively.
d. $-50 and $-5, respectively.
Table 17-12
Each year the United States considers renewal of Most Favored Nation (MFN) trading status with
Farland (a mythical nation). Historically, legislators have made threats of not renewing MFN status
because of human rights abuses in Farland. The non-renewal of MFN trading status is likely to
involve some retaliatory measures by Farland. The payoff table below shows the potential economic
gains associated with a game in which Farland may impose trade sanctions against U.S. firms and
the United States may not renew MFN status with Farland. The table contains the dollar value of all
trade-flow benefits to the United States and Farland.
Farland
Impose trade sanctions Do not impose trade sanctions
against U.S. firms against U.S. firms
Don't renew MFN U.S. trade value = $65 b U.S. trade value = $140 b
United status with Farland Farland trade value = $75 b Farland trade value = $5 b
States Renew MFN status U.S. trade value = $35 b U.S. trade value = $130 b
with Farland Farland trade value = $285 b Farland trade value = $275 b
19. Refer to Table 17-12. Pursuing its own best interests, Farland will impose trade sanctions against
U.S. firms
a. only if the U.S. does not renew MFN status with Farland.
b. only if the U.S. renews MFN status with Farland.
c. regardless of whether the U.S. renews MFN status with Farland.
d. None of the above is correct. In pursuing its own best interests, Farland will in no case impose trade
sanctions against U.S. firms.
20. Refer to Table 17-12. Pursuing its own best interests, the U.S. will renew MFN status with Farland
a. only if Farland does not impose trade sanctions against U.S. firms.
b. only if Farland imposes trade sanctions against U.S. firms.
c. regardless of whether Farland imposes trade sanctions against U.S. firms.
d. None of the above is correct. In pursuing its own best interests, the United States will in no case
renew MFN status with Farland.
21. Refer to Table 17-12. This particular game
a. features a dominant strategy for the U.S.
b. features a dominant strategy for Farland.
c. is a version of the prisoners' dilemma game.
d. All of the above are correct.

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 Chapter 17/Oligopoly ❖ 99

22. Refer to Table 17-12. If both countries follow a dominant strategy, the value of trade flow benefits
for Farland will be
a. $5 b.
b. $75 b.
c. $275 b.
d. $285 b.

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100 ❖ Chapter 17/Oligopoly

23. Refer to Table 17-12. If both countries follow a dominant strategy, the value of trade flow benefits
for the United States will be
a. $35 b.
b. $65 b.
c. $130 b.
d. $140 b.

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 Chapter 17/Oligopoly ❖ 101

24. Refer to Table 17-12. When this game reaches a Nash equilibrium, the value of trade flow benefits
will be
a. United States $35 b and Farland $285 b.
b. United States $65 b and Farland $75 b.
c. United States $140 b and Farland $5 b.
d. United States $130 b and Farland $275 b.

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102 ❖ Chapter 17/Oligopoly

25. Refer to Table 17-12. If trade negotiators are able to communicate effectively about the conse-
quences of various trade policies (i.e., enter into an agreement about the policy they should adopt),
then we would expect the countries to agree to which outcome?
a. United States $35 b and Farland $285 b
b. United States $65 b and Farland $75 b
c. United States $140 b and Farland $5 b
d. United States $130 b and Farland $275 b

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 Chapter 17/Oligopoly ❖ 103

26. Refer to Table 17-12. Assume that trade negotiators meet to discuss trade policy between the
United States and Farland. If neither party to the negotiation is able to trust the other party, then
a. each should assume that the other will choose a strategy that optimizes total value of the trade
relationship.
b. the Nash equilibrium will provide the largest possible gains to each party.
c. Farland negotiators should assume that United States negotiators will implement a policy that is in
the mutual best interest of both countries.
d. each should follow its dominant strategy.

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104 ❖ Chapter 17/Oligopoly

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.
Lopes
Increase the size of store Do not increase the size of
and parking lot store and parking lot
Increase the size
Lopes = $1.0 million Lopes = $0.4 million
of store and
HomeMax = $1.5 million HomeMax = $3.4 million
parking lot
HomeMax
Do not increase
Lopes = $3.2 million Lopes = $2.00 million
the size of store
HomeMax = $0.6 million HomeMax = $2.5 million
and parking lot
27. Refer to Table 17-13. Pursuing its own best interest, Lopes will
a. increase the size of its store and parking lot only if HomeMax also increases the size of its store and
parking lot.
b. increase the size of its store and parking lot only if HomeMax does not increase the size of its store
and parking lot.
c. increase the size of its store and parking lot regardless of the decision made by HomeMax.
d. not increase the size of its store and parking lot regardless of the decision made by HomeMax.
28. Refer to Table 17-13. Pursuing its own best interest, HomeMax will
a. increase the size of its store and parking lot only if Lopes also increases the size of its store and
parking lot.
b. increase the size of its store and parking lot only if Lopes does not increase the size of its store and
parking lot.
c. increase the size of its store and parking lot regardless of the decision made by Lopes.
d. not increase the size of its store and parking lot regardless of the decision made by Lopes.
29. Refer to Table 17-13. Increasing the size of its store and parking lot is a dominant strategy for
a. Lopes, but not for HomeMax.
b. HomeMax, but not for Lopes.
c. both stores.
d. neither store.
30. Refer to Table 17-13. If both stores follow a dominant strategy, HomeMax's annual profit will grow
by
a. $0.6 million.
b. $1.5 million.
c. $2.5 million.
d. $3.4 million.
31. Refer to Table 17-13. If both stores follow a dominant strategy, Lopes's annual profit will grow by
a. $0.4 million.
b. $1.0 million.
c. $2.0 million.
d. $3.2 million.
32. Refer to Table 17-13. When this game reaches a Nash equilibrium, annual profit will grow by
a. $1.5 million for HomeMax and by $1.0 million for Lopes.
b. $3.4 million for HomeMax and by $0.4 million for Lopes.
c. $0.6 million for HomeMax and by $3.2 million for Lopes.
d. $2.5 million for HomeMax and by $2.0 million for Lopes.

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 Chapter 17/Oligopoly ❖ 105

33. Refer to Table 17-13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf
one afternoon and happen to discuss a strategy to optimize growth related profit. They should both
agree to
a. increase their store and parking lot sizes.
b. refrain from increasing their store and parking lot sizes.
c. be more competitive in capturing market share.
d. share the context of their conversation with the Federal Trade Commission.
34. Refer to Table 17-13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf
one afternoon and happen to discuss a strategy to optimize growth related profit. If they both agree
to cooperate on a strategy that maximizes their joint profits, annual profit will grow by
a. $1.0 million for Lopes and by $1.5 million for HomeMax.
b. $0.4 million for Lopes and by $3.4 million for HomeMax.
c. $3.2 million for Lopes and by $0.6 million for HomeMax.
d. $2.0 million for Lopes and by $2.5 million for HomeMax.
Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low
level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two
companies.
ABC's Decision

High output Low output

ABC's profit = $3 million ABC's profit = $2.5 million

High output

XYZ's profit = $3 million XYZ's profit = $4 million

XYZ's
Decision
ABC's profit = $4 million ABC's profit = $3.5 million

Low output

XYZ's profit = $2.5 million XYZ's profit = $3.5 million

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106 ❖ Chapter 17/Oligopoly

35. Refer to Figure 17-1. The dominant strategy for ABC is to

a. produce high output, and the dominant strategy for XYZ is to produce high output.
b. produce high output, and the dominant strategy for XYZ is to produce low output.
c. produce low output, and the dominant strategy for XYZ is to produce high output.
d. produce low output, and the dominant strategy for XYZ is to produce low output.

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 Chapter 17/Oligopoly ❖ 107

36. Refer to Figure 17-1. Which of the following statements is correct?

a. ABC can potentially earn its highest possible profit if it produces a high level of output, and for that
reason it is a dominant strategy for ABC to produce a high level of output.
b. The highest possible combined profit for the two firms occurs when both produce a low level of
output, and for that reason producing a low level of output is a dominant strategy for both firms.
c. Regardless of the strategy pursued by ABC, XYZ’s best strategy is to produce a high level of
output, and for that reason producing a high level of output is a dominant strategy for XYZ.
d. Our knowledge of game theory suggests that the most likely outcome of the game, if it is played
only once, is for one firm to produce a low level of output and for the other firm to produce a high
level of output.

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108 ❖ Chapter 17/Oligopoly

37. Refer to Figure 17-1. If this game is played only once, then the most likely outcome is that
a. both firms produce a low level of output.
b. ABC produces a low level of output and XYZ produces a high level of output.
c. ABC produces a high level of output and XYZ produces a low level of output.
d. both firms produce a high level of output.

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 Chapter 17/Oligopoly ❖ 109

38. Refer to Figure 17-1. If this game is played repeatedly and ABC uses a tit-for-tat strategy, it will
choose a
a. high level of output in the first round and in subsequent rounds it will choose whatever XYZ chose
in the previous round.
b. low level of output in the first round and in subsequent rounds it will choose whatever XYZ chose
in the previous round.
c. high level of output in all rounds, regardless of the choice made by XYZ.
d. high level of output in all rounds, regardless of the choice made by XYZ.

39. Much of the research on game theory in recent decades was driven by attempts to analyze actions of
players during
a. the Great Depression of the 1930s.
b. World War II.
c. the Cold War between the United States and the Soviet Union.
d. the ascendancy of the conservative movement in the United States in the 1970s and 1980s.

