economics data bank

____ 76. For cartels, as the number of firms (members of the cartel) increases,

a. the monopoly outcome becomes more likely.

b. the magnitude of the price effect decreases.

c. the more concerned each seller is about its own impact on the market price.

d. the easier it becomes to observe members violating their agreements.

____ 77. An agreement among firms regarding price and/or production levels is called

a. an antitrust market.

b. a free-trade arrangement.

c. collusion.

d. a Nash agreement.

____ 78. To increase their individual profits, members of a cartel have an incentive to

a. charge a higher price than the other members of the cartel.

b. increase production above the level agreed upon.

c. ignore the choices made by the other firms and act as a monopolist.

d. charge the same price a monopolist would charge.

____ 79. If an oligopolist is part of a cartel that is collectively producing the monopoly level of output, then that

oligopolist has the incentive to lower production with the aim of

a. lowering prices.

b. increasing profits for the group of firms as a whole.

c. increasing profits for itself, regardless of the impact on profits for the group of firms as a

whole.

d. None of the above is correct.

____ 80. An oligopolist will increase production if the output effect is

a. less than the price effect.

b. equal to the price effect.

c. greater than the price effect.

d. The oligopolist never has an incentive to increase production.

____ 81. The theory of oligopoly provides a reason as to why

a. perfect competition is not a useful object of study.

b. price is less than marginal cost for many firms.

c. all countries can benefit from free trade among nations.

d. firms do not want to capture larger shares of their markets.

Name: ________________________ ID: A

Table 16-6

Quantity Price

0 10

5 9

10 8

15 7

20 6

25 5

30 4

35 3

40 2

45 1

50 0

____ 82.Refer to Table 16-6.This table shows the demand schedule for a particular product. Suppose that the

marginal cost to produce this product is constant at $2 per unit and that the fixed cost of producing this

product is $10. If the market is served by two duopolists who each, acting in their own self-interest, choose

the Nash equilibrium level of production, how much profit will each firm earn?

a. $10

b. $20

c. $30

d. $40

Name: ________________________ ID: A

21

Table 16-8

Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the

healthcare related expenses associated with cigarette smoking. Both cigarette firms have evidence that

indicates that cigarette smoke causes lung cancer (and other related illnesses). State prosecutors do not have

access to the same data used by cigarette manufacturers and thus will have difficulty recovering full costs

without the help of at least one cigarette firm study. Each firm has been presented with an opportunity to

lower its liability in the suit if it cooperates with attorneys representing the states.

Firm B

Concede that

cigarette smoke

causes lung cancer

Argue that there is no evidence

that smoke causes cancer

Firm A

Concede that

cigarette smoke

causes lung cancer

Firm A profit = $–20

Firm B profit = $–15

Firm A profit = $–50

Firm B profit = $–5

Argue that there

is no evidence that

smoke causes cancer

Firm A profit = $–5

Firm B profit = $–50

Firm A profit = $–10

Firm B profit = $–10

____ 83.Refer to Table 16-8. Pursuing its own best interests, Firm B will concede that cigarette smoke causes lung

cancer

a. only if Firm A concedes that cigarette smoke causes lung cancer.

b. only if Firm A does not concede that cigarette smoke causes lung cancer.

c. regardless of whether Firm A concedes that cigarette smoke causes lung cancer.

d. None of the above; in pursuing its own best interests, Firm B will in no case concede that

cigarette smoke causes lung cancer.

Name: ________________________ ID: A

22

Table 16-9

Each year the United States considers renewal of Most Favored Nation (MFN) trading status with China.

Historically, legislators have made threats of not renewing MFN status because of human rights abuses in

China. The non renewal of MFN trading status is likely to involve some retaliatory measures by China. The

payoff table below shows the potential economic gains associated with a game in which China may impose

trade sanctions against U.S. firms and the United States may not renew MFN status with China. The table

contains the dollar value of all trade-flow benefits to the United States and China.

China

Impose trade sanctions

against U.S. firms

Do not impose trade sanctions

against U.S. firms

United

States

Don't renew MFN

status with China

U.S. trade value = $65 b

China trade value = $75 b

U.S. trade value = $140 b

China trade value = $5 b

Renew MFN status

with China

U.S. trade value = $35 b

China trade value = $285 b

U.S. trade value = $130 b

China trade value = $275 b

____ 84.Refer to Table 16-9. This particular game

a. features a dominant strategy for Firm A.

b. features a dominant strategy for Firm B.

c. is a version of the prisoners' dilemma game.

d. All of the above are correct.

Table 16-10

Two discount superstores (Ultimate Saver and SuperDuper Saver) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Growth-related profits of the two discount superstores are shown in the table

below.

SuperDuper Saver

Increase the size of store

and parking lot

Do not increase the size of

store and parking lot

Ultimate

Saver

Increase the size

of store and

parking lot

SuperDuper Saver = $50

Ultimate Saver = $65

SuperDuper Saver = $25

Ultimate Saver = $275

Do not increase

the size of store

and parking lot

SuperDuper Saver = $250

Ultimate Saver = $35

SuperDuper Saver = $85

Ultimate Saver = $135

____ 85.Refer to Table 16-10. Suppose the owners of SuperDuper Saver and Ultimate Saver meet for a friendly

game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. They should

both agree to

a. increase their store and parking lot sizes.

b. refrain from increasing their store and parking lot sizes.

c. be more competitive in capturing market share.

d. share the context of their conversation with the Federal Trade Commission.

Name: ________________________ ID: A

23

Scenario 16-1

Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume that both

countries have entered into an agreement to maintain certain production levels in order to maximize profits.

In the world market for oil, the demand curve is downward sloping.

