ECON101 STUDY GUIDE 7 CHAPTER 14

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1 ECON101 STUDY GUIDE 7 CHAPTER 14 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) An oligopoly firm is similar to a monopolistically competitive firm in that A) both firms have market power. B) both firms face the prisoner's dilemma. C) both operate in a market in which there are entry barriers. D) both firms are in industries characterized by an interdependent firm. 2) An oligopolist differs from a perfect competitor in that A) there is cutthroat competition in perfect competition but little competition in oligopoly because firms have significant market power. B) the market demand curve for a perfectly competitive industry is perfectly elastic but it is downward-sloping in an oligopolistic industry. C) there are no entry barriers in perfect competition but there are entry barriers in oligopoly. D) firms in an oligopoly do not produce homogeneous products while firms in perfect competition do. 3) Producing a homogeneous product occurs in which of the following industries? A) oligopoly, monopolistic competition and perfect competition B) oligopoly and perfect competition C) monopolistic competition and perfect competition D) perfect competition only 4) Producing a differentiated product occurs in which of the following industries? A) oligopoly, monopolistic competition and perfect competition B) oligopoly only C) monopolistic competition only D) monopolistic competition and oligopoly 5) In an oligopoly market A) advertising of one firm has no effect on all other firms. B) the pricing decisions of all other firms have no effect on an individual firm. C) one firm's pricing decision affects all the other firms. D) individual firms pay no attention to the behavior of other firms. 6) Oligopolies exist and do not attract new rivals because A) there can be no product differentiation. B) of barriers to entry. C) of competition. D) the firms keep profits and prices so low that no rivals are attracted. 7) An example of a barrier to entry is A) high profits. B) increasing marginal costs C) superior technological knowledge. D) product differentiation. 1

2 8) Patents, tariffs and quotas are all examples of A) government-imposed barriers. B) economic regulations that increase efficiency. C) entry barriers that protect consumers. D) entry barriers that improve a country's standard of living. 9) Economies of scale can lead to an oligopolistic market structure because A) a few firms can force rivals to produce at low levels of output. B) if larger firms have lower costs, new small entrants will not be able to produce at the low costs achieved by the big established firms. C) if economies of scale are insignificant, only a few firms are able to produce at the low costs achieved by the big established firms. D) a few firms can use high profits to keep out new entrants. 10) The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called A) dominant strategy equilibrium. B) Nash equilibrium. C) game theory. D) the prisoner's dilemma. 11) A market comprised of only two firms is called a A) monopoly. B) monopolistically competitive market. C) competitive market. D) duopoly. 12) A dominant strategy A) involves deciding what to do after all rivals have chosen their own strategies. B) is one that is the best for a firm, no matter what strategies other firms use. C) involves colluding with rivals to maximize joint profits. D) is one that a firm is forced into following by government policy. 13) A Nash equilibrium is A) reached when an oligopoly's market demand and supply intersect. B) reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group. C) reached when each player chooses the best strategy for himself and for the group. D) an equilibrium comprising non-dominant strategies only. 14) Collusion between two firms occurs when A) firms act altruistically to bring about the economically efficient outcome. B) the firms independently pursue strategies that could hurt each other. C) announce that each will match its rival's market price. D) firms explicitly or implicitly agree to adopt a uniform business strategy. 2

3 Table 14-1 Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. 15) Refer to Table Is there a dominant strategy for Godrickporter and if so, what is it? A) Yes, Godrickporter's dominant strategy is to collude with Star Connections. B) Yes, Godrickporter should reduce its advertising spending. C) No, its outcome depends on what Star Connections does. D) Yes, Godrickporter should increase its advertising spending. 16) Refer to Table Is there a dominant strategy for Star Connections and if so, what is it? A) No, its outcome depends on what Godrickporter does. B) Yes, Star Connections' dominant strategy is to collude with Godrickporter. C) Yes, Star Connections should increase its advertising spending. D) Yes, Star Connections should reduce its advertising spending. 17) Refer to Table What is the Nash equilibrium in this game? A) Godrickporter increases its advertising budget, but Star Connections does not. B) Both Godrickporter and Star Connections increase their advertising budgets. C) Star Connections increases its advertising budget, but Godrickporter does not. D) There is no Nash equilibrium. 3

4 Table 14-2 Table 14-2 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3. At the start of the game each firm charges a low price and each earns a profit of $7, ) Refer to Table Is the current strategy in which each firm charges the low price and earns a profit of $7,000 a Nash equilibrium? If not, why and what is the Nash equilibrium? A) No, the current situation is not a Nash equilibrium; it is a dominant strategy equilibrium. There is no Nash equilibrium in this game. B) Yes, the current situation is a Nash equilibrium. C) No, it is not a Nash equilibrium because each firm can do better by charging the high price. The Nash equilibrium occurs when each firm charges the high price and earns a profit of $10,000. D) No, the current situation is not a Nash equilibrium. The Nash equilibrium for each firm is to have the other charge a high price and for the firm in question charge a low price. 19) Refer to Table 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? A) Yes, the firms can implicitly collude and agree to charge a higher price. B) Yes, each firm can implicitly agree to increase output and not to deviate from a low price. C) No, there is no incentive for each firm to consider any other strategy. D) No, any other strategy hurts consumers. 20) In an oligopoly, firms can increase their market power by A) undertaking heavy advertising expenditure. B) colluding to set prices. C) selling to buyers who have market power. D) pursuing dominant strategies. 4

5 Answer Key Testname: TA SESSION 7 CH14 1) A 2) C 3) B 4) D 5) C 6) B 7) C 8) A 9) B 10) C 11) D 12) B 13) B 14) D 15) D 16) A 17) A 18) B 19) A 20) B 5

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