Chapter 15

Oligopoly
15.1 Oligopoly Games

1) Game theory is most useful for analyzing

A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
Answer: C
Topic: Game Theory
Skill: Conceptual

2) Game theory is distinctive in that its elements are

A) costs, prices, and profits.
B) revenues, elasticity, and profits.
C) rules, strategies, payoffs, and outcomes.
D) patents, copyrights, and barriers to entry.
Answer: C
Topic: What Is A Game?
Skill: Conceptual

3) The prisoners' dilemma describes a single-play game that features

A) an outcome in which the participants collude.
B) a large number of rivals cooperating with each other.
C) a situation in which one player has better odds than the other.
D) two players who are unable to communicate with each other.
Answer: D
Topic: Prisoners' Dilemma
Skill: Recognition

4) In the prisoners' dilemma game, each player

A) has only one possible strategy.
B) can choose from two strategies.
C) can choose from three strategies.
D) can choose from four strategies.
Answer: B
Topic: Prisoners' Dilemma
Skill: Analytical

5) 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.
Answer: B
Topic: Prisoners' Dilemma
Skill: Recognition

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 Bob
Don't
Confess
Confess
B: 10 years B: 20 years
Confess
J: 10 years J: 1 year
Joe
Don't B: 1 year B: 2 years
Confess J: 20 years J: 2 years
6) The table above displays the possible outcomes for Bob and Joe, who have been arrested for
armed robbery and car theft. Which of the following is true?
A) If Joe confesses, Bob should not confess.
B) If Bob confesses, Joe should confess.
C) The dominant equilibrium is that Joe and Bob both serve 2 years.
D) If Joe does not confess, Bob should not confess.
Answer: B
Topic: Prisoners' Dilemma
Skill: Conceptual

7) The prisoners' dilemma has an equilibrium in which

A) both players deny.
B) both players confess.
C) the player who confesses wins.
D) the player who denies wins.
Answer: B
Topic: Prisoners' Dilemma
Skill: Conceptual

8) The prisoners' dilemma has an equilibrium that is

A) a Nash equilibrium and both players confess.
B) not a Nash equilibrium and both players confess.
C) a Nash equilibrium and both players deny.
D) not a Nash equilibrium and both players deny.
Answer: A
Topic: Prisoners' Dilemma
Skill: Conceptual

Firm 1
Give
Sell
away
1: $3 1: $4
Sell
2: $3 2: -$1
Firm 2
1: -$1 1: $2
Give away
2: $4 2: $2
9) Two software firms have developed an identical new software application. They are
debating whether to give the new application away free and then sell add-ons or sell the
application at $30 a copy. The payoff matrix is above and the payoffs are profits in millions
of dollars. What is Firm 1's best strategy?
A) Give away the application regardless of what Firm 2 does.
B) Sell the application at $30 a copy regardless of what Firm 2 does.
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 C) Give away the application only if Firm 2 sells the application.
D) Give away the application only if Firm 2 gives away the application.
Answer: A
Topic: Game Theory
Skill: Analytical

10) Two software firms have developed an identical new software application. They are
debating whether to give the new application away free and then sell add-ons or sell the
application at $30 a copy. The payoff matrix is above and the payoffs are profits in millions
of dollars. What is the Nash equilibrium of the game?
A) Both Firm 1 and 2 will sell the software application at $30 a copy.
B) Both Firm 1 and 2 will give the software application away free.
C) Firm 1 will give the application away free and Firm 2 will sell it at $30.
D) There is no Nash equilibrium to this game.
Answer: B
Topic: Game Theory, Nash Equilibrium
Skill: Analytical

Firm A
No
R&D
R&D
A: $25 A: -$3
R&D
B: $15 B: $60
Firm B
A: $60 A: $50
No R&D
B: -$3 B: $35
11) Firms A and B can conduct research and development (R&D) or not conduct it. R&D is
costly but can increase the quality of the product and increase sales. The payoff matrix is the
economic profits of the two firms and is given above, where the numbers are millions of
dollars. A's best strategy is to
A) conduct R&D regardless of what B does.
B) not conduct R&D regardless of what B does.
C) conduct R&D only if B conducts R&D.
D) conduct R&D only if B does not conduction R&D.
Answer: A
Topic: Game Theory
Skill: Conceptual

