TUTORIAL 7

GT11103 ECONOMICS
Sem 2, 2023/2024
___________________________________________________________________________
Topic: Oligopoly

Multiple-choice Questions

1) The distinguishing features of oligopoly are ________ and a ________ in the industry.
A) barriers to entry; large number of firms
B) no barriers to entry; few firms
C) barriers to entry; few firms
D) no barriers to entry; large number of firms

2) The simplest prisoners' dilemma is a game that, in part, requires

A) two players who are able to communicate with each other.
B) two players who are unable to communicate with each other.
C) monopolistic competition.
D) an oligopoly with one very large firm.

3) In a prisoner's dilemma game, each person will pick

A) their best outcome given what the other person will do
B) their best outcome.
C) their worse outcome.
D) their best outcome after consulting with the other person.

4) In a prisoner's dilemma, the Nash equilibrium occurs where

A) neither person ends up with their best outcome.
B) both end up with their best outcome.
C) only one ends up with his best outcome.
D) the one who goes first ends up with his best outcome.

Dr. Smith
Advertise Don't advertise
S: $80 S: $60
Advertise
J: $70 J: $110
Dr. Jones
Don't S: $120 S: $100
advertise J: $60 J: $90

Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise
his service or not. The incomes of each optometrist, in thousands of dollars, are given in the payoff
matrix above.

5) Which of the following statements correctly describes Dr. Smith's strategy given what Dr. Jones
may do?
A) Dr. Smith should advertise no matter what Dr. Jones does.
B) Dr. Smith should not advertise no matter what Dr. Jones does.
C) Dr. Smith should advertise only if Dr. Jones doesn't advertise.
D) Dr. Smith should advertise only if Dr. Jones advertises.
6) Which of the following statements correctly describes Dr. Jones' strategy given what Dr. Smith may
do?
A) Dr. Jones should advertise no matter what Dr. Smith does.
B) Dr. Jones should not advertise no matter what Dr. Smith does.
C) Dr. Jones should advertise only if Dr. Smith doesn't advertise.
D) Dr. Jones should advertise only if Dr. Smith advertises.

7) Which of the following statements correctly categorizes the Nash equilibrium for the game?
A) The game has a Nash equilibrium in which both optometrists advertise.
B) The game has a Nash equilibrium in which both optometrists do not advertise.
C) The game has a Nash equilibrium in which Dr. Smith advertises and Dr. Jones does not advertise.
D) The game has a Nash equilibrium in which Dr. Smith does not advertise and Dr. Jones does
advertise.

8) In the oligopoly price-fixing game, the payoffs are the

A) profits of the firms.
B) market shares of the firms.
C) sales of the firms.
D) reputations of the firms.

9) A group of firms that has entered into a collusive agreement to restrict output and increase prices
and profits is called
A) a compliance.
B) a cartel.
C) an oligopoly.
D) a duopoly.

10) If firms in a duopoly can successfully collude,

A) each firm can earn an economic profit.
B) the industry, that is, both firms taken together, can earn the maximum economic profit.
C) the firms achieve a cooperative equilibrium.
D) All of the answers are true.

11) When two firms collude to maximize profit the total quantity produced by both firms taken
together is determined at the quantity where ________.
A) excess capacity is minimized
B) industry marginal cost equals industry marginal revenue
C) the price equals the industry's marginal cost
D) excess capacity is as large as possible zero

12) Two duopoly firms form a cartel. They decide to collude and fix the price of their good. Each
individual firm will earn the highest profit if
A) it cheats and the other sticks with the agreement.
B) both stick with the agreement.
C) it sticks with the agreement and the other cheats.
D) they both cheat.
 American
Cheat Comply
A: $0 A: -$2,000
Cheat
N: $0 N: $4,000
National
A: $4,000 A: $3,000
Comply
N: -$2,000 N: $3,000

13) There are two can companies, American and National, which have entered into a collusive
agreement. The payoff matrix of economic profits is above. If both firms cheat on the collusive
agreement, what amount of economic profit is made by American?
A) $0
B) $3,000
C) $4,000
D) -$2,000

14) If National is able to cheat on the agreement but American complies with the agreement, what
amount of economic profit is made by National?
A) $2,000
B) $3,000
C) $4,000
D) $6,000

Firm A
Competitive
Monopoly price
price
A: $5 A: $8
Monopoly price
B: $5 B: -$1
Firm B
Competitive A: -$1 A: $0 Nash equilibrium
price B: $8 B: $0

15) The above payoff matrix shows the economic profits (in millions of dollars) of two firms in a
duopoly that have agreed to a cartel agreement to restrict their output and set their prices equal to the
monopoly price. Assuming the game is played once, the equilibrium outcome is where
A) both choose the monopoly price.
B) both choose the competitive price.
C) firm A chooses the monopoly price and firm B chooses the competitive price.
D) firm B chooses the monopoly price and firm A chooses the competitive price.

16) A collusive agreement between two duopolists is similar to the prisoners' dilemma because in
both games,
A) the best outcome is always achieved.
B) each players strategy depends on what the other player does.
C) the Nash equilibrium is not the best outcome for the players.
D) All of the above answers are correct.

17) Price wars are

A) most likely when there is a monopoly.
B) most likely when there is oligopoly.
C) most likely when there is perfect competition.
D) equally likely in the cases of monopoly, oligopoly, and perfect competition.

18) A contestable market is one in which

A) one dominant firm sets the market price, and all other firms are price takers.
B) if a firm cuts its price, all other firms will follow the price cut.
C) one or a small number of firms operate, but faces competition from potential entrants.
D) a group of firms enter into an agreement to restrict output and raise prices.

19) If a duopolist's collusive price-fixing game can be played repeatedly,

A) one possible equilibrium is that both firms cheat.
B) players can signal their willingness to cooperate.
C) players can punish cheaters in the following game.
D) All of the above answers are correct.