40. Consider a game of the “Jack and Jill” type in which a market is a duopoly and each firm decides to
produce either a “high” quantity of output or a “low” quantity of output. If the two firms success-
fully reach and maintain the cooperative outcome of the game, then
a. both the combined profit of the firms and total surplus are maximized.
b. the combined profit of the firms is maximized but total surplus is not maximized.
c. the combined profit of the firms is not maximized but total surplus is maximized.
d. neither the combined profit of the firms nor total surplus is maximized.

41. Games that are played more than once generally

a. lead to outcomes dominated purely by self-interest.
b. lead to outcomes that do not reflect joint rationality.
c. encourage cheating on cartel production quotas.
d. make collusive arrangements easier to enforce.
42. Very often, the reason that players can solve the prisoners' dilemma and reach the most profitable
outcome is that
a. each player tries to capture a large portion of the market share.
b. the players play the game not once but many times.
c. the game becomes more competitive.
d. self interest results in the Nash equilibrium which is the best outcome for the players.

43. In a two-person repeated game, a tit-for-tat strategy starts with

a. cooperation and then each player mimics the other player's last move.
b. cooperation and then each player is unresponsive to the strategic moves of the other player.
c. noncooperation and then each player pursues his or her own self-interest.
d. noncooperation and then each player cooperates when the other player demonstrates a desire for the
cooperative solution.

44. A tit-for-tat strategy starts out

a. conciliatory and then encourages an optimal social outcome among the other players.
b. unfriendly and then encourages friendly strategies among players.
c. friendly, then penalizes unfriendly players, and forgives them if warranted.
d. aggressive, then compensates losing players, and eventually forgives unfriendly players.

45. Individual profit earned by Dave, the oligopolist, depends on which of the following?
(i) The quantity of output that Dave produces
(ii) The quantities of output that the other firms in the market produce
(iii) The extent of collusion between Dave and the other firms in the market
a. (i) and (ii)

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110 ❖ Chapter 17/Oligopoly

b. (ii) and (iii)

c. (iii) only
d. (i), (ii), and (iii)

46. Which of the following statements is (are) true of the prisoners' dilemma?
(i) Rational self-interest leads neither party to confess.
(ii) Cooperation between the prisoners is difficult to maintain.
(iii) Cooperation between the prisoners is individually rational.
a. (ii) only
b. (ii) and (iii)
c. (i) and (iii)
d. (i), (ii), and (iii)

47. When the prisoners’ dilemma game is generalized to describe situations other than those that liter-
ally involve two prisoners, we see that cooperation between the players of the game
a. can be difficult to maintain, but only when cooperation would make at least one of the players of
the game worse off.
b. can be difficult to maintain, even when cooperation would make both players of the game better
off.
c. always works to the benefit of society as a whole.
d. always works to the detriment of society as a whole.
Scenario 17-2. Imagine that two oil companies, Mobile and Cargo, own adjacent oil fields. Under the fields is
a common pool of oil worth $96 million. Drilling a well to recover oil costs $3 million per well. If each
company drills one well, each will get half of the oil and earn a $45 million profit ($48 million in revenue - $3
million in costs). Assume that having X percent of the total wells means that a company will collect X percent
of the total revenue.

48. Refer to Scenario 17-2. If Mobile and Cargo are able to successfully collude to maximize their joint
profits, Mobile will
a. drill one well and Cargo will drill one well.
b. drill one well and Cargo will drill two wells.
c. drill two wells and Cargo will drill one well.
d. drill two wells and Cargo will drill two wells.

49. Refer to Scenario 17-2. If Mobile and Cargo are able to successfully collude to maximize their joint
profits, Mobile will earn
a. $29 million and Cargo will earn $58 million.
b. $42 million and Cargo will earn $42 million.
c. $45 million and Cargo will earn $45 million.
d. $58 million and Cargo will earn $29 million.

50. Refer to Scenario 17-2. If Mobile were to drill a second well, what would its profit be if Cargo did
not drill a second well?
a. $29 million
b. $58 million
c. $61 million
d. $64 million

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 Chapter 17/Oligopoly ❖ 111

51. Refer to Scenario 17-2. If Mobile were to drill a second well and Cargo also drilled a second well,
what would Mobile's profit be?
a. $24 million
b. $42 million
c. $45 million
d. $48 million

52. Refer to Scenario 17-2. Cargo's dominant strategy would lead to what sort of well-drilling behav-
ior?
a. Cargo will never drill a second well.
b. Cargo will always drill a second well.
c. Cargo will drill a second well only if Mobile drills a well.
d. Cargo will drill a second well only if Mobile does not drill a well.

53. Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil worth
$30 million. For each well that is drilled, the company that drills the well incurs a cost of $3 mil-
lion. Each company can drill up to two wells. What is the likely outcome of this game if each com-
pany pursues its own self-interest?
a. Each company drills one well and experiences a profit of $12 million.
b. Each company drills one well and experiences a profit of $10 million.
c. Each company drills two wells and experiences a profit of $9 million.
d. One company drills two wells and experiences a profit of $14 million; the other company drills one
well and experiences a profit of $7 million.

54. We know that people tend to overuse common resources. This problem can be viewed as an exam-
ple of
a. a game in which the players succeed in reaching the cooperative outcome.
b. the prisoners’ dilemma.
c. a situation to which game theory does not apply because of a lack of strategic thinking.
d. a situation to which game theory does not apply because of too many decision-makers.

55. The paradoxical nature of oligopoly can be demonstrated by the fact that, even though the monopoly
outcome is best for the oligopolists,
a. they collude to set the output level equal to the Nash equilibrium level of output.
b. they have incentives to increase production above the monopoly outcome.
c. they do not behave as profit maximizers.
d. self-interest juxtaposes the profits earned at the Nash equilibrium.

56. Hot dog vendors on the beach fail to cooperate with one another on the quantity of hot dogs they
should sell to earn monopoly profits. A consequence of their failure is that, relative to the outcome
the vendors would like,
(i) the quantity of hot dogs supplied is closer to the socially optimal level.
(ii) the price of hot dogs is closer to marginal cost.
(iii) the hot dog market at the beach is less competitive.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (iii) only

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112 ❖ Chapter 17/Oligopoly

57. Why would lack of cooperation between criminal suspects be desirable for society as a whole?
a. The suspects are able to choose optimal outcomes for themselves by acting in their own self
interest.
b. The prisoners' dilemma safeguards the criminals' constitutional rights.
c. More criminals will be convicted.
d. None of the above is correct.

58. What happens when the prisoners' dilemma game is repeated numerous times in an oligopoly mar-
ket?
(i) The firms may well reach the monopoly outcome.
(ii) The firms may well reach the competitive outcome.
(iii) Buyers of the oligopolists' product will likely be worse off as a result.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (i), (ii), and (iii)

59. In game theory, a Nash equilibrium is

a. an outcome in which each player is doing his best given the strategies chosen by the other players.
b. an outcome in which no player wishes to change her chosen strategy given the strategies chosen by
the other players.
c. the outcome that occurs when all players have a dominant strategy.
d. All of the above are correct.
Scenario 17-3. Consider two countries, Muria and Zenya, that are engaged in an arms race. Each
country must decide whether to build new weapons or to disarm existing weapons. Each country
prefers to have more arms than the other because a large arsenal gives it more influence in world
affairs. But each country also prefers to live in a world safe from the other country's weapons. The
following table shows the possible outcomes for each decision combination. The numbers in each
cell represent the country’s ranking of the outcome (4 = best outcome, 1 = worst outcome).
Zenya
Build new weapons Disarm existing weapons
Build new Muria: 2 Muria: 4
weapons Zenya: 2 Zenya: 1
Muria
Disarm existing Muria: 1 Muria: 3
weapons Zenya: 4 Zenya: 3

60. Refer to Scenario 17-3. If Zenya chooses to build new weapons, then Muria will
a. disarm in order to prevent the loss of influence in world affairs.
b. disarm in order to promote world peace.
c. build new weapons in order to prevent the loss of influence in world affairs.
d. None of the above are correct.

61. Refer to Scenario 17-3. If Zenya chooses to disarm its existing weapons, then Muria will
a. disarm in order to increase its influence in world affairs.
b. disarm in order to promote world peace.
c. build new weapons in order to promote world peace.
d. build new weapons in order to increase its influence in world affairs.

62. Refer to Scenario 17-3. Which of these statements is correct?

(i) Muria is better off building new weapons if Zenya builds new weapons.
(ii) Muria is better off building new weapons if Zenya disarms existing weapons.
(iii) Building new weapons is Muria's dominant strategy.
a. (i) and (ii)

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 Chapter 17/Oligopoly ❖ 113

b. (ii) and (iii)

c. (i) and (iii)
d. (i), (ii), and (iii)

63. Refer to Scenario 17-3. Building new weapons is a dominant strategy for
a. Muria, but not for Zenya.
b. Zenya, but not for Muria.
c. both Muria and Zenya.
d. neither Muria nor Zenya.

64. Refer to Scenario 17-3. Suppose the two countries agreed to disarm existing weapons. In reality
these two countries may have a hard time keeping this agreement due to which of the following rea-
sons?
(i) Even though Muria has no incentive to cheat on the agreement, Zenya has an incentive to
cheat on the agreement.
(ii) Much like the prisoners’ dilemma, both countries are better off reneging on the agreement
and building new weapons.
(iii) Both countries want to increase their world power by building new weapons.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. (i), (ii), and (iii)
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.

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114 ❖ Chapter 17/Oligopoly

65. Refer to Scenario 17-4. What will these two companies do if they behave as individual profit maxi-
mizers?
a. Neither company will advertise.
b. Both companies will advertise.
c. One company will advertise, the other will not.
d. There is no way of knowing without knowing how many customers are stolen through advertising.

66. Refer to Scenario 17-4. The likely outcome of this game is that PM Inc. earns
a. $30 million and Brown Inc. earns $60 million.
b. $40 million and Brown Inc. earns $40 million.
c. $50 million and Brown Inc. earns $50 million.
d. $60 million and Brown Inc. earns $30 million.

67. Refer to Scenario 17-4. If these two companies collude and agree upon the best joint strategy,
a. neither company will advertise.
b. both companies will advertise.
c. PM Inc. will advertise but Brown Inc. will not.
d. Brown Inc. will advertise but PM Inc. will not.

68. Refer to Scenario 17-4. PM Inc.'s dominant strategy is to

a. refrain from advertising regardless of whether Brown Inc. advertises.
b. advertise only if Brown Inc. advertises.
c. advertise only if Brown Inc. does not advertise.
d. advertise regardless of whether Brown Inc. advertises.

69. Refer to Scenario 17-4. In 1971, Congress passed a law that banned cigarette advertising on televi-
sion. 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.

70. Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the
car and finds a small bag of marijuana and arrests the two. During the interrogation, each is sepa-
rately offered the following: "If you confess to dealing drugs and testify against your partner, you
will be given immunity and released while your partner will get 10 years in prison. If you both con-
fess, you will each get 5 years." If neither confesses, there is no evidence of drug dealing, and the
most they could get is one year each for possession of marijuana. If each suspected drug dealer fol-
lows a dominant strategy, what should he/she do?
a. Confess regardless of the partner's decision
b. Confess only if the partner confesses
c. Don’t confess regardless of the partner's decision
d. Don’t confess only if the partner doesn’t confess

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 Chapter 17/Oligopoly ❖ 115

71. A lack of cooperation by oligopolists trying to maintain monopoly profits

a. is desirable for society as a whole.
b. is not desirable for society as a whole.
c. may or may not be desirable for society as a whole.
d. is not a concern due to antitrust laws.

72. Oligopolists may well be able to reach their preferred, cooperative outcome if
a. the number of oligopolists is large.
b. they learn that a Nash equilibrium is in their best long-term interests.
c. a sufficient number of firms can be persuaded to lower their prices.
d. the game they play is repeated a sufficient number of times.

73. Martha and Oleg are competitors in a local market and each is trying to decide if it is worthwhile to
advertise. If both of them advertise, each will earn a profit of $5,000. If neither of them advertise,
each will earn a profit of $10,000. If one advertises and the other doesn't, then the one who adver-
tises will earn a profit of $15,000 and the other will earn $7,000. To earn the highest profit, Martha
a. should advertise, and she will earn $5,000.
b. should advertise, and she will earn $15,000.
c. should not advertise, and she will earn $10,000.
d. has no dominant strategy.

74. Barb and Sue are competitors in a local market. Each is trying to decide if it is better to advertise on
TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $5,000. If they
both advertise on radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a
profit of $10,000. If one advertises on TV and other advertises on radio, then the one advertising on
TV will earn $8,000 and the other will earn $3,000. If one advertises on TV and the other does not
advertise, then the one advertising on TV will earn $15,000 and the other will earn $2,000. If one
advertises on radio and the other does not advertise, then the one advertising on radio will earn
$12,000 and the other will earn $4,000. If both follow their dominant strategy, then Barb will
a. advertise on TV and earn $5,000.
b. advertise on radio and earn $7,000.
c. not advertise at all and earn $10,000.
d. None of the above is correct. Barb and Sue do not have dominant strategies.

75. Dave and Andy are competitors in a local market. Each is trying to decide if it is better to advertise
on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $4,000. If they
both advertise on radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a
profit of $10,000. If one advertises on TV and other advertises on radio, then the one advertising on
TV will earn $6,000 and the other will earn $5,000. If one advertises on TV and the other does not
advertise, then the one advertising on TV will earn $11,000 and the other will earn $2,000. If one
advertises on radio and the other does not advertise, then the one advertising on radio will earn
$12,000 and the other will earn $4,000. If both follow their dominant strategy, then Dave will
a. advertise on TV and earn $4,000.
b. advertise on radio and earn $7,000.
c. advertise on TV and earn $11,000.
d. not advertise and earn $10,000.

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116 ❖ Chapter 17/Oligopoly

76. George and Jerry are competitors in a local market. Each is trying to decide if it is better to advertise
on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $3,000. If they
both advertise on radio, each will earn a profit of $5,000. If neither advertises at all, each will earn a
profit of $10,000. If one advertises on TV and the other advertises on radio, then the one advertising
on TV will earn $4,000 and the other will earn $2,000. If one advertises on TV and the other does
not advertise, then the one advertising on TV will earn $8,000 and the other will earn $5,000. If one
advertises on radio and the other does not advertise, then the one advertising on radio will earn
$9,000 and the other will earn $6,000. If both follow their dominant strategy, then George will
a. advertise on TV and earn $3,000.
b. advertise on radio and earn $5,000.
c. advertise on TV and earn $8,000.
d. not advertise and earn $10,000.

77. Laurel and Janet are competitors in a local market and each is trying to decide if it is worthwhile to
advertise. If both of them advertise, each will earn a profit of $5,000. If neither of them advertise,
each will earn a profit of $10,000. If one advertises and the other doesn't, then the one who adver-
tises will earn a profit of $12,000 and the other will earn $2,000. In this version of the prisoners'
dilemma, if the game is played only once, Laurel should
a. advertise, but if the game is to be repeated many times she should probably not advertise.
b. advertise, and if the game is to be repeated many times she should still probably advertise.
c. not advertise, but if the game is to be repeated many times she should probably advertise.
d. not advertise, and if the game is to be repeated many times she should still not advertise.
Table 17-14
This table shows a game played between two players, A and B. The payoffs in the table are
shown as (Payoff to A, Payoff to B).
B
Right Left
Up (2, 2) (3, 1)
A
Down (1, 3) (0, 0)
78. Refer to Table 17-14. If player A chooses his/her best strategy, player B should
a. choose right and earn a payoff of 2.
b. choose right and earn a payoff of 3.
c. choose left and earn a payoff of 1.
d. choose left and earn a payoff of 0.

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 Chapter 17/Oligopoly ❖ 117

79. Refer to Table 17-14. If both players choose their best strategies, player A will earn a payoff of
a. 0.
b. 1.
c. 2.
d. 3.

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118 ❖ Chapter 17/Oligopoly

80. Refer to Table 17-14. Which of the following statements about this game is true?
a. Up is a dominant strategy for A and Right is a dominant strategy for B.
b. Up is a dominant strategy for A and Left is a dominant strategy for B.
c. Down is a dominant strategy for A and Right is a dominant strategy for B.
d. Down is a dominant strategy for A and Left is a dominant strategy for B.

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 Chapter 17/Oligopoly ❖ 119

81. Refer to Table 17-14. Which outcome is the Nash equilibrium in this game?
a. Up-Right
b. Up-Left
c. Down-Right
d. Down-Left

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120 ❖ Chapter 17/Oligopoly

Table 17-15
This table shows a game played between two players, A and B. The payoffs in the table are shown
as (Payoff to A, Payoff to B).
B
Left Center Right
Up (1, 4) (6, 2) (3, 1)
A Middle (2, 2) (4, 6) (5, 7)
Down (3, 2) (5, 5) (4, 3)

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 Chapter 17/Oligopoly ❖ 121

82. Refer to Table 17-15. If player B chooses Right, player A should choose
a. Up and earn a payoff of 1.
b. Middle and earn a payoff of 5.
c. Middle and earn a payoff of 7.
d. Down and earn a payoff of 4.
83. Refer to Table 17-15. Which of the following statements regarding this game is true?
a. Both players have a dominant strategy.
b. Player A has a dominant strategy, but player B does not have a dominant strategy.
c. Player A does not have a dominant strategy, but player B does have a dominant strategy.
d. Neither player has a dominant strategy.
84. Refer to Table 17-15. Which of the following outcomes represents a Nash equilibrium in the
game?
a. Up-Center
b. Middle-Right
c. Down-Left
d. Down-Center
Table 17-16
This table shows a game played between two players, A and B. The payoffs are given in the
table as (Payoff to A, Payoff to B).
B
Left Center Right
Up (8, 4) (4, 10) (6, 6)
A Middle (6, 2) (10, 6) (10, 4)
Down (2, 6) (8, 8) (12, 2)

85. Refer to Table 17-16. Which of the following statements is true regarding this game?
a. Both players have a dominant strategy.
b. Neither player has a dominant strategy.
c. A has a dominant strategy, but B does not have a dominant strategy.
d. B has a dominant strategy, but A does not have a dominant strategy.
86. Refer to Table 17-16. Which of the following outcomes represents a Nash equilibrium in the
game?
a. Middle-Center
b. Down-Center
c. Up-Left
d. More than one of the above is a Nash equilibrium in this game.
Table 17-17
This table shows a game played between two firms, Firm A and Firm B. In this game each
firm must decide how much output (Q) to produce: 2 units or 3 units. The profit for each firm
is given in the table as (Profit for Firm A, Profit for Firm B).
Firm B
Q=2 Q=3
Q=2 (10, 10) (8, 12)
Firm A
Q=3 (12, 8) (6, 6)
87. Refer to Table 17-17. In this game,
a. neither player has a dominant strategy.
b. both players have a dominant strategy.
c. Firm A has a dominant strategy, but Firm B does not have a dominant strategy.
d. Firm B has a dominant strategy, but Firm A does not have a dominant strategy.

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122 ❖ Chapter 17/Oligopoly

88. Refer to Table 17-17. Which of the following outcomes represent the Nash equilibrium in this
game?
a. Q=2 for Firm A and Q=3 for Firm B.
b. Q=3 for Firm A and Q=2 for Firm B.
c. There is no Nash equilibrium in this game since neither player has a dominant strategy.
d. Both a and b are correct.

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 Chapter 17/Oligopoly ❖ 123

Table 17-18
This table shows a game played between two firms, Firm A and Firm B. In this game each
firm must decide how much output (Q) to produce: 10 units or 12 units. The profit for each
firm is given in the table as (Profit for Firm A, Profit for Firm B).
Firm B
Q=10 Q=12
Q=10 (48, 48) (20, 60)
Firm A
Q=12 (60, 20) (38, 38)

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124 ❖ Chapter 17/Oligopoly

89. Refer to Table 17-18. The dominant strategy For Firm A is to produce
a. 10 units and the dominant strategy for Firm B is to produce 10 units.
b. 10 units and the dominant strategy for Firm B is to produce 12 units.
c. 12 units and the dominant strategy for Firm B is to produce 10 units.
d. 12 units and the dominant strategy for Firm B is to produce 12 units.

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 Chapter 17/Oligopoly ❖ 125

90. Refer to Table 17-18. The Nash equilibrium for this game is
a. 10 units of output for Firm A and 10 units of output for Firm B.
b. 10 units of output for Firm A and 12 units of output for Firm B.
c. 12 units of output for Firm A and 10 units of output for Firm B.
d. 12 units of output for Firm A and 12 units of output for Firm B.

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126 ❖ Chapter 17/Oligopoly

91. Refer to Table 17-18. If these two firms agree to cooperate to maximize their joint profit, the out-
come of the game will be
a. 10 units of output for Firm A and 10 units of output for Firm B.
b. 10 units of output for Firm A and 12 units of output for Firm B.
c. 12 units of output for Firm A and 10 units of output for Firm B.
d. 12 units of output for Firm A and 12 units of output for Firm B.

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 Chapter 17/Oligopoly ❖ 127

92. Refer to Table 17-18. If these two firms play this game repeatedly, the likely outcome will be
a. 10 units of output for Firm A and 10 units of output for Firm B.
b. 10 units of output for Firm A and 12 units of output for Firm B.
c. 12 units of output for Firm A and 10 units of output for Firm B.
d. 12 units of output for Firm A and 12 units of output for Firm B.

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128 ❖ Chapter 17/Oligopoly

93. The prisoners' dilemma game

a. is a situation in which two players both have dominant strategies which lead to the highest total
payoff for the two players.
b. has no Nash equilibrium since players, after agreeing to play their dominant strategy, will have an
incentive to switch to another strategy.
c. has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would
agree to if they could cooperate with each other.
d. Both a and c are correct.

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 Chapter 17/Oligopoly ❖ 129

94. In a prisoners' dilemma game,

a. the solution when playing the game once will be the same as the solution when the players play the
game repeatedly, since agreements cannot be maintained in a prisoners' dilemma.
b. if the players play the game repeatedly, the players can achieve a higher payoff, on average, than
when they play the game only once.
c. repeated play will always result in a better outcome for both players than when the game is played
only once.
d. the tit-for-tat strategy in repeated play requires players to always select the opposite strategy as
their opponent.

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130 ❖ Chapter 17/Oligopoly

Table 17-19
Consider a small town that has two grocery stores from which residents can choose to buy a gallon
of milk. The store owners each must make a decision to set a high milk price or a low milk price.
The payoff table, showing profit per week, is provided below. The profit in each cell is shown as
(Store 1, Store 2).
Store 2
Low Price High Price
Low Price (500, 500) (800, 100)
Store 1
High Price (100, 800) (650, 650)

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 Chapter 17/Oligopoly ❖ 131

95. Refer to Table 17-19. If grocery store 2 sets a low price, what price should grocery store 1 set? And
what will grocery store 1's payoff equal?
a. Low price, $500
b. High price, $800
c. Low price, $100
d. High price, $100

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132 ❖ Chapter 17/Oligopoly

96. Refer to Table 17-19. If grocery store 2 sets a high price, what price should grocery store 1 set?
And what will grocery store 1's payoff equal?
a. Low price, $800
b. High price, $650
c. Low price, $100
d. High price, $800

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 Chapter 17/Oligopoly ❖ 133

97. 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?
a. Low price, $500
b. High price, $800
c. Low price, $100
d. High price, $650
98. Refer to Table 17-19. If grocery store 1 sets a high price, what price should grocery store 2 set?
And what will grocery store 2's payoff equal?
a. Low price, $800
b. High price, $100
c. Low price, $500
d. High price, $650
99. Refer to Table 17-19. What is grocery store 1's dominant strategy?
a. Grocery store 1 does not have a dominant strategy.
b. Grocery store 1 should always set a low price.
c. Grocery store 1 should always set a high price.
d. Grocery store 1 should set a low price when grocery store 2 sets a low price, and grocery store 1
should set a high price when grocery store 2 sets a high price.
100. Refer to Table 17-19. What is grocery store 2's dominant strategy?
a. Grocery store 2 does not have a dominant strategy.
b. Grocery store 2 should always set a low price.
c. Grocery store 2 should always set a high price.
d. Grocery store 2 should set a low price when grocery store 1 sets a low price, and grocery store 2
should set a high price when grocery store 1 sets a high price.
101. Refer to Table 17-19. What is the Nash Equilibrium of this price-setting game?
a. Grocery store 1: Low price
Grocery store 2: Low price
b. Grocery store 1: Low price
Grocery store 2: High price
c. Grocery store 1: High price
Grocery store 2: How price
d. Grocery store 1: High price
Grocery store 2: High price
Table 17-20
Nadia and Maddie are two college roommates who both prefer a clean common space in their dorm
room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not
clean the dorm room's common space. The payoff table for this situation is provided below, where
the higher a player’s payoff number, the better off that player is. The payoffs in each cell are shown
as (payoff for Nadia, payoff for Maddie).
Maddie
Clean Don’t Clean
Clean (30, 30) (7, 50)
Nadia
Don’t Clean (50, 7) (10, 10)
102. Refer to Table 17-20. If Maddie chooses to clean, then Nadia will
a. clean and Maddie’s payoff will be 30.
b. not clean and Maddie’s payoff will be 7.
c. clean and Maddie’s payoff will be 50.
d. not clean and Maddie’s payoff will be 10.

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134 ❖ Chapter 17/Oligopoly

103. Refer to Table 17-20. If Maddie chooses not to clean, then Nadia will
a. clean, and Nadia’s payoff will be 50.
b. not clean, and Nadia’s payoff will be 10.
c. clean, and Nadia’s payoff will be 7.
d. not clean, and Nadia’s payoff will be 30.

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 Chapter 17/Oligopoly ❖ 135

104. Refer to Table 17-20. If Nadia chooses to clean, then Maddie will
a. clean, and Maddie’s payoff will be 30.
b. not clean, and Maddie’s payoff will be 50.
c. clean, and Maddie’s payoff will be 7.
d. not clean, and Maddie’s payoff will be 10.

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136 ❖ Chapter 17/Oligopoly

105. Refer to Table 17-20. If Nadia chooses to not clean, then Maddie will
a. clean, and Maddie’s payoff will be 10.
b. not clean, and Maddie’s payoff will be 50.
c. clean, and Maddie’s payoff will be 30.
d. not clean, and Maddie’s payoff will be 10.
106. Refer to Table 17-20. What is Nadia's dominant strategy?
a. Nadia has no dominant strategy.
b. Nadia should always choose Clean.
c. Nadia should always choose Don’t Clean.
d. Nadia has two dominant strategies, Clean and Don’t Clean, depending on the choice Maddie
makes.
107. Refer to Table 17-20. What is Maddie's dominant strategy?
a. Maddie has no dominant strategy.
b. Maddie should always choose Clean.
c. Maddie should always choose Don’t Clean.
d. Maddie has two dominant strategies, Clean and Don’t Clean, depending on the choice Nadia
makes.
108. Refer to Table 17-20. What is the Nash Equilibrium in this dorm room cleaning game?
a. Nadia: Clean
Maddie: Clean
b. Nadia: Don't Clean
Maddie: Clean
c. Nadia: Clean
Maddie: Don't Clean
d. Nadia: Don't Clean
Maddie: Don't Clean
Figure 17-2. Hector and Bart are roommates. On a particular day, their apartment needs to be cleaned. Each
person has to decide whether to take part in cleaning. At the end of the day, either the apartment will be
completely clean (if one or both roommates take part in cleaning), or it will remain dirty (if neither roommate
cleans). With happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes
are as follows:

Hector's Decision

Clean Don't clean

Hector's happiness = 6 Hector's happiness = 10

Clean

Bart's happiness = 7 Bart's happiness = 2

Bart's
Decision
Hector's happiness = 2 Hector's happiness = 5

Don't clean

Bart's happiness = 10 Bart's happiness = 4

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 Chapter 17/Oligopoly ❖ 137

109. Refer to Figure 17-2. The dominant strategy for Hector is to

a. clean, and the dominant strategy for Bart is to clean.
b. clean, and the dominant strategy for Bart is to refrain from cleaning.
c. refrain from cleaning, and the dominant strategy for Bart is to clean.
d. refrain from cleaning, and the dominant strategy for Bart is to refrain from cleaning.