12) Firms A and B can conduct research and development (R&D) or not conduct it. R&D is
costly but can increase the quality of the product and increase sales. The payoff matrix is the
economic profits of the two firms and is given above, where the numbers are millions of
dollars. The Nash equilibrium occurs when
A) both A and B conduct R&D.
B) only A conducts R&D.
C) only B conducts R&D.
D) neither A nor B conduct R&D.
Answer: A
Topic: Game Theory, Nash Equilibrium
Skill: Conceptual

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 Disney
Thanks Christ
giving mas
release release
Thanksgiving D: $100 D: $105
release F: $80 F: $95
Fox
Christmas D: $110 D: $95
release F: $100 F: $85
13) Disney and Fox must decide when to release their next films. The revenues received by each
studio depends in part on when the other studio releases its film. Each studio can release its
film at Thanksgiving or at Christmas. The revenues received by each studio, in millions of
dollars, are depicted in the payoff matrix above. Which of the following statements correctly
describes Fox's strategy given what Disney's release choice may be?
A) If Disney chooses a Thanksgiving release, Fox should choose a Christmas release.
B) If Disney chooses a Christmas release, Fox should choose a Thanksgiving release.
C) Fox should release on Christmas regardless of what Disney does.
D) Both answers A and B are correct.
Answer: D
Topic: Game Theory
Skill: Analytical

14) Disney and Fox must decide when to release their next films. The revenues received by each
studio depends in part on when the other studio releases its film. Each studio can release its
film at Thanksgiving or at Christmas. The revenues received by each studio, in millions of
dollars, are depicted in the payoff matrix above. Which of the following statements correctly
describes Disney's strategy given what Fox's release choice may be?
A) If Fox chooses a Thanksgiving release, Disney should choose a Christmas release.
B) If Fox chooses a Christmas release, Disney should choose a Thanksgiving release.
C) Disney should release on Thanksgiving regardless of what Fox does.
D) Both answers A and B are correct.
Answer: D
Topic: Game Theory
Skill: Analytical

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 Dr. Smith
Don't
Adverti
adverti
se
se
S: $80 S: $60
Advertise
J: $70 J: $110
Dr. Jones
Don't S: $120 S: $100
advertise J: $60 J: $90
15) 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. 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.
Answer: A
Topic: Game Theory
Skill: Analytical

16) 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. 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.
Answer: A
Topic: Game Theory
Skill: Analytical

17) 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. 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.
Answer: A
Topic: Nash Equilibrium
Skill: Analytical

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18) In an oligopoly price-fixing game, each player tries to
A) minimize the market shares of its opponents.
B) maximize its own market share.
C) minimize the profits of its opponents.
D) maximize its own profit.
Answer: D
Topic: Price-Fixing Game
Skill: Recognition

19) 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.
Answer: A
Topic: Price-Fixing Game
Skill: Recognition

20) A duopoly is a form of

A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
Answer: C
Topic: Price-Fixing Game
Skill: Conceptual

21) A cartel usually has a collusive agreement to

A) restrict output.
B) boost output.
C) lower the price.
D) increase the number of firms in the industry.
Answer: A
Topic: Cartel
Skill: Recognition

22) A cartel is a group of firms that

A) produce differentiated products.
B) produce products that are complements.
C) agree to restrict output to boost their profit.
D) agree to boost output to boost their profit.
Answer: C
Topic: Cartel
Skill: Recognition

23) If there is a collusive agreement in a duopoly to maximize profit, then the price will
A) equal the marginal cost of production.
B) equal the average total cost of production.
C) be the same as the price set by a monopoly.
D) be the same as the price set by a competitive industry.
Answer: C
Topic: Colluding To Maximize Profits
Skill: Conceptual

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24) The maximum total economic profit that can be made by colluding duopolists
A) is less than the economic profit made by a monopolist.
B) equals the economic profit made by a monopolist.
C) exceeds the economic profit made by a monopolist.
D) bears no necessary relation to the economic profit made by a monopolist.
Answer: B
Topic: Colluding To Maximize Profits
Skill: Recognition

25) Once a cartel determines the profit-maximizing price,

A) each firm faces the temptation to cheat by raising its price.
B) each firm faces the temptation to cheat by lowering its price.
C) changes in the output of any member firm will not affect the market price.
D) entry into the industry by rival firms will not affect the profit of the cartel.
Answer: B
Topic: Cartel; Incentive To Cheat
Skill: Conceptual

26) In a cartel,
A) each firm has an incentive to decrease its own production below the level set by the
cartel.
B) the firms' marginal cost equals the price set by the cartel.
C) each firm has an incentive to lower its price below the level set by the cartel.
D) each firm has an incentive to raise its price above the level set by the cartel.
Answer: C
Topic: Cartel; Incentive To Cheat
Skill: Conceptual

