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Describe the output and price effects that influence the profit-maximizing decision faced by a firm in an oligopoly market. How does this differ from output and price effects in a monopoly market?

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Output effect: Price > Marginal cost => ...

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Scenario 17-1. ā€‹ 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. -Refer to Scenario 17-1. As long as the combined level of output is less than the Nash equilibrium level, both Irun and Urun have the individual incentive to


A) hold production constant.
B) decrease production.
C) increase production.
D) increase price.

E) B) and D)
F) C) and D)

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Table 17-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the table below: Table 17-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the table below: -Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, what price will they charge? A) $25 B) $30 C) $35 D) $40 -Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, what price will they charge?


A) $25
B) $30
C) $35
D) $40

E) A) and D)
F) A) and C)

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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.

E) C) and D)
F) None of the above

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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.

E) B) and D)
F) A) and B)

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A particular cable TV company requires a household to subscribe to its high-speed Internet service if it subscribes to cable TV, and vice versa. This practice


A) is referred to as tying.
B) is regarded by some economists as a form of price discrimination.
C) is controversial among economists because they disagree on whether it has adverse effects for society as a whole.
D) All of the above are correct.

E) C) and D)
F) A) and D)

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Table 17-2 Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Table 17-2 Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: -Refer to Table 17-2. If this market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? A) 12 gallons B) 8 gallons C) 6 gallons D) 0 gallons -Refer to Table 17-2. If this market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold?


A) 12 gallons
B) 8 gallons
C) 6 gallons
D) 0 gallons

E) None of the above
F) B) and D)

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Table 17-12 The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. Table 17-12 The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. -Refer to Table 17-12. If the market for gasoline in Driveaway is perfectly competitive, then the equilibrium price of gasoline is A) $0 and the equilibrium quantity is 400 gallons. B) $1 and the equilibrium quantity is 350 gallons. C) $2 and the equilibrium quantity is 300 gallons. D) $4 and the equilibrium quantity is 200 gallons. -Refer to Table 17-12. If the market for gasoline in Driveaway is perfectly competitive, then the equilibrium price of gasoline is


A) $0 and the equilibrium quantity is 400 gallons.
B) $1 and the equilibrium quantity is 350 gallons.
C) $2 and the equilibrium quantity is 300 gallons.
D) $4 and the equilibrium quantity is 200 gallons.

E) C) and D)
F) None of the above

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Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. -Refer to Figure 17-5. If the two companies make their pricing decisions independently, then it is likely that QRS will A) charge a low price only if ABC charges a low price. B) charge a low price only if ABC charges a high price. C) charge a low price regardless of whether ABC charges a high price or a low price. D) None of the above are correct. -Refer to Figure 17-5. If the two companies make their pricing decisions independently, then it is likely that QRS will


A) charge a low price only if ABC charges a low price.
B) charge a low price only if ABC charges a high price.
C) charge a low price regardless of whether ABC charges a high price or a low price.
D) None of the above are correct.

E) None of the above
F) All of the above

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Table 17-7 The information in the table below shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. Table 17-7 The information in the table below shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. -Refer to Table 17-7. Suppose there is only one internet radio provider in this market and it seeks to maximize its profit. The company will A) sell 2,000 subscriptions and charge a price of $48 for each subscription. B) sell 3,000 subscriptions and charge a price of $40 for each subscription. C) sell 4,000 subscriptions and charge a price of $32 for each subscription. D) sell 5,000 subscriptions and charge a price of $24 for each subscription. -Refer to Table 17-7. Suppose there is only one internet radio provider in this market and it seeks to maximize its profit. The company will


A) sell 2,000 subscriptions and charge a price of $48 for each subscription.
B) sell 3,000 subscriptions and charge a price of $40 for each subscription.
C) sell 4,000 subscriptions and charge a price of $32 for each subscription.
D) sell 5,000 subscriptions and charge a price of $24 for each subscription.

E) B) and D)
F) B) and C)

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Which of the following statements is correct?


A) When duopoly firms reach a Nash equilibrium, their combined level of output is the monopoly level of output.
B) When oligopoly firms collude, they are behaving as a cartel.
C) In an oligopoly, self-interest drives the market to the competitive outcome.
D) An oligopoly is an example of monopolistic competition.

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

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Table 17-9 The table shows the demand schedule for a particular product. Table 17-9 The table shows the demand schedule for a particular product. -Refer to Table 17-9. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $4? A) $6 B) $8 C) $10 D) $12 -Refer to Table 17-9. Suppose the market for this product is served by two firms that have formed a cartel. What price will the cartel charge in this market if the marginal cost of production is $4?


A) $6
B) $8
C) $10
D) $12

E) A) and C)
F) None of the above

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Table 17-20 Nadia and Maddie are two college roommates who both prefer a clean common space in their dorm room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm room's common space. The payoff table for this situation is provided below, where the higher a player's payoff number, the better off that player is. The payoffs in each cell are shown as (payoff for Nadia, payoff for Maddie) . Table 17-20 Nadia and Maddie are two college roommates who both prefer a clean common space in their dorm room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm room's common space. The payoff table for this situation is provided below, where the higher a player's payoff number, the better off that player is. The payoffs in each cell are shown as (payoff for Nadia, payoff for Maddie) . -Refer to Table 17-20. If Maddie chooses not to clean, then Nadia will A) clean, and Nadia's payoff will be 50. B) not clean, and Nadia's payoff will be 10. C) clean, and Nadia's payoff will be 7. D) not clean, and Nadia's payoff will be 30. -Refer to Table 17-20. If Maddie chooses not to clean, then Nadia will


A) clean, and Nadia's payoff will be 50.
B) not clean, and Nadia's payoff will be 10.
C) clean, and Nadia's payoff will be 7.
D) not clean, and Nadia's payoff will be 30.

E) C) and D)
F) None of the above

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Table 17-26 Two prescription drug manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare related expenses associated with side-effects from its drugs. Each drug manufacturer has evidence that indicates that taking its prescription drug causes liver failure. State prosecutors do not have access to the same data used by drug manufacturers and thus will have difficulty recovering full costs without the help of at least one of the drug manufacturer's studies. Each firm has been presented with an opportunity to lower its liability in the suit if it cooperates with attorneys representing the states. Table 17-26 Two prescription drug manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare related expenses associated with side-effects from its drugs. Each drug manufacturer has evidence that indicates that taking its prescription drug causes liver failure. State prosecutors do not have access to the same data used by drug manufacturers and thus will have difficulty recovering full costs without the help of at least one of the drug manufacturer's studies. Each firm has been presented with an opportunity to lower its liability in the suit if it cooperates with attorneys representