CH 16. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

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1 Class: Date: CH 16 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. A firm faces a small number of competitors. This firm is competing in a. a monopoly. b. monopolistic competition. c. an oligopoly. d. perfect competition. e. a perfect multi-firm monopoly. 2. Firms in an oligopoly i. are independent of each others' actions. ii. can each influence the market price. iii. charge a price equal to marginal revenue. a. i only. b. ii only. c. iii only. d. i and iii. e. i, ii, and iii. 3. A group of firms acting together to limit output, raise price, and increase economic profit is a called a a. duopoly. b. monopolistic oligopoly. c. competitive oligopoly. d. cartel. e. multi-firm competitive monopoly. 4. A market with two firms competing a. is known as a duopoly. b. is monopolistic competition if the firms produce differentiated products. c. cannot have a Herfindahl-Hirschman Index because there are less than 50 firms in the market. d. is called a "dual monopoly." e. is perfect competition if the firms produce an identical product. 1

2 5. The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the lowest price at which a firm could stay in business in the long run is per unit and the quantity demanded in the market at that price is units per hour. a. $20; 4,000 b. $10; 8,000 c. $10; 4,000 d. $20; 2,000 e. $20; 8, The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, economies of scale limit the market to firm(s). a. 1 b. 2 c. 3 d. 4 e. 8 2

3 7. In the above figure, the output of an oligopoly will range between a. 0 and Q 1. b. Q 1 and Q 2. c. Q 1 and Q 3. d. Q 2 and Q 3. e. 0 and Q Game theory is the tool that economists use to analyze strategic behavior, which is behavior that takes into account the behavior of others and the mutual recognition of. a. unexpected; interdependence b. unexpected; independence c. expected; interdependence d. expected; independence e. random; profit 9. Game theory is used to analyze the interactions among firms in. a. oligopoly. b. perfect competition. c. monopoly. d. monopolistic competition. e. Both answers A and D are correct. 10. The concepts of mutual interdependence and game theory illustrate the fact that firms competing in oligopoly a. consider the actions of the rivals before changing the price of their product. b. ignore the actions of their rivals when considering price changes. c. engage in frequent price changes. d. never change prices. e. will mutually determine the combined best outcome for all players. 3

4 11. A Nash equilibrium occurs when each player in a game takes the given the action of the other player. a. worst possible action for himself or herself b. best possible action for himself or herself c. most unpredictable possible action d. most mutually beneficial possible action e. best possible action for the other player 12. In a prisoners' dilemma game, in the Nash equilibrium a. neither player gets his or her best outcome. b. both players get their best outcome. c. one player gets his or her best outcome and the other player does not. d. collusion would not alter the outcome. e. Either answer A or B might be correct depending on whether the players communicate with each other or do not communicate with each other. 13. Suppose MCI and AT&T can each charge either 3 or 4 a minute for a long distance call. The above table illustrates the payoffs, in millions of dollars, from each of the four possible outcomes that could occur in their duopoly setting. If MCI charges 4 a minute and AT&T charges 4 a minute, then MCI's profit will be million and AT&T's profit will be million. a. $320; $320 b. $200; $500 c. $500; $200 d. $450; $450 e. $320; $ Suppose MCI and AT&T can each charge either 3 or 4 a minute for a long distance call. The above table illustrates the payoffs, in millions of dollars, from each of the four possible outcomes that could occur in their duopoly setting. What must MCI's price be for AT&T to earn $500 million in profit? a. 4 a minute b. 3 a minute c. 0 a minute d. either 4 or 3 a minute because AT&T earns $500 million in profit either way e. None of the above answers is correct because the payoff matrix shows that it is not possible for AT&T to earn $500 million in profit 4

5 15. Long-run economic profits are most likely to be earned in a. perfect competition and oligopoly. b. perfect competition and monopoly. c. monopoly and oligopoly. d. oligopoly and monopolistic competition. e. perfect competition and monopolistic competition. 16. If two duopolists can stick to a cartel agreement to boost their prices, then both a. earn greater profits than if they did not collude. b. price at marginal cost. c. price below average total cost. d. decrease their economic profits. e. increase their production so that each produces more than if they did not collude. 17. The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the Nash equilibrium, Firm A will set a price of and Firm B will set a price of. a. $10; $20 b. $20; $10 c. $10; $10 d. $20; $20 e. $20; something, but more information is needed to determine Firm B's price 18. If the HHI for an industry equals 3,200, a. firms in the industry must enter a cartel in order to earn an economic profit. b. firms in the industry are most likely to earn zero economic profit. c. the industry is probably an oligopoly. d. firms in the industry are likely to act independently of each other. e. the industry is almost surely monopolistic competition. 5

6 19. Which of the following are characteristics of an oligopoly? i. The HHI for an oligopoly is between 100 and ii. There are a few firms that compete. iii. The firms can increase their profit by forming a cartel. a. i and ii b. i and iii c. ii and iii d. i, ii, and iii e. i only. 20. The figure above shows the market demand curve and the ATC curve for a firm. Each firm in the market has the same ATC curve. If the firms in the industry agree to form a cartel, the firms in the industry earn an economic profit if there are firms, each producing units per hour. a. 3; 4,000 b. 4; 3,000 c. 2; 6,000 d. 2; 4,000 e. 2; 12, The range of output for a duopoly ranges between the a. perfectly competitive outcome and the monopolistically competitive outcome. b. efficient scale and the perfectly competitive outcome. c. minimum of ATC and the efficient scale. d. monopoly outcome and the perfectly competitive outcome. e. short-run perfectly competitive outcome and the long-run perfectly competitive outcome. 6

7 22. What is the conclusion in the prisoners' dilemma? a. Firms should not enter a legal duopoly. b. Two prisoners acting in their own best interest harm their joint interest. c. There is no Nash equilibrium available to the prisoners. d. Prisoners do not act interdependently. e. Duopolies almost always reach their best outcome. 23. Sammy's Inc. competes with a few other firms because there are natural barriers to entry. Sammy's operates in a. a perfectly competitive market. b. an oligopoly. c. a monopolistically competitive market. d. a monopoly. e. a natural monopolistically competitive market. 24. Which of the following is found ONLY in oligopoly? a. producers who sell identical products b. one firm's actions affect another firm's profit c. entry into the industry is blocked d. sellers face a downward sloping demand curve for their product e. the firm's demand curve is horizontal 25. In an oligopoly, there are a. many firms and barriers to entry. b. many firms and no barriers to entry. c. few firms and barriers to entry. d. few firms and no barriers to entry. e. barriers to entry and only one firm. 26. Which of the following is correct about firms in an oligopoly? a. Each firm has complete control over its own selling price and the prices of its competitors. b. All firms independently charge monopoly prices. c. No one firm controls price, but each has an influence on the price. d. There is no competition in oligopoly industries. e. Each firm in an oligopoly is a price taker and must accept the price determined in the market. 27. Daryl's Inc. has formed a cartel with the two other firms in its industry. In which of the following market structures does Daryl's operate? a. monopolistic competition b. oligopoly c. perfect competition d. monopoly e. legally protected monopoly 28. There are two bookstores in a college town. If another bookstore opened, each of the stores would incur an economic loss. This bookstore market is a. a natural monopoly. b. a monopoly. c. monopolistic competition. d. a natural oligopoly. e. a legal oligopoly. 7

8 29. The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the efficient scale for one firm is units per hour. a. 2,000 b. 4,000 c. 8,000 d. 6,000 e. 10,000 8

9 30. The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, economies of scale limit the market to firm(s). a. 1 b. 2 c. 3 d. 4 e The fact that firms in oligopoly are interdependent means that a. there are barriers to entry. b. one firm's profits are affected by other firms' actions. c. they can produce either identical or differentiated goods. d. there are too many of them for any one firm to influence price. e. they definitely compete with each other so that the price is driven down to the monopoly level. 32. Collusion results when a group of firms i. act separately to limit output, lower prices, and decrease economic profits. ii. act together to limit output, raise prices, and increase economic profits. iii. in the United States legally fix prices. a. i only. b. ii only. c. iii only. d. i and iii. e. ii and iii. 9

10 33. A market with only two firms is called a a. duopoly. b. two-firm monopolistic competition. c. two-firm monopoly. d. cartel. e. two-firm quasi monopoly. 34. If firms in an oligopolistic industry successfully collude and form a cartel, what price and output will result? a. the monopoly price and output b. the competitive price and output c. the monopolistically competitive price and output d. a price higher than the monopoly price and, because there is more than one firm in the industry, more output than the monopoly amount e. a price lower than the competitive price and, because there are only a few firms in the industry, less output than the competitive amount 35. The above figure shows the market demand curve for long-distance telephone calls. Suppose the marginal cost of a long-distance telephone call is 2 a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as perfect competitors, the price of a call is per minute and if the firms in the industry operate as a monopoly, the price of a call is per minute. a. 2 cents; more than 3 cents and less than 4 cents b. more than 3 cents and less than 4 cents; more than 3 cents and less than 4 cents c. 1 cents; 2 cents d. 2 cents; either equal to 4 cents or more than 4 cents e. either equal to 4 cents or more than 4 cents; 2 cents 10