27) In a cartel, the incentive to cheat is significant because

A) each firm has an incentive to decrease its own production.
B) each firm's marginal cost exceeds the price that the cartel sets.
C) each firm has an incentive to raise its price.
D) each firm has an incentive to expand its production.
Answer: D
Topic: Cartel; Incentive To Cheat
Skill: Conceptual

28) If a duopoly has a collusive agreement that maximizes joint profit, then each duopolist has
A) no incentive to cheat.
B) an incentive to cheat by lowering its price.
C) an incentive to cheat by raising its price.
D) an incentive to cheat by decreasing its production.
Answer: B
Topic: Cartel; Incentive To Cheat
Skill: Analytical

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 29) A firm might be tempted to cheat on a collusive price-fixing agreement by setting a ________
price and producing ________ than agreed upon.
A) lower; more
B) lower; less
C) higher; more
D) higher; less
Answer: A
Topic: Cartel; Incentive To Cheat
Skill: Analytical

Sears
Don't
Lower
lower
prices
prices
S: $5 million S: $1 million
Lower prices
W: $5 million W: $30 million
Wal-Mart
Don't lower S: $30 million S: $20 million
prices W: $1 million W: $20 million
30) Sears and Wal-Mart must decide whether to lower their prices, based on the economic
profits shown in the table above. Which of the following is true?
A) This situation is not a prisoners' dilemma.
B) If Sears lowers its prices and Wal-Mart does not, Sears will earn a $20 million economic
profit.
C) If Wal-Mart lowers its prices, Sears should keep its prices high.
D) Both Sears and Wal-Mart would jointly be better off if they could each keep their prices
high.
Answer: D
Topic: Colluding To Maximize Profits
Skill: Conceptual

31) Refer to the payoffs in the table above. Sears and Wal-Mart must decide whether to lower
their prices based on the profits shown in the table. This game has
A) no Nash equilibrium.
B) a Nash equilibrium: Sears keeps its prices high and Wal-Mart lowers its prices.
C) a Nash equilibrium: both Sears and Wal-Mart keep prices high.
D) a Nash equilibrium: both Sears and Wal-Mart lower prices.
Answer: D
Topic: Equilibrium of the Duopolists' Dilemma
Skill: Analytical

32) In an oligopoly with a collusive agreement, the total industry profits will be smallest when
A) all firms comply with the agreement.
B) one firm cheats on the agreement and the other firms do not cheat.
C) all firms cheat on the agreement.
D) the firms act as a monopoly.
Answer: C
Topic: Study Guide Question, Equilibrium of the Duopolists' Dilemma
Skill: Conceptual

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33) Price wars can be the result of
A) a cooperative equilibrium.
B) a firm playing a tit-for-tat strategy in which last period the competitors complied with
a collusive agreement.
C) new firms entering the industry and immediately agreeing to abide by a collusive
agreement.
D) new firms entering the industry and all firms then finding themselves in a prisoners'
dilemma.
Answer: D
Topic: Study Guide Question, Games and Price Wars
Skill: Conceptual

34) When a cartel maximizes its profit,

A) each firm necessarily produces the same amount.
B) the industry level of output is efficient.
C) industry marginal revenue equals industry marginal cost at the level of total output.
D) total output is greater than it would be without collusion.
Answer: C
Topic: Study Guide Question, Colluding to Maximize Profits
Skill: Conceptual

35) In game theory, strategies include ________.

A) all possible actions of each player
B) only the winning action of each player
C) all possible actions and payoffs of each player
D) the payoff matrix
Answer: A
Topic: Game Theory
Skill: Recognition

36) A table that shows the payoffs for every possible action by each player for every possible
action by each other player is called the ________.
A) strategy table
B) game matrix
C) payoff matrix
D) strategy matrix
Answer: C
Topic: Game Theory
Skill: Recognition

37) In the prisoners' dilemma game, when each player takes the best possible action given the
action of the other player, ________.
A) a competitive equilibrium is reached
B) one player denies and one player confesses
C) both players deny
D) a Nash equilibrium is reached
Answer: D
Topic: Nash Equilibrium
Skill: Recognition

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38) The outcome of a prisoners' dilemma game with a Nash equilibrium is that ________.
A) both players deny
B) one player denies and one player confesses
C) both players confess
D) there is no equilibrium
Answer: A
Topic: Prisoners' Dilemma
Skill: Recognition