110. Refer to Figure 17-2. In pursuing his own self-interest, Bart will
a. refrain from cleaning whether or not Hector cleans.
b. clean only if Hector cleans.
c. clean only if Hector refrains from cleaning.
d. clean whether or not Hector cleans.

111. Refer to Figure 17-2. If this game is played only once, then the most likely outcome is that
a. Hector and Bart both clean.
b. Hector cleans and Bart does not clean.
c. Bart cleans and Hector does not clean.
d. neither Hector nor Bart cleans.

112. Refer to Figure 17-2. In pursuing his own self-interest, Hector will
a. refrain from cleaning whether or not Bart cleans.
b. clean only if Bart cleans.
c. clean only if Bart refrains from cleaning.
d. clean whether or not Bart cleans.

113. Refer to Figure 17-2. The possible outcome in which both Hector and Bart clean is analogous to
which of the following outcomes of the duopoly game?
a. The duopolists collude to achieve the monopoly outcome.
b. The duopolists collude to achieve the monopolistically-competitive outcome.
c. The outcome is the one that is most preferable for consumers of the duopolists’ product.
d. The outcome is the one that is least preferable for both the duopolists and for the consumers of their
product.
Figure 17-3. Katie and Taylor are roommates. On a particular day, their lawn needs to be mowed. Each person has
to decide whether to take part in mowing the lawn. At the end of the day, either the lawn will be mowed (if
one or both roommates take part in mowing), or it will remain unmowed (if neither roommate mows). With
happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as follows:

Katie's Decision

Mow Don't mow

Katie's happiness = 7 Katie's happiness = 10

Mow

Taylor's happiness = 7 Taylor's happiness = 2

Taylor's
Decision
Katie's happiness = 5 Katie's happiness = 4

Don't mow

Taylor's happiness = 8 Taylor's happiness = 4

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138 ❖ Chapter 17/Oligopoly

114. Refer to Figure 17-3. The dominant strategy for Taylor is to

a. mow, and the dominant strategy for Katie is to mow.
b. mow, and the dominant strategy for Katie is to refrain from mowing.
c. refrain from mowing, and the dominant strategy for Katie is to mow.
d. refrain from mowing, and there is no dominant strategy for Katie.

115. Refer to Figure 17-3. If this game is played only once, then which of the following outcomes is the
most likely one?
a. Katie and Taylor both mow.
b. Katie mows and Taylor does not mow.
c. Taylor mows and Katie does not mow.
d. All of the above outcomes are equally likely.

116. Refer to Figure 17-3. In pursuing her own self-interest, Taylor will
a. refrain from mowing whether or not Katie mows.
b. mow only if Katie mows.
c. mow only if Katie refrains from mowing.
d. mow whether or not Katie mows.

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 Chapter 17/Oligopoly ❖ 139

117. Refer to Figure 17-3. In pursuing her own self-interest, Katie will
a. refrain from mowing whether or not Taylor mows.
b. mow only if Taylor mows.
c. mow only if Taylor refrains from mowing.
d. mow whether or not Taylor mows.
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).
Paul
Turn Drive Straight
Turn (10, 10) (5, 20)
John
Drive Straight (20, 5) (0, 0)
118. Refer to Table 17-21. If Paul chooses Turn, what will John choose to do and what will John’s pay-
off equal?
a. Turn, 10
b. Drive Straight, 20
c. Turn, 5
d. Drive Straight, 0
119. Refer to Table 17-21. If Paul chooses Drive Straight, what will John choose to do and what will
John’s payoff equal?
a. Turn, 5
b. Drive Straight, 0
c. Turn, 20
d. Drive Straight, 5
120. Refer to Table 17-21. If John chooses Turn, what will Paul choose to do and what will Paul's pay-
off equal?
a. Turn, 10
b. Drive Straight, 20
c. Turn, 5
d. Drive Straight, 0
121. Refer to Table 17-21. If John chooses Drive Straight, what will Paul choose to do and what will
Paul's payoff equal?
a. Turn, 5
b. Drive Straight, 0
c. Turn, 10
d. Drive Straight, 200
122. Refer to Table 17-21. What is Paul's dominant strategy?
a. Paul has no dominant strategy.
b. Paul should always choose Turn.
c. Paul should always choose Drive Straight.
d. Paul has more than one dominant strategy.
123. Refer to Table 17-21. What is John's dominant strategy?
a. John has no dominant strategy.
b. John should always choose Turn.
c. John should always choose Drive Straight.
d. John has two dominant strategies.

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140 ❖ Chapter 17/Oligopoly

124. Refer to Table 17-21. How many Nash equilibria are there in this Chicken game?
a. 0
b. 1
c. 2
d. 3
125. Refer to Table 17-21. What is (are) the Nash equilibrium (equilibria) in this Chicken game?
a. John: Turn
Paul: Turn
b. John: Turn
Paul: Drive Straight
c. John: Drive Straight
Paul: Turn
d. Both b and c are Nash equilibria

126. In the prisoners’ dilemma,

a. the prisoners easily collude in order to achieve the best possible payoff for both.
b. only one player has a dominant strategy.
c. when each player chooses his dominant strategy the players achieve the best joint outcome.
d. when each player chooses his dominant strategy the players reach a Nash equilibrium.

127. In the game in which two oil companies own adjacent oil fields, the companies will not use the oil
efficiently because
a. neither company has a dominant strategy in the game.
b. the companies collude and produce a quantity of oil that is less than the socially-efficient quantity.
c. the pool from which they recover the oil is a common resource.
d. the pool from which they recover the oil is not large enough to allow both companies to earn a
positive profit.

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 Chapter 17/Oligopoly ❖ 141

128. An equilibrium occurs in a game when

a. price equals marginal cost.
b. quantity supplied equals quantity demanded.
c. all independent strategies counterbalance all dominant strategies.
d. all players follow a strategy that they have no incentive to change.

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142 ❖ Chapter 17/Oligopoly

129. The players in a two-person game are choosing between Strategy X and Strategy Y. If the second
player chooses Strategy X, the first player's best outcome is to select X. If the second player chooses
Strategy Y, the first player's best outcome is to select X. For the first player, Strategy X is called a
a. dominant strategy.
b. collusive strategy.
c. repeated-trial strategy.
d. cartel strategy.

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 Chapter 17/Oligopoly ❖ 143

130. 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 or-
der to drive the other players from the game first. Economists would model such behavior as
a. monopolistic competition.
b. game theory.
c. predatory pricing.
d. a dominant strategy.

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144 ❖ Chapter 17/Oligopoly

131. After initial success, the OPEC cartel saw the price of oil and the revenues of its members decline
due, in part, to
a. the low elasticity of demand for oil in the short run.
b. the large number of buyers from each member nation.
c. surging demand for oil in the early 1980s.
d. OPEC members failing to produce their agreed-upon production levels.

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 Chapter 17/Oligopoly ❖ 145

Table 17-22
Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low
price for repair work and a high price. The annual economic profit from each strategy is indicated in
the table. The profits are shown as (Matt, Brian) in each cell.
Brian
Low Price High Price
Low Price (1500, 1500) (5000, 200)
Matt
High Price (200, 3000) (4000, 4000)

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146 ❖ Chapter 17/Oligopoly

132. Refer to Table 17-22. Which of the following statements is correct?

a. Matt's dominant strategy is to charge a low price.
b. Brian's dominant strategy is to charge a high price.
c. The dominant strategy for both Brian and Matt is to charge a low price.
d. Matt's dominant strategy is to charge a high price.

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 Chapter 17/Oligopoly ❖ 147

133. Refer to Table 17-22. Which of the following statements is correct if Brian and Matt will play this
game only once?
a. The Nash equilibrium is the high price.
b. A Nash equilibrium cannot be established unless Brian and Matt collude.
c. A Nash equilibrium cannot be established without the players repeating the game.
d. The Nash equilibrium price is the low price.

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148 ❖ Chapter 17/Oligopoly

Table 17-23
Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their
costs, and thus increase their profits, if they reduced their advertising budgets. But in order for the
plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising
works by increasing the demand for the firm’s product, but each firm also believes that if neither
firm advertises, the costs savings will outweigh the lost sales. Listed in the table below are the
individual profits for each firm.
Firm A
Breaks the agreement Maintains the agreement and
and advertises does not advertise
Breaks the agreement Firm A profit = $9,000 Firm A profit = $8,000
and advertises Firm B profit = $4,000 Firm B profit = $6,000
Firm B
Maintains the agreement Firm A profit = $11,000 Firm A profit = $10,000
and does not advertise Firm B profit = $3,500 Firm B profit = $5,000

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 Chapter 17/Oligopoly ❖ 149

134. Refer to Table 17-23. Suppose that the two firms, A and B, make an agreement to with-
hold any advertising for one month in order to lower each firm’s costs and raise each firm’s profits.
If the firms reach the Nash equilibrium,
a. both firms will choose not to advertise.
b. firm A will choose not to advertise, but firm B will break the agreement and choose to advertise.
c. firm B will choose not to advertise, but firm A will break the agreement and choose to advertise.
d. both firms will break the agreement and choose to advertise.

