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Exam 11: Monopolistic Competition and Oligopoly

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Question 151

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Collusion makes firms better off because if they act as a single entity (a cartel) they can reduce output and increase their prices and profits.But some cartels have failed and others are unstable.Which of the following is a reason why cartels often break down?

A) Most cartels do not have a dominant strategy.
B) When a cartel is profitable the amount of competition it faces increases.
C) Members of a cartel may resent having to share their profits equally.
D) Each member of a cartel has an incentive to "cheat" on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement.

E) A) and B)
F) B) and C)

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Question 152

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A characteristic found only in oligopolies is

A) break even level of profits.
B) interdependence of firms.
C) independence of firms.
D) products that are slightly different.

E) A) and B)
F) All of the above

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Question 153

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Firms are more likely to find themselves in a prisoner's dilemma in sequential games as opposed to simultaneous games.

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 ________.

Table 11-13 $\begin{array}{c} \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad\text { Power Fuel's (P) Strategy }\\\text { Brawny Juice's (B) Strategy }\begin{array}{|c|c|c|} \hline& \text { High Price } & \text { Low Price } \\\hline{\text { High Price }} & \text { P: } \$ 12 \mathrm{~m} & \text { P: } \$ 16 \mathrm{~m} \\& \text { B: } \$ 12 \mathrm{~m} & \text { B: } \$ 4 m \\\hline {\text { Low Price }} & \text { P: } \$ 4 \mathrm{~m} & \text { P: } \$ 8 \mathrm{~m} \\& \text { B: } \$ 16 \mathrm{~m} & \text { B: } \$ 8 \mathrm{~m}\\\hline\end{array}\end{array}$ Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy.Each can choose either a high price or a low price.Table 11-13 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts. -Refer to Table 11-13.If the two firms collude,is there an incentive for either to cheat on the collusion agreement?

In which of the following cartels is total cartel profit likely to be the highest?

Which of the following is not necessarily a consequence of occupational licensing laws?

Suppose a monopolistically competitive firm sells 25 units at a price of $10.Calculate its marginal revenue per unit of output if it sells 5 more units of output when it reduced its price to $9.

An example of a government-imposed barrier to entry gives a firm the exclusive right to a new product for a period of 20 years from the date the product is invented.This entry barrier is known as

Figure 11-14 Figure 11-14 illustrates a monopolistically competitive firm. -Refer to Figure 11-14.Which of the following statements describes the firm depicted in the diagram?

In most business situations where firms compete,often they can escape the prisoner's dilemma and reach the most profitable outcome.Which of the following is a reason for this?

Which of the following is an example of a way in which a firm in oligopoly can escape the prisoner's dilemma?

Only one of the following statements is correct.The statements compare perfectly competitive (PC) markets and monopolistically competitive (MC) markets.Which statement is correct?

The economic analysis of monopolistic competition shows that market forces eliminate profits in the long run.However,it is possible for a firm to continue to earn economic profits if the firm

Figure 11-9 -Refer to Figure 11-9.Which of the graphs in the figure depicts a monopolistically competitive firm that is minimizing its losses?

The DeBeers Company of South Africa was able to block competition through

If firms are protected by substantial barriers to entry,short-run profits can turn into long-run profits.

In both monopolistically competitive and perfectly competitive industries

Table 11-5 $\begin{array} { | c | c | c | } \hline \text { Quantity } & \text { Price } & \text { Total Cost } \\\hline 1 & \$ 18 & \$ 14 \\\hline 2 & 16 & 20 \\\hline 3 & 14 & 26 \\\hline 4 & 12 & 32 \\\hline 5 & 10 & 38 \\\hline 6 & 8 & 44 \\\hline\end{array}$ Table 11-5 shows the demand and cost data facing a monopolistically competitive producer of canvas bags. -Refer to Table 11-5.At the profit-maximizing or loss-minimizing output level

Table 11-15 -Refer to Table 11-15.Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Yemen for the production of oil.Saudi Arabia and Yemen must decide how much oil to produce.Since the demand for oil is inelastic,relatively low production rates drive up prices and profits.Saudi Arabia,the world's largest and lowest cost producer,is able to influence market price; it has an incentive to keep output low.Yemen,on the other hand,is a relatively high cost producer with much smaller reserves.Assume Saudi Arabia now decides to try to further influence the oil market by offering to pay Yemen $25 million to produce a low output. a.Create a new payoff matrix that reflects Saudi Arabia's willingness to pay Yemen $25 million to produce a low output. b.What is the dominant strategy for each country in this new game? c.What is the new Nash equilibrium?