39) John von Neumann and Oskar Morgenstern are the inventors of ________.
A) duopoly theory
B) game theory
C) oligopoly theory
D) the Nash equilibrium
Answer: B
Topic: Game Theory
Skill: Recognition

40) Ann and Lynn have been arrested by the police, who have evidence that will convict them of
robbing a bank. If convicted, each will receive a sentence of 6 years for the robbery. During
questioning, the police suspect that Ann and Lynn are responsible for a series of bank
robberies. If both confess to the series, each will receive 12 years in jail. If only one confesses,
she will receive 4 years and the one who does not confess will receive 14 years. What is the
equilibrium for this game?
A) both confess
B) Ann confesses and Lynn does not confess
C) Lynn confesses and Ann does not confess
D) neither confess
Answer: A
Topic: Prisoners' Dilemma
Skill: Conceptual

41) Game theory is a tool for studying ________.

A) Nash behavior
B) payoff dilemmas
C) rational dilemmas
D) strategic behavior
Answer: D
Topic: Game Theory
Skill: Recognition

42) The maximum economic profit that can be made by a duopoly that colludes is equal to the
________.
A) economic profit made by duopolists who cheat
B) normal profit made by an oligopoly
C) economic profit made by a monopoly
D) normal profit made by firms in perfect competition
Answer: C
Topic: Colluding To Maximize Profits
Skill: Recognition

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 43) In a duopoly with a collusive agreement and in a one-time only game, a firm's profit is
largest if it ________ the agreement and if the other firm ________ the agreement.
A) complies with; complies with
B) complies with; cheats on
C) cheats on; complies with
D) cheats on; cheats on
Answer: C
Topic: Colluding To Maximize Profits
Skill: Conceptual

44) Game theory is most useful for determining the outcome when ________.
A) the market structure is oligopoly
B) monopolistic competition exists
C) prison terms are involved
D) the market is dominated by a monopoly
Answer: A
Topic: Game Theory
Skill: Recognition

45) 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
Answer: B
Topic: Colluding To Maximize Profits
Skill: Conceptual

Oscar
Compl
Cheat
y
O: $1 M O: -$2 M
Cheat
F: $1 M F: $12 M
Felix
O: $12 M O: $10 M
Comply
F: -$2 M F: $10 M
46) Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a
cartel. The payoff matrix above gives the economic profit that each firm can make. If Felix
cheats on the agreement but Oscar complies, Felix makes an economic profit of ________ and
Oscar makes an economic profit of ________.
A) $10 million; $10 million
B) $1 million; $1 million
C) -$2 million; $12 million
D) $12 million; -$2 million
Answer: D
Topic: Game Theory
Skill: Conceptual

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 47) Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a
cartel. The payoff matrix above shows the economic profit that each firm can make. If the
game is played only once, then ________.
A) Felix and Oscar will each make $10 million profit
B) Felix will comply and Oscar will make $12 million profit
C) Felix and Oscar will each make $1 million profit
D) Felix will cheat and Oscar will make -$2 million profit
Answer: C
Topic: Game Theory
Skill: Analytical

48) Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a
cartel. The payoff matrix shows the economic profit that each firm can make. If the game is
played repeatedly and Felix and Oscar both use a tit-for-tat strategy, then ________.
A) Felix will make $10 million and Oscar will cheat
B) Felix and Oscar will each make $1 million profit
C) Felix will make -$2 million and Oscar will cheat
D) Felix and Oscar will each make $10 million profit
Answer: D
Topic: Game Theory
Skill: Analytical

15.2 Repeated Games and Sequential Games

1) A tit-for-tat strategy can be used in

A) a single-play game or a repeated game.
B) a single-play game but not a repeated game.
C) a repeated game but not a single-play game.
D) neither a repeated game nor a single-play game.
Answer: C
Topic: Repeated Games
Skill: Analytical

2) A trigger strategy can be used in

A) a single-play game or a repeated game.
B) a single-play game but not a repeated game.
C) a repeated game but not a single-play game.
D) neither a single-play game nor a repeated game.
Answer: C
Topic: Repeated Games
Skill: Recognition

3) A strategy in which a player cooperates in the current period if the other player cooperated
in the previous period, but the player cheats in the current period if the other player cheated
in the previous period is called a
A) tit-for-tat strategy.
B) trigger strategy.
C) duopoly strategy.
D) dominant firm strategy.
Answer: A
Topic: Repeated Games
Skill: Recognition