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150 ❖ Chapter 17/Oligopoly

135. Refer to Table 17-23. At the Nash equilibrium, how much profit will Firm A earn?
a. $8,000 because firm A will maintain the agreement not to advertise, but firm B will break the
agreement and choose to advertise.
b. $9,000 because each firm will break the agreement and choose to advertise.
c. $10,000 because each firm will maintain the agreement and choose not to advertise.
d. $11,000 because firm B will maintain the agreement not to advertise, but firm A will break the
agreement and choose to advertise.

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 Chapter 17/Oligopoly ❖ 151

136. Refer to Table 17-23. At the Nash equilibrium, how much profit will Firm B earn?
a. $3,500 because firm B will maintain the agreement not to advertise, but firm A will break the
agreement and choose to advertise.
b. $4,000 because each firm will break the agreement and choose to advertise.
c. $5,000 because each firm will maintain the agreement and choose not to advertise.
d. $6,000 because firm A will maintain the agreement not to advertise, but firm B will break the
agreement and choose to advertise.

137. In which of the following games is it clearly the case that the cooperative outcome of the game is
good for the two players and good for society?
a. Two guilty criminals have been captured by the police, and each prisoner decides whether to
confess or to remain silent.
b. Two airlines dominate air travel between City A and City B, and each airline decides whether to
charge a “high” airfare or a “low” airfare.
c. Two duopoly firms account for all of the production in a market, and each firm decides whether to
produce a “high” amount of output or a “low” amount of output.
d. Two oil companies own adjacent oil fields over a common pool of oil, and each company decides
whether to drill one well or two wells.

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152 ❖ Chapter 17/Oligopoly

138. In which of the following games is it clearly the case that the cooperative outcome of the game is
good for the two players and bad for society?
a. Two oil companies own adjacent oil fields over a common pool of oil, and each company decides
whether to drill one well or two wells.
b. Two airlines dominate air travel between City A and City B, and each airline decides whether to
charge a “high” airfare or a “low” airfare on flights between those two cities.
c. Two superpowers decide whether to build new weapons or to disarm.
d. In all of the above cases, the cooperative outcome of the game is good for the two players and bad
for society
Table 17-24
Two firms are considering going out of business and selling their assets. Each considers what
happens if the other goes out of business. The payoff matrix below shows the net gain or loss to
each firm.
Firm A
Stays in business Sells business
A gains $9 million A gains $7 million
Stays in business
B gains $7million B gains $15 million
Firm B
A gains $15 million A gains $1 million
Sells business
B gains $8 million B gains $3 million
139. Refer to Table 17-24. Which firm’s dominant strategy is to sell?
a. firm A’s and firm B’s
b. firm A’s but not firm B’s
c. firm B’s but not firm A’s
d. neither firm A’s nor firm B’s
140. Refer to Table 17-24. Which firms have a dominant strategy?
a. A and B
b. Neither A nor B
c. A but not B
d. B but not A
141. Refer to Table 17-24. What is the Nash equilibrium?
a. A and B both stay in business
b. A stays in business, B sells
c. B stays in business, A sells
d. Both A and B sell
Table 17-25
There are just two producers of a certain product. Each is considering offering promotional
discounts.
Firm A
Does not offer discount Offers discount
Firm A profit = $90,000 Firm A profit = $120,000
Does not offer discount
Firm B profit = $90,000 Firm B profit = $70,000
Firm B
Firm A profit = $70,000 Firm A profit = $80,000
Offers discount
Firm B profit = $120,000 Firm B profit = $80,000
142. Refer to Table 17-25. The dominant strategy
a. for both firms is to offer the discount.
b. for both firms is to not offer the discount.
c. for firm A is to offer the discount. The dominant strategy for firm B is to not offer the discount.
d. for firm A is to not offer the discount. The dominant strategy for firm B is to offer the discount.

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 Chapter 17/Oligopoly ❖ 153

143. Refer to Table 17-25. At the Nash equilibrium, how much profit will Firm A earn?
a. $120,000
b. $90,000
c. $80,000
d. $70,000

144. Which of the following is correct? When oligopolies collude

a. they make higher profits and consumers of the product are better off.
b. they make higher profits but consumers of the product are worse off.
c. they make lower profits and consumers of the product are better off.
d. they make lower profits and consumers of the product are worse off.
Figure 17-4. Two companies, Acme and Bilco, are sellers in the same market. Each company decides whether to
charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual
profits for the two companies.
Acme's Decision

High price Low price

Acme's profit = $5 million Acme's profit = $7 million

High price

Bilco's profit = $5 million Bilco's profit = $2 million

Bilco's
Decision
Acme's profit = $2 million Acme's profit = $3.25 million

Low price

Bilco's profit = $7 million Bilco's profit = $3.25 million

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154 ❖ Chapter 17/Oligopoly

145. Refer to Figure 17-4. Suppose the outcome of the game is one in which Acme’s profit is $2 mil-
lion and Bilco’s profit is $7 million. The most likely explanation for this outcome is that
a. each company pursued its dominant strategy.
b. each company’s objective was to maximize the sum of the two companies’ profits.
c. the two companies reached an agreement on what price to charge, and Acme subsequently cheated.
d. the two companies reached an agreement on what price to charge, and Bilco subsequently cheated.

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 Chapter 17/Oligopoly ❖ 155

146. Refer to Figure 17-4. If the two companies make their pricing decisions independently, then it is
likely that Acme will
a. charge a high price only if Bilco charges a high price.
b. charge a high price only if Bilco charges a low price.
c. charge a high price regardless of whether Bilco charges a high price or a low price.
d. None of the above are correct.

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156 ❖ Chapter 17/Oligopoly

147. Refer to Figure 17-4. If the two companies make their pricing decisions independently, then it is
likely that Bilco will
a. charge a low price only if Acme charges a low price.
b. charge a low price only if Acme charges a high price.
c. charge a low price regardless of whether Acme charges a high price or a low price.
d. None of the above are correct.

148. Refer to Figure 17-4. If this game is played only once, then the most likely outcome is that
a. both firms charge a low price.
b. Acme charges a low price and Bilco charges a high price.
c. Acme charges a high price and Bilco charges a low price.
d. both firms charge a high price.

149. Refer to Figure 17-4. The dominant strategy for Acme is to

a. charge a high price, and the dominant strategy for Bilco is to charge a high price.
b. charge a high price, and the dominant strategy for Bilco is to charge a low price.
c. charge a low price, and the dominant strategy for Bilco is to charge a high price.
d. charge a low price, and the dominant strategy for Bilco is to charge a low price.

150. Refer to Figure 17-4. Suppose we observe that the outcome of the game is one in which each com-
pany earns a profit of $5 million. This outcome
a. is the result of each company pursuing its dominant strategy.
b. is the result of cooperation between the two companies, and we know that a cooperative outcome is
easy in a game such as this one.
c. is the result of cooperation between the two companies, and we know that a cooperative outcome is
difficult in a game such as this one.
d. is the most likely outcome of the game, regardless of whether the two companies cooperate.

151. Refer to Figure 17-4. The situation faced by Acme and Bilco is
a. one in which the players, pursuing their own interests, are likely to reach an outcome that is not
particularly good for either player.
b. one in which an agreement between the players to behave in a certain way is not likely to hold up.
c. similar to the situation faced by Bonnie and Clyde in the prisoners’ dilemma game.
d. All of the above are correct.

152. Refer to Figure 17-4. In what sense is the game involving Acme and Bilco similar to the prisoners’
dilemma game involving Bonnie and Clyde?
a. In both games, if the players pursue their own interests, then the outcome is the best possible
outcome for each player.
b. In both games, a dominant strategy can be identified for each player.
c. In both games, cooperation between the players is easy to maintain.
d. All of the above are correct.

153. A cooperative agreement among oligopolists is more likely to be maintained,

a. the greater the number of oligopolists.
b. the larger the number of buyers of the oligopolists’ product.
c. the smaller the number of buyers of the oligopolists’ product.
d. the more likely it is that the game among the oligopolists will be played over and over again.

154. A cooperative agreement among oligopolists is less likely to be maintained,

a. the greater the number of oligopolists.
b. the larger the number of buyers of the oligopolists’ product.
c. the smaller the number of buyers of the oligopolists’ product.
d. the more likely it is that the game among the oligopolists will be played over and over again.

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 Chapter 17/Oligopoly ❖ 157

PUBLIC POLICY TOWARD OLIGOPOLIES

1. From society’s standpoint, cooperation among oligopolists is

a. desirable, because it leads to less conflict among firms and a wider variety of products for
consumers.
b. desirable, because it leads to an outcome closer to the competitive outcome than what would be
observed in the absence of cooperation.
c. undesirable, because it leads to output levels that are too low and prices that are too high.
d. undesirable, because it leads to output levels that are too high and prices that are too high.

