MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Transcription

1 Practice set Chapter 14 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A market comprised of only two firms is called a 1) A) monopolistically competitive market. B) duopoly. C) competitive market. D) monopoly. 2) The music streaming industry, where a firm's profitability depends on its interactions with other firms, is an example of A) perfect competition. B) oligopoly. C) monopoly. D) monopolistic competition. 2) 3) An oligopolistic industry is characterized by all of the following except 3) A) production of standardized or differentiated products. B) existence of entry barriers. C) firms pursuing aggressive business strategies, independent of rivals' strategies. D) the possibility of reaping long-run economic profits. 4) The value of the four-firm concentration ratio that many economists consider indicative of the existence of an oligopoly in a particular industry is A) anything greater than 20 percent. B) anything greater than 30 percent. C) anything greater than 40 percent. D) anything greater than 10 percent. 4) 5) A four-firm concentration ratio measures 5) A) the fraction of an industry's sales accounted for by the four largest firms. B) the fraction of employment of the four largest firms in an industry. C) how the four largest firms became so concentrated. D) the production of any four firms in an industry. 6) If economies of scale are relatively unimportant in an industry, the typical firm's long-run average total cost curve will reach a minimum at a level of output that is a fraction of total industry sales. The industry will be. A) large; an oligopoly B) large; competitive C) small; competitive D) small; an oligopoly 6) 7) Collusion between two firms occurs when 7) A) firms act altruistically to bring about the economically efficient outcome. B) firms explicitly or implicitly agree to adopt a uniform business strategy. C) the firms independently pursue strategies that could hurt each other. D) announce that each will match its rival's market price. 8) What is a prisoner's dilemma? 8) A) a game in which prisoners are stumped because they cannot communicate with each other B) a game in which players collude to outfox authorities C) a game that involves no dominant strategies D) a game in which players act in rational, self-interested ways that leave everyone worse off 1

2 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. 9) Refer to Table Is there a dominant strategy for Godrickporter and if so, what is it? 9) A) Yes, Godrickporter should increase its advertising budget. B) No, its outcome depends on what Star Connections does. C) Yes, Godrickporter's dominant strategy is to collude with Star Connections. D) Yes, Godrickporter should not change its advertising budget. 10) Refer to Table Is there a dominant strategy for Star Connections and if so, what is it? 10) A) Yes, Star Connections should not change its advertising budget. B) Yes, Star Connections' dominant strategy is to collude with Godrickporter. C) Yes, Star Connections should increase its advertising budget. D) No, its outcome depends on what Godrickporter does. 11) Refer to Table Let's suppose the game starts with each firm adhering to its original budget so that Godrickporter earns a profit of $6,000 and Star Connections earns a profit of $12,000. Is there an incentive for any one firm to increase its advertising budget? A) Yes, both firms have an incentive to raise their advertising budgets. B) Yes, Godrickporter has an incentive to increase its advertising budget, but Star Connections does not. C) No, neither firm has an incentive to raise its advertising budget. D) Yes, Star Connections has an incentive to increase its advertising budget, but Godrickporter does not. 11) 12) Refer to Table What is the Nash equilibrium in this game? 12) A) Godrickporter increases its advertising budget, but Star Connections does not. B) There is no Nash equilibrium. C) Star Connections increases its advertising budget, but Godrickporter does not. D) Both Godrickporter and Star Connections increase their advertising budgets. 2

3 Table 14-3 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 Table 14-3 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. 13) Refer to Table Is there a dominant strategy for Saudi Arabia and, if so, what is it? 13) A) Yes, the dominant strategy is to produce a low output. B) No, there is no dominant strategy. C) Yes, it has a dominant strategy depending on what Nigeria does. D) Yes, the dominant strategy is to produce a high output. 14) Refer to Table Is there a dominant strategy for Nigeria and, if so, what is it? 14) A) Yes, it has a dominant strategy depending on what Saudi Arabia does. B) Yes, the dominant strategy is to produce a low output. C) No, there is no dominant strategy. D) Yes, the dominant strategy is to produce a high output. 15) Refer to Table What is the Nash equilibrium in this game? 15) A) In the Nash equilibrium both Saudi Arabia and Nigeria produce a high output and earn a profit of $60 million and $20 million respectively. B) 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. C) In the Nash equilibrium both Saudi Arabia and Nigeria produce a low output and earn a profit of $100 million and $20 million respectively. D) There is no Nash equilibrium. 16) Refer to Table Which of the following statements is true? 16) A) The Nash equilibrium is a collusive equilibrium. B) There is no Nash equilibrium in this game because each party pursues its dominant strategy. C) The Nash equilibrium is a cooperative equilibrium. D) The Nash equilibrium is a noncooperative, dominant strategy equilibrium. 3

4 Table 14-4 Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising budget to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 14-4 shows the payoff matrix for this advertising game. 17) Refer to Table If Alistair assumes that Baine would increase its advertising budget, what should it do? A) Alistair should also increase its advertising budget. B) Alistair should not change its advertising budget. C) Alistair should keep its own budget the same and allow Baine to incur the higher cost. D) Being a duopolist, Alistair is not affected by Baine's choices because it has a secure 50 percent market share. 17) 18) Refer to Table Does Alistair have a dominant strategy and if so, what is it? 18) A) There are two dominant strategies: if Baine increases its advertising budget, then Alistair's best bet is to keep its budget the same but if Baine does not increase its budget then Alistair should raise its advertising budget. B) No, there is no dominant strategy. C) Yes, Alistair should increase its advertising budget. D) Yes, Alistair should keep its advertising budget as is. 19) Refer to Table Does Baine have a dominant strategy and if so, what is it? 19) A) Yes, Baine should keep its advertising budget as is. B) No, there is no dominant strategy. C) There are two dominant strategies: if Alistair increases its advertising budget, then Baine's best bet is to keep its budget the same but if Alistair does not increase its budget then Baine should raise its advertising budget. D) Yes, Baine should increase its advertising budget. 20) Refer to Table What is the Nash equilibrium in this game? 20) A) Both Alistair and Baine increase their advertising budgets. B) There is no Nash equilibrium. C) Baine increases its advertising budget, but Alistair does not. D) Alistair increases its advertising budget, but Baine does not. 4

5 21) Refer to Table How are the firms in this advertising game caught in a prisoner's dilemma? 21) A) Since each firm is uncertain about the other's behavior, each will adopt a wait-and-see attitude which results in no increase in market share and no new customers. B) They would be more profitable if they refrained from advertising but each fears that if it does not advertise, it will lose customers. C) Only the first mover is caught in a prisoner's dilemma because the second has a chance to observe and respond. D) They are not in a prisoner's dilemma because there is one clear strategy for each. TRUE/FALSE. Write 'A' if the statement is true and 'B' if the statement is false. 22) An equilibrium in which each player chooses its best strategy given the strategies chosen by the other players is called a Nash equilibrium. 22) 23) In an oligopoly, minimum efficient scale is likely to occur at a level of output that is a large fraction of industry sales. 23) 24) Collusion is common in oligopoly and monopolistically competitive industries. 24) 25) A prisoner's dilemma leads to a noncooperative equilibrium. 25) 5

6 Answer Key Testname: UNTITLED1 1) B 2) B 3) C 4) C 5) A 6) C 7) B 8) D 9) A 10) D 11) B 12) A 13) A 14) D 15) B 16) D 17) A 18) C 19) D 20) A 21) B 22) TRUE 23) TRUE 24) FALSE 25) TRUE 6