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4) A trigger strategy is one in which a player
A) cooperates in the current period if the other player cooperated in the previous period,
but cheats in the current period only if the other player cheated in the previous period.
B) cheats in the current period if the other player cooperated in the previous period, but
cooperates in the current period if the other player cheated in the previous period.
C) cooperates in the current period if the other player has always cooperated, but cheats
forever if the other player ever cheats.
D) cheats in the current period if the other player has always cheated, but cooperates
forever if the other player has ever cooperated.
Answer: C
Topic: Repeated Games
Skill: Recognition

5) In a repeated game, the punishments for a

A) tit-for-tat strategy and a trigger strategy are both mild.
B) tit-for-tat strategy and a trigger strategy are both severe.
C) tit-for-tat strategy is mild and a trigger strategy is severe.
D) tit-for-tat strategy is severe and a trigger strategy is mild.
Answer: C
Topic: Repeated Games
Skill: Recognition

6) A cooperative equilibrium is most likely to arise in a

A) single-play game with a large number of players.
B) single-play game without communication.
C) repeated game with a large number of players.
D) repeated game with a small number of players.
Answer: D
Topic: Repeated Games
Skill: Analytical

7) With barriers to the entry of new firms,

A) a cartel is guaranteed to earn an economic profit.
B) a cartel's members have no incentive to cheat.
C) the cartel might earn an economic profit.
D) industry supply will expand if the firms form a cartel.
Answer: C
Topic: Games And Price Wars
Skill: Analytical

8) 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.
Answer: B
Topic: Games And Price Wars
Skill: Conceptual

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 9) Of the following, the best example of firm that might operate in a contestable market is a
A) cable TV company.
B) wheat farmer.
C) ship owner operating on a major waterway.
D) private college operating in a state with many public colleges.
Answer: C
Topic: Contestable Market
Skill: Conceptual

10) In a contestable market the Herfindahl-Hirschman Index is ________ and the market behaves
as if it is ________.
A) low; perfectly competitive
B) low; a monopoly
C) high; perfectly competitive
D) high; a monopoly
Answer: C
Topic: Contestable Market
Skill: Conceptual

11) A contestable market is one in which there are

A) one or a few firms and entry into the market is costly.
B) one or a few firms and entry into the market is not costly.
C) many firms and entry into the market is costly.
D) many firms and entry into the market is not costly.
Answer: B
Topic: Contestable Market
Skill: Recognition

12) In a contestable market

A) two or more firms are competing.
B) the Herfindahl-Hirschman Index exceeds 1,800.
C) the four-firm concentration ratio exceeds 50 percent.
D) potential entry holds down prices.
Answer: D
Topic: Contestable Market
Skill: Conceptual

13) Adkins Air is the only seller offering service directly from Milwaukee to Greensboro. The
market is contestable. Thus the Nash Equilibrium for a game between Adkins Air and a
potential entrant is when the potential entrant
A) enters and Adkins earns a normal profit.
B) enters and Adkins earns an economic profit.
C) does not enter and Adkins earns a normal profit.
D) does not enter and Adkins earns an economic profit.
Answer: C
Topic: Entry-Deterrence Game
Skill: Analytical

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14) The practice of the only seller in a market charging a price less than the monopoly price in
order to scare away potential entrants is called
A) limit pricing.
B) collusive pricing.
C) agile pricing.
D) trigger pricing.
Answer: A
Topic: Limit Pricing
Skill: Recognition

15) In a contestable market,

A) the HHI is usually quite low.
B) the firm in the market usually earns a large economic profit.
C) the firm in the market may play an entry-deterrence game.
D) there are high barriers to entry.
Answer: C
Topic: Study Guide Question, Contestable Markets
Skill: Conceptual

16) In a repeated game, punishments that result in heavy damages are an incentive for players
to adopt the strategies that result in a ________ equilibrium.
A) contestable
B) strategic
C) cooperative
D) winner-share-all
Answer: C
Topic: Cooperative Equilibrium
Skill: Recognition

17) Limit pricing in a contestable market sets the price at the highest level that ________.
A) maximizes the profit of an entrant
B) maximizes the profit of the existing firm
C) maximizes the profit of both the existing firm and the entering firm
D) inflicts a loss on the entrant
Answer: D
Topic: Limit Pricing
Skill: Recognition

18) The Herfindahl-Hirschman Index will indicate that a contestable market is ________.
A) a sequential market
B) competitive
C) uncompetitive
D) a prisoners' dilemma
Answer: C
Topic: Contestable Market
Skill: Conceptual

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