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9/12/24, 4:02 Chapter 17 - M/C withPM answers
Chapter 17
Oligopoly
TRUE/FALSE
1. The essence of an oligopolistic market is that there are only a few
sellers. ANS: T
2. Game theory is just as necessary for understanding competitive or monopoly markets as it is for
understanding oligopolistic markets.
ANS: F
3. In a competitive market, strategic interactions among the firms are not
important. ANS: T
4. For a firm, strategic interactions with other firms in the market become more important as the number of
firms in the market becomes larger.
ANS: F
5. Suppose three firms form a cartel and agree to charge a specific price for their output. Each individual firm
has an incentive to maintain the agreement because the firm’s individual profits will be the greatest under
the cartel arrangement.
ANS: F
6. If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the same
level of output as they would produce in a Nash equilibrium.
ANS: F
7. Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the
same. ANS: F
8. Cartels with a small number of firms have a greater probability of reaching the monopoly outcome than
do cartels with a larger number of firms.
ANS: T
9. As the number of firms in an oligopoly becomes very large, the price effect
disappears. ANS: T
10. If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the cartel is
equal to what it would be if the market were a monopoly.
ANS: T
11. As the number of firms in an oligopoly increases, the magnitude of the price effect
increases. ANS: F
12. All examples of the prisoner’s dilemma game are characterized by one and only one Nash
equilibrium. ANS: F
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130 Chapter 17/Oligopoly
13. If two players engaged in a prisoner’s dilemma game are likely to repeat the game, they are more likely
to cooperate than if they play the game only once.
ANS: T
14. The story of the prisoners' dilemma contains a general lesson that applies to any group trying to
maintain cooperation among its members.
ANS: T
15. In the prisoners' dilemma game, one prisoner is always better off confessing, no matter what the other
prisoner does.
ANS: T
16. In the prisoners' dilemma game, confessing is a dominant strategy for each of the two
prisoners. ANS: T
17. The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that the
two prisoners play in the prisoners' dilemma.
ANS: T
18. In the case of oligopolistic markets, self-interest makes cooperation difficult and it often leads to
an undesirable outcome for the firms that are involved.
ANS: T
19. When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes
both parties to cooperate.
ANS: T
20. A tit-for-tat strategy, in a repeated game, is one in which a player starts by cooperating and then does
whatever the other player did last time.
ANS: T
21. One way that public policy encourages cooperation among oligopolists is through antitrust
law. ANS: F
22. The Sherman Antitrust Act prohibits competing firms from even talking about fixing
prices. ANS: T
23. Resale price maintenance prevents retailers from competing on
price. ANS: T
24. Some business practices that appear to reduce competition, such as resale price maintenance, may
have legitimate economic purposes.
ANS: T
25. In 2007 the U.S. Supreme Court ruled that it was not necessary illegal for manufacturers and distributors
to agree on minimum retail prices.
ANS: T
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Chapter 17/Oligopoly 131
Tying can be thought of as a form of price discrimination.
ANS: T
Policymakers should be aggressive in using their powers to place limits on firm behavior, because business practices that appear to reduce competition never have any legitimate purposes.
ANS: F
Sec00 - Oligopoly
MULTIPLE CHOICE
1. In the language of game theory, a situation in which each person must consider how others might respond
to his or her own actions is called a
a. quantifiable situation.
b. cooperative situation.
c. strategic situation.
d. tactical
situation.
ANS: C
2. In general, game theory is the study of
a. how people behave in strategic situations.
b. how people behave when the possible actions of other people are irrelevant.
c. oligopolistic markets.
d. all types of markets, including competitive markets, monopolistic markets, and
oligopolistic markets.
ANS: A
3. Which of the following statements is correct?
a. Strategic situations are more likely to arise when the number of decision-makers is very large
rather than very small.
b. Strategic situations are more likely to arise in monopolistically competitive markets than
in oligopolistic markets.
c. Game theory is useful in understanding certain business decisions, but it is not really applicable
to ordinary games such as chess or tic-tac-toe.
d. Game theory is not necessary for understanding competitive or monopoly
markets. ANS: D
4. In which of the following markets are strategic interactions among firms most likely to occur?
a. markets to which patent and copyright laws apply
b. the market for piano lessons
c. the market for tennis balls
d. the market for
corn ANS: C
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132 Chapter 17/Oligopoly
Sec01 - Oligopoly - Markets with Only a Few Sellers
MULTIPLE CHOICE
1. A distinguishing feature of an oligopolistic industry is the tension between
a. profit maximization and cost minimization.
b. cooperation and self interest.
c. producing a small amount of output and charging a price above marginal cost.
d. short-run decisions and long-run
decisions. ANS: B
2. In studying oligopolistic markets, economists assume that
a. there is no conflict or tension between cooperation and self-interest.
b. it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly outcome.
c. each oligopolist cares only about its own profit.
d. strategic decisions do not play a role in such
markets. ANS: C
3. The simplest type of oligopoly is
a. monopoly.
b. duopoly.
c. monopolistic competition.
d. oligopolistic competition.
ANS: B
4. A special kind of imperfectly competitive market that has only two firms is called
a. a two-tier competitive structure.
b. an incidental monopoly.
c. a doublet.
d. a duopoly.
ANS: D
5. An agreement between two duopolists to function as a monopolist usually breaks down because
a. they cannot agree on the price that a monopolist would charge.
b. they cannot agree on the output that a monopolist would produce.
c. each duopolist wants a larger share of the market in order to capture more profit.
d. each duopolist wants to charge a higher price than the monopoly
price. ANS: C
6. Which of the following statements is correct?
a. If duopolists successfully collude, then their combined output will be equal to the output that
would be observed if the market were a monopoly.
b. Although the logic of self-interest decreases a duopoly’s price below the monopoly price, it
does not push the duopolists to reach the competitive price.
c. Although the logic of self-interest increases a duopoly’s level of output above the monopoly
level, it does not push the duopolists to reach the competitive level.
d. All of the above are
correct. ANS: D
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