question
What is a prisoners' dilemma?
answer
a game in which players act in rational, self−interested ways that leave everyone worse off
question
Suppose we want to use game theory to analyze how an oligopolist selects its optimal price. The cells of the payoff matrix show
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the profit that each producer can expect to earn from every combination of strategies by the firms in the market.
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A Nash equilibrium is
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reached when each player chooses the best strategy for himself, given the strategies chosen by the other players in the group.
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Which of the following is the best example of an oligopolistic industry?
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the pharmaceutical industry
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One reason why, in the last four decades, the number of new auto makers in the world has been very small compared to the past is that
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new producers cannot match the economies of scale of existing auto makers.
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Oligopolies are difficult to analyze because
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how firms respond to a price change by a rival is uncertain.
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Consumers benefit from monopolistic competition by
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being able to choose from products more closely suited to their tastes.
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When a monopolistically competitive firm cuts its price to increase its sales, it experiences a gain in revenue due to the
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output effect
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A set of actions that a firm takes to achieve a goal, such as maximizing profits, is called
answer
a business strategy
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What is the marginal revenue of the sixth unit of output?
answer
$4
question
Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
Should the firm represented in the diagram continue to stay in business despite its losses?
Should the firm represented in the diagram continue to stay in business despite its losses?
answer
Yes, its total revenue covers its variable cost.
question
The marginal revenue from one additional unit sold is the sum of the gain in revenue from selling the additional unit and the loss in revenue from having to charge a lower price to sell the additional unit. Based on the diagram in the figure,
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Y represents the gain (output effect) and X the loss (price effect).
question
Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
What is the area that represents the loss made by the firm?
What is the area that represents the loss made by the firm?
answer
the area P2cdP3
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Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower-cost producer compared to Nigeria. The payoff matrix in the table to the right shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
What is the Nash equilibrium in this game?
What is the Nash equilibrium in this game?
answer
In the Nash equilibrium Saudi Arabia produces a low output and earns a profit of $80 million and Nigeria produces a high output and earns a profit of $30 million.
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If a firm faces a downward−sloping demand curve,
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It must reduce its price to sell more units.
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A dominant strategy
answer
is one that is the best for a firm, no matter what strategies other firms use.
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A monopolistically competitive industry that earns economic profits in the short run will
answer
experience the entry of new rival firms into the industry in the long run.
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The table to the right shows the payoff matrix for Walminus−Mart and Target from every combination of pricing strategies for the popular PlayStation 4. At the start of the game each firm charges a low price and each earns a profit of $7,000.
For each firm, is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000?
For each firm, is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000?
answer
Yes, the firms can implicitly collude and agree to charge a higher price.
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A cartel is
answer
a group of firms that enter into a formal agreement to fix prices to maximize joint profits.
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The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called
answer
game theory
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A monopolistically competitive firm will
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have some control over its price because its product is differentiated.
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An oligopolistic industry is characterized by all of the following except
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firms pursuing aggressive business strategies, independent of rivals' strategies.
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Which of the following is true for a monopolistically competitive firm in long−run equilibrium?
answer
P = ATC and MR = MC.
question
Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower-cost producer compared to Nigeria. The payoff matrix in the table to the right shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
Is there a dominant strategy for Saudi Arabia and, if so, what is it?
Is there a dominant strategy for Saudi Arabia and, if so, what is it?
answer
Yes, the dominant strategy is to produce a low output.
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Which of the following is an example of a way in which an oligopolistic firm can escape the prisoners' dilemma?
answer
advertising that it will match its rival's price
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Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. The table to the right shows the firm's demand and cost schedules.
What is the most output (Q) that Eco Energy can produce that will maximize profit and what is the price (P) charged?
What is the most output (Q) that Eco Energy can produce that will maximize profit and what is the price (P) charged?
answer
P=$50; Q=6 cases
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Refer to the diagram to the right. The firm represented in the diagram makes
answer
makes zero economic profit.
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What is the profitminus−maximizing rule for a monopolistically competitive firm?
answer
to produce a quantity such that marginal revenue equals marginal cost
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Collusion between two firms occurs when
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firms explicitly or implicitly agree to adopt a uniform business strategy.
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In an oligopoly market
answer
one firm's pricing decision affects all the other firms.
question
Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
What is the area that represents the total revenue made by the firm?
What is the area that represents the total revenue made by the firm?
answer
0P2cQa
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A monopolistically competitive market is described as one in which there are
answer
a large number of firms selling similar, but not identical, products.
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Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. The table to the right shows the firm's demand and cost schedules.
What is Eco Energy's profit?
What is Eco Energy's profit?
answer
$145
question
Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
If the firm represented in the diagram is currently producing and selling Qa units, what is the price charged?
If the firm represented in the diagram is currently producing and selling Qa units, what is the price charged?
answer
$P2
question
What is the incentive for a firm to join a cartel?
answer
to be able earn larger profits than if it was not part of the cartel.
question
Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower-cost producer compared to Nigeria. The payoff matrix in the table to the right shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
Is there a dominant strategy for Nigeria and, if so, what is it?
Is there a dominant strategy for Nigeria and, if so, what is it?
answer
Yes, the dominant strategy is to produce a high output.
question
Refer to the diagram to the right which shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
What is the area that represents the total fixed cost of production?
What is the area that represents the total fixed cost of production?
answer
P1bdP3
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