11 36. Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing output and equally share the economic profit. If firm A increases output, a. both firms' profits increase. b. firm A's profits increase and firm B's profits decrease. c. firm B's profits increase and firm A's profits decrease. d. both firms' profits decrease. e. firm A's profits increase and firm B's profits do not change. 37. Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing output and equally share the economic profit. If firm A increases its output, the market price and total economic profit of the two firms combined. a. falls; decreases b. falls; increases c. rises; decreases d. rises; increases e. falls; does not change 38. For a duopoly, the smallest quantity is produced when the duopoly achieves a. the competitive outcome. b. the monopoly outcome. c. an outcome between the competitive outcome and the monopoly outcome. d. its noncooperative Nash equilibrium. e. Both answers A and D are correct because both refer to the same amount of output. 39. For a duopoly, the maximum total profit is reached when the duopoly produces a. the same amount of output as the competitive outcome. b. the same amount of output as the monopoly outcome. c. an amount of output that lies between the competitive outcome and the monopoly outcome. d. more output than the competitive outcome. e. less output than the monopoly outcome. 40. Suppose a duopoly had reached the monopoly outcome and then the first firm increased its production. If the second firm next increases its production, the second firm's profit and the first firm's profit. a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases e. increases; does not change 41. A table showing the various results in a game theory situation is known as which of the following? a. short-run cost table b. payoff matrix c. demand and supply schedule d. game theory table e. results table 42. In the prisoners' dilemma, each player is regardless of the other player's actions. a. forced to confess b. forced to deny c. better off confessing d. better off denying e. going to go free 11

12 43. The equilibrium in the prisoners' dilemma i. minimizes the prisoners' combined jail time. ii. has one prisoner confessing and the other denying. iii. is a Nash equilibrium. a. i only. b. ii only. c. iii only. d. i and iii. e. i, ii, and iii. 44. Which of the following is used to analyze all possible choices and outcomes in the prisoners' dilemma? a. the four-firm concentration ratio b. the payoff matrix c. product differentiation d. strategies e. the game-theory profit index 45. A Nash equilibrium is defined as a. earning normal profits in the long run. b. forming a cartel with strong penalties for cheaters. c. relying on other game players to realize the benefit of cooperation. d. each player taking the best possible action given the action of the other player. e. each player taking the action that is best for all the players. 46. The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is a. Bonnie confesses only if she thinks Clyde denies committing the crime. b. Clyde confesses only if he thinks Bonnie denies committing the crime. c. both Bonnie and Clyde confess to the crime. d. both Bonnie and Clyde deny committing the crime. e. Clyde confesses and Bonnie might either confess or not confess, either outcome is consistent with the Nash equilibrium. 12

13 47. Intel and AMD are a duopoly that produce CPU chips. Intel and AMD can conduct R&D or they can not conduct R&D. The table above shows the payoff matrix for the two firms. The numbers are millions of dollars of profit. The Nash equilibrium is for Intel to and for AMD to. a. conduct R&D; conduct R&D b. conduct R&D; not conduct R&D c. not conduct R&D; conduct R&D d. not conduct R&D; not conduct R&D e. conduct R&D; either conduct R&D or not conduct R&D, the equilibrium could be either choice for AMD 48. If an oligopolistic game is repeatedly played, which of the following can occur? a. players can learn ways to cooperate and earn an economic profit b. the competitive price and output consistently is the final result c. firms can learn how to cheat more effectively on the other player d. one firm will be driven out of business e. an implicit agreement is reached in which one firm constantly cheats on the cartel and the other firm complies with it 49. The prisoners' dilemma game a. shows that prisoners are better off if they cooperate. b. shows it is easy to cooperate. c. has an equilibrium in which both prisoners are made as well off as possible. d. would have the same outcome even if the prisoners can communicate and cooperate. e. has an equilibrium in which one prisoner is made as well off as possible and the other prisoner is made as worse off as possible. 50. From a social perspective, oligopoly is a. always efficient. b. efficient only if the firms cooperate. c. efficient only if the firms play non-repeated games. d. generally not efficient. e. efficient only if the firms innovate. 13