____ 86.Refer to Scenario 16-1. As long as production levels are less than the Nash equilibrium level, both Irun and

Urun have the individual incentive to

a. hold production levels constant.

b. decrease production.

c. increase production.

d. increase price.

____ 87.Refer to Scenario 16-1. If Irun fails to live up to the production agreement and overproduces, which of the

following statements will be true of Urun's condition?

a. Urun will invariably be worse off than before the agreement was broken.

b. Urun will counter by decreasing its production in order to maintain price stability.

c. Urun's profit will be maximized by holding its production constant.

d. Urun will be hurt worse if it follows suit and increases production.

____ 88. What happens when the prisoners' dilemma game is repeated numerous times in an oligopoly market?

(i) The firms may well reach the monopoly outcome.

(ii) The firms may well reach the competitive outcome.

(iii) Buyers of the oligopolists' product will likely be worse off as a result.

a. (i) and (ii)

b. (ii) and (iii)

c. (i) and (iii)

d. (i), (ii), and (iii)

Table 16-13

B

Left Center Right

Up(4, 2) (2, 5) (3, 3)

AMiddle(3, 1) (5, 3) (5, 2)

Down(1, 3) (4, 4) (6, 1)

____ 89.Refer to Table 16-13.This table shows a game played between two players, A and B. The payoffs are given

in the table as (Payoff to A, Payoff to B). Which of the following statements is true regarding this game?

a. Both players have a dominant strategy.

b. Neither player has a dominant strategy.

c. A has a dominant strategy, but B does not have a dominant strategy.

d. B has a dominant strategy, but A does not have a dominant strategy.

Name: ________________________ ID: A

24

____ 90.Refer to Table 16-13.This table shows a game played between two players, A and B. The payoffs in the

table are shown as (Payoff to A, Payoff to B). Which of the following outcomes represents a Nash

equilibrium in the game?

a. Middle-Center

b. Down-Center

c. Up-Left

d. More than one of the above is a Nash equilibrium in this game.

Table 16-14

B

Q=2 Q=3

A

Q=2(10, 10) (8, 12)

Q=3(12, 8) (6, 6)

____ 91.Refer to Table 16-14.This table shows a game played between two firms, A and B. In this game each firm

must decide how much output to produce. The profit for each firm is given in the table as (Profit for A, Profit

for B). In this game

a. neither player has a dominant strategy.

b. both players have a dominant strategy.

c. A has a dominant strategy, but B does not have a dominant strategy.

d. B has a dominant strategy, but A does not have a dominant strategy.

Table 16-16

Consider a small town that has two grocery stores from which residents can choose to buy a gallon of milk.

The store owners each must make a decision to set a high milk price or a low milk price. The payoff table,

showing profit per week, is provided below. The profit in each cell is shown as (Store 1, Store 2).

Store 2

Low Price High Price

Store 1

Low Price(500, 500) (800, 100)

High Price(100, 800) (650, 650)

____ 92.Refer to Table 16-16.If grocery store 2 sets a low price, what price should grocery store 1 set? And what

will grocery store 1's payoff equal?

a. Low price, $500

b. High price, $800

c. Low price, $100

d. High price, $100

____ 93.Refer to Table 16-16.If grocery store 1 sets a high price, what price should grocery store 2 set? And what

will grocery store 2's payoff equal?

a. Low price, $800

b. High price, $100

c. Low price, $500

d. High price, $650

Name: ________________________ ID: A

25

____ 94. The Sherman Act made cooperative agreements

a. unenforceable outside of established judicial review processes.

b. enforceable with proper judicial review.

c. a criminal conspiracy.

d. a crime, but did not give direction on possible penalties.

____ 95. The Clayton Act

a. replaced the Sherman Act.

b. strengthened the Sherman Act.

c. was specifically designed to reduce the ability of cartels to organize.

d. was enforced by the executive, rather than judicial, branch of government.

Scenario 16-5

Assume that a local bank sells two services, checking accounts and ATM card services. Mr. Donethat is

willing to pay $8 a month for the bank to service his checking account and $2 a month for unlimited use of his ATM card. Ms. Beenthere is willing to pay only $5 for a checking account, but is willing to pay $9 for unlimited use of her ATM card. Assume that the bank can provide each of these services at zero marginal

cost.

____ 96.Refer to Scenario 16-5. If the bank is unable to use tying, what is the profit-maximizing price to charge for a

checking account?

a. $13

b. $9

c. $8

d. $5

____ 97.Refer to Scenario 16-5. How much additional profit can the bank earn by switching to the use of a tying

strategy to price checking accounts and ATM service rather than pricing these services separately?

a. $14

b. $11

c. $7

d. $1

____ 98. Which of the following statements is true?

a. The proper scope of antitrust laws is well defined and definite.

b. Antitrust laws focus on granting certain firms the option to form a cartel.

c. Policymakers have the difficult task of determining whether some firms' decisions have

legitimate purposes even though they appear anti-competitive.

d. There is always a need for policymakers to try to limit a firm's pricing power, regardless

of whether the firm's market is competitive, a monopoly, or an oligopoly.

____ 99. Consider a market served by a monopolist, Firm A. A new firm, Firm B, enters the market and, as a result,

Firm A lowers its price to try to drive Firm B out of the market. This practice is known as

a. resale price maintenance.

b. predatory tying.

c. tying.

d. predatory pricing.

Name: ________________________ ID: A

26

____ 100. The primary purpose of antitrust legislation is to

a. protect small businesses.

b. protect the competitiveness of U.S. markets.

c. protect the prices of American-made products.

d. ensure firms earn only a fair profit.

I