2. A law that encourages market competition by prohibiting firms from gaining or exercising excessive
market power is
a. a patent.
b. impossible to enforce.
c. an antitrust law.
d. an externality law.

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158 ❖ Chapter 17/Oligopoly

3. The primary purpose of antitrust legislation is to

a. protect small businesses.
b. protect the competitiveness of U.S. markets.
c. protect the prices of American-made products.
d. ensure firms earn only a fair profit.

4. To move the allocation of resources closer to the social optimum, policymakers should typically try
to induce firms in an oligopoly to
a. collude with each other.
b. form various degrees of cartels.
c. compete rather than cooperate with each other.
d. cooperate rather than compete with each other.

5. Which of the following statements is true?

a. The proper scope of antitrust laws is well defined and definite.
b. Antitrust laws focus on granting certain firms the option to form a cartel.
c. Policymakers have the difficult task of determining whether some firms' decisions have legitimate
purposes even though they appear anti-competitive.
d. There is always a need for policymakers to try to limit a firm's pricing power, regardless of whether
the firm's market is competitive, a monopoly, or an oligopoly.

6. Which of the following is necessarily a problem with antitrust laws?

a. They may target a business whose practices appear to be anti-competitive but in fact have
legitimate purposes.
b. They promote competition.
c. They limit monopoly power.
d. They prohibit firms from entering or exiting a market.

7. Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust
laws?
a. the U.S. Justice Department
b. private citizens
c. corporations
d. All of the above are correct.

8. Which government entity is charged with investigating and enforcing antitrust laws?
a. the U.S. Justice Department
b. the U.S. Commerce Department
c. the U.S. Treasury Department
d. the Bureau of Alcohol, Tobacco, and Firearms

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 Chapter 17/Oligopoly ❖ 159

9. Who wrote, "People of the same trade seldom meet together, but the conversation ends in a conspir-
acy against the public, or in some diversion to raise prices."?
a. Thomas Jefferson
b. Adam Smith
c. Bill Gates
d. Robert Axelrod

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160 ❖ Chapter 17/Oligopoly

10. The Sherman Antitrust Act

a. was passed to encourage judicial leniency in the review of cooperative agreements.
b. was concerned with self-interest dominated Nash equilibriums in prisoners' dilemma games.
c. enhanced the ability to enforce cartel agreements.
d. restricted the ability of competitors to engage in cooperative agreements.

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 Chapter 17/Oligopoly ❖ 161

11. The Sherman Act made cooperative agreements

a. unenforceable outside of established judicial review processes.
b. enforceable with proper judicial review.
c. a criminal conspiracy.
d. a crime, but did not give direction on possible penalties.

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162 ❖ Chapter 17/Oligopoly

12. The Sherman Antitrust Act was passed in

a. 1836.
b. 1890.
c. 1914.
d. 1946.

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 Chapter 17/Oligopoly ❖ 163

13. The Sherman Antitrust Act prohibits price-fixing in the sense that
a. competing executives cannot even talk about fixing prices.
b. competing executives can talk about fixing prices, but they cannot take action to fix prices.
c. a price-fixing agreement can lead to prosecution provided the government can show that the public
was not well-served by the agreement.
d. None of the above is correct. The Sherman Act did not address the matter of price-fixing.

14. The Sherman Antitrust Act prohibits executives of competing companies from
a. fixing prices, but it does not prohibit them from talking about fixing prices.
b. even talking about fixing prices.
c. sharing with one another their knowledge of game theory.
d. failing to stand by agreements that they had made with one another.

15. The Sherman Antitrust Act

a. overturned centuries-old views of English and American judges on agreements among competitors.
b. had the effect of discouraging private lawsuits against conspiring oligopolists.
c. strengthened the Clayton Act.
d. elevated agreements among conspiring oligopolists from an unenforceable contract to a criminal
conspiracy.

16. Which of the following prohibits executives of competing firms from even talking about fixing
prices?
a. Sherman Act
b. Clayton Act
c. Federal Trade Commission
d. U.S. Justice Department

17. Two CEOs from different firms in the same market collude to fix the price in the market. This action
violates the
a. Clayton Act of 1914.
b. Sherman Antitrust Act of 1890.
c. Crandall-Putnam ruling of 1983.
d. Jackson-Microsoft ruling of 2000.

18. The Clayton Act

a. preceded the Sherman Act.
b. replaced the Sherman Act.
c. strengthened the Sherman Act.
d. was specifically designed to reduce the ability of cartels to organize.

19. According to the Clayton Act,

a. lawyers are given an incentive to reduce the number of cases involving cooperative arrangements.
b. individuals can sue to recover damages from illegal cooperative agreements.
c. the government was able to incarcerate the CEO of a firm for illegal pricing arrangements.
d. private lawsuits are discouraged.

20. If a person can prove that she was damaged by an illegal arrangement to restrain trade, that person
can sue and recover
a. the damages she sustained, as provided for in the Sherman Act.
b. the damages she sustained, as provided for in the Clayton Act.
c. three times the damages she sustained, as provided for in the Sherman Act.
d. three times the damages she sustained, as provided for in the Clayton Act.

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164 ❖ Chapter 17/Oligopoly

21. Which of the following statements is false?

a. The Clayton Act allows triple damages in civil lawsuits in order to encourage lawsuits against
conspiring oligopolists.
b. Many economists defend the practice of resale price maintenance on the grounds that it may help
solve a free-rider problem.
c.
Most economists agree that predatory pricing is a profitable business strategy that usually preserves
market power.
d. The U.S. Supreme Court's view that the practice of tying usually allows a firm to extend its market
power is not generally supported by economic theory.

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 Chapter 17/Oligopoly ❖ 165

22. When individuals are damaged by an illegal arrangement to restrain trade, which law allows them to
pursue civil action and recover up to three times the damages sustained?
a. Trade Damage Act
b. Clayton Act
c. Sherman Act
d. No law allows individuals to pursue civil action and recover up to three times the damages
sustained.

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166 ❖ Chapter 17/Oligopoly

23. The Clayton Act of 1914 allows those harmed by illegal arrangements to restrain trade to
a. sue for up to two times the damages they incurred.
b. sue for up to three times the damages they incurred.
c. sue for up to four times the damages they incurred.
d. sue for damages, but only for the actual amount of damages they incurred.

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 Chapter 17/Oligopoly ❖ 167

24. Antitrust laws in general are used to

a. prevent oligopolists from acting in ways that make markets less competitive.
b. encourage oligopolists to pursue cooperative-interest at the expense of self-interest.
c. encourage frivolous lawsuits among competitive firms.
d. encourage all firms to cut production levels and cut prices.

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168 ❖ Chapter 17/Oligopoly

25. The practice of selling a product to retailers and requiring the retailers to charge a specific price for
the product is called
a. fixed retail pricing.
b. resale price maintenance.
c. cost plus pricing.
d. unfair trade.

26. Economists claim that a resale price maintenance agreement is not anti-competitive because
a. suppliers are never able to exercise noncompetitive market power.
b. if a supplier has market power, it will be likely to exert that power through wholesale price rather
than retail price.
c. retail markets are inherently noncompetitive.
d. retail cartel agreements cannot increase retail profits.

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 Chapter 17/Oligopoly ❖ 169

27. Assume that Peach Computers has entered into a resale price maintenance agreement with Computer
Super Stores Inc. (CSS Inc.) but not with CompuMart. In this case,
a. the wholesale price of Peach computers will be different for CSS Inc. than it is for CompuMart.
b. Peach computers will never increase profits by having a resale price maintenance agreement with
all retail outlets that sell its products.
c. CompuMart might benefit from customers who go to CSS Inc. for information about different
computers.
d. CSS Inc. will sell Peach computers at a lower price than CompuMart.

28. Assume that Apple Computer has entered into an enforceable resale price maintenance agreement
with Computer Super Stores Inc. (CSS Inc.) and Wal-Mart. Which of the following will always be
true?
a. The wholesale price of Apple computers will be different for CSS Inc. than it is for Wal-Mart.
b. Wal-Mart will benefit from customers who go to CSS Inc. for information about different
computers.
c. CSS Inc. will sell Apple computers at a lower price than Wal-Mart.
d. Wal-Mart and CSS Inc. will always sell Apple Computers for exactly the same price.

29. A firm that practices resale price maintenance

a. has incentive to reduce competition between its retailers. Resale price maintenance can lead to
more service.
b. has incentive to reduce competition between its retailers. Resale price maintenance cannot lead to
more service.
c. has no incentive to reduce competition between its retailers. Resale price maintenance can lead to
more service.
d. has no incentive to reduce competition between its retailers. Resale price maintenance cannot lead
to more service.

30. Resale price maintenance involves a firm

a. colluding with another firm to restrict output and raise prices.
b. selling two individual products together for a single price rather than selling each product
individually at separate prices.
c. temporarily cutting the price of its product to drive a competitor out of the market.
d. requiring that the firm reselling its product do so at a specified price.

31. The manufacturer of Bozz Radios sells radios to retail stores for $500 each, and it requires the retail
stores to charge customers $550 per radio. Any retailer that charges less than $550 would violate its
contract with Bozz Radios. What do economists call this business practice?
a. predatory pricing
b. resale price maintenance
c. tying
d. leverage

32. If Levi Strauss & Co. were to require every retailer that carried its clothing to charge customers $42
for each pair of jeans, Levi Strauss & Co. would be practicing
a. resale price maintenance.
b. fixed retail pricing.
c. tying.
d. cost plus pricing.

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170 ❖ Chapter 17/Oligopoly

33. Acme Computer Co. sells computers to retail stores for $400. If Acme requires the retailers to
charge customers $500 for the computers, then it is engaging in
a. resale price maintenance.
b. predatory pricing.
c. tying.
d. monopolistic competition.

34. Predatory pricing refers to

a. a firm selling certain products together rather than separately.
b. a monopoly firm reducing its price in an attempt to maintain its monopoly.
c. firms colluding to set prices.
d. All of the above are examples of predatory pricing.

35. Predatory pricing occurs when a firm

a. exercises its oligopoly power by raising its price through the formation of a cartel.
b. exercises its monopoly power by raising its price.
c. cuts its prices in order make itself more competitive.
d. cuts its prices temporarily in order to drive out any competition.

36. Although the practice of predatory pricing is a common claim in antitrust suits, some economists are
skeptical of this argument because they believe
a. the evidence of its practice is nearly impossible to collect.
b.
predatory pricing is not a profitable business strategy.
c.
even though predatory pricing is a profitable business strategy, it is on balance beneficial to society.
d. predatory pricing actually attracts new firms to the industry.

37. Consider a market served by a monopolist, Firm A. A new firm, Firm B, enters the market and, as a
result, Firm A lowers its price to try to drive Firm B out of the market. This practice is known as
a. resale price maintenance.
b. predatory tying.
c. tying.
d. predatory pricing.

38. Which of the following questions about predatory pricing remains unresolved?
a. Are the courts capable of determining which price cuts are competitive and which are predatory?
b. Are the courts capable of determining which price cuts are good for consumers?
c.
Is predatory pricing ever a profitable business strategy?
d. All of the above questions about predatory pricing are unresolved.

39. Predatory pricing occurs when

a. firms collude to set prices. Economists are certain this practice is profitable.
b. firms collude to set prices. Economists are skeptical that this practice is profitable.
c. A monopolist decreases its prices to maintain its monopoly. Economists are certain this practice is
profitable.
d. A monopolist decreases its prices to maintain its monopoly. Economists are skeptical that this
practice is profitable.

40. Predatory pricing involves a firm

a. colluding with another firm to restrict output and raise prices.
b. selling two individual products together for a single price rather than selling each product
individually at separate prices.
c. temporarily cutting the price of its product to drive a competitor out of the market.
d. requiring that the firm reselling its product do so at a specified price.

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 Chapter 17/Oligopoly ❖ 171

41. The practice of requiring someone to buy two or more items together, rather than separately, is
called
a. resale maintenance.
b. product fixing.
c. tying.
d. free-riding.

42. The practice of tying is illegal on the grounds that

a. it allows firms to expand their market power.
b. it allows firms to form collusive arrangements.
c. it prevents firms from forming collusive agreements.
d. the Sherman Act explicitly prohibited such agreements.

43. Tying involves a firm

a. colluding with another firm to restrict output and raise prices.
b. selling two individual products together for a single price rather than selling each product
individually at separate prices.
c. temporarily cutting the price of its product to drive a competitor out of the market.
d. requiring that the firm reselling its product do so at a specified price.

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172 ❖ Chapter 17/Oligopoly

44. The argument that consumers will not be willing to pay any more for two items sold as one than
they would for the two items sold separately is used to justify the legality of which of the following?
a. resale price maintenance
b. tying
c. predatory pricing
d. free-riding

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 Chapter 17/Oligopoly ❖ 173

45. The practice of tying is used to

a. enhance the enforcement of antitrust laws.
b. encourage the enforcement of collusive agreements.
c. control the retail price of a collection of related products.
d. package products to sell at a combined price closer to a buyer's total willingness to pay.

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174 ❖ Chapter 17/Oligopoly

Scenario 17-5
Assume that a local bank sells two services, checking accounts and ATM card services. The bank’s only two
customers are Mr. Donethat and Ms. Beenthere. Mr. Donethat is willing to pay $8 a month for the bank to
service his checking account and $2 a month for unlimited use of his ATM card. Ms. Beenthere is willing to
pay only $5 for a checking account, but is willing to pay $9 for unlimited use of her ATM card. Assume that
the bank can provide each of these services at zero marginal cost.

46. Refer to Scenario 17-5. If the bank is unable to use tying, what is the profit-maximizing price to
charge for a checking account?
a. $13
b. $9
c. $8
d. $5

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 Chapter 17/Oligopoly ❖ 175

47. Refer to Scenario 17-5. If the bank is unable to use tying, what is the profit-maximizing price to
charge for unlimited use of an ATM card?
a. $14
b. $11
c. $9
d. $2

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176 ❖ Chapter 17/Oligopoly

48. Refer to Scenario 17-5. If the bank is able to use tying to price checking account and ATM ser-
vices, what is the profit-maximizing price to charge for the "tied" good?
a. $14
b. $10
c. $9
d. $8

49. Refer to Scenario 17-5. How much additional profit can the bank earn by switching to the use of a
tying strategy to price checking accounts and ATM service rather than pricing these services sepa-
rately?
a. $14
b. $11
c. $7
d. $1

50. A particular cable TV company requires a household to subscribe to its high-speed Internet service
if it subscribes to cable TV, and vice versa. This practice
a. is referred to as tying.
b. is regarded by some economists as a form of price discrimination.
c. is controversial among economists because they disagree on whether it has adverse effects for
society as a whole.
d. All of the above are correct.

51. Suppose that Makemoney Movies produces two new films — The Hulk and The Piano. Makemoney
offers theaters the two films together at a single price but will not supply the movies separately.
What do economists call this business practice?
a. predatory pricing
b. resale price maintenance
c. tying
d. leverage

52. OPEC is able to raise the price of its product by

a. tying.
b. setting production levels for each of its members.
c. increasing the supply of oil above the competitive level.
d. imposing resale price maintenance agreements on members.

53. All cartels are inherently reliant on

a. a horizontal demand curve.
b. an inelastic demand for their product.
c. the cooperation of their members.
d. enforcement of antitrust laws.

54. In 1971, Congress passed a law that banned cigarette advertising on television. After the ban it is
most likely that the
(i) profits of cigarette companies increased.
(ii) prices of cigarettes increased.
(iii) total costs incurred by cigarette companies increased.
a. (i) only
b. (i) and (ii)
c. (ii) and (iii)
d. (i), (ii), and (iii)

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 Chapter 17/Oligopoly ❖ 177

55. A central issue in the Microsoft antitrust lawsuit involved Microsoft's integration of its Internet
browser into its Windows operating system, to be sold as one unit. This practice is known as
a. tying.
b. predation.
c. wholesale maintenance.
d. retail maintenance.

56. In the U.S. government’s 1998 suit against the Microsoft Corporation, a central issue was whether
Microsoft should be allowed to integrate its Internet browser into its Windows operating system.
Microsoft responded that
a.
this integration of products is an example of tying, and the U.S. Supreme Court has consistently
ruled that tying is a perfectly acceptable and legal business practice.
b.
this integration of products is an example of resale price maintenance, and the U.S. Supreme Court
has consistently ruled that fair trade is a perfectly acceptable and legal business practice.
c. putting new features into old products is a natural part of technological practice.
d. it would discontinue this integration of products, provided a speedy resolution of the government’s
case could be reached.
CONCLUSION

1. The story of the prisoners’ dilemma shows why

a. predatory pricing is clearly not in society’s best interest.
b. economists are unanimous in condemning resale price maintenance, since it inevitably reduces
competition.
c. oligopolies can fail to act independently, even when independent decision-making is in their best
interest.
d. oligopolies can fail to cooperate, even when cooperation is in their best interest.
SHORT ANSWER

1. Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of
the cartel. Why?

2. What effect does the number of firms in an oligopoly have on the characteristics of the market?
3. Assume that demand for a product that is produced at zero marginal cost is reflected in the table be-
low.
Quantity Price
0 $36
200 $33
400 $30
600 $27
800 $24
1000 $21
1200 $18
1400 $15
1600 $12
1800 $9
2000 $6
2200 $3
2400 $0
a. What is the profit-maximizing level of production for a group of oligopolistic firms that operate as a
cartel?

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178 ❖ Chapter 17/Oligopoly

b. Assume that this market is characterized by a duopoly in which collusive agreements are illegal. What
market price and quantity will be associated with a Nash equilibrium?

4. Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly.
Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.

5. Describe the output and price effects that influence the profit-maximizing decision faced by a firm in an oli-
gopoly market. How does this differ from output and price effects in a monopoly market?

6. Explain how the output effect and the price effect influence the production decision of the individual oligopo-
list.

7. Ford and General Motors are considering expanding into the Vietnamese automobile market. Devise a simple
prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision.

8. Nike and Reebok (athletic shoe companies) are considering whether to advertise during the Super Bowl. De-
vise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this de-
cision. Does the repeated game scenario differ from a single period game? Is it possible that a repeated game
(without collusive agreements) could lead to an outcome that is better than a single-period game? Explain the
circumstances in which this may be true.

9. Outline the purpose of antitrust laws. What do they accomplish?

10. Explain the practice of resale price maintenance and discuss why it is controversial.

11. Explain the practice of tying and discuss why it is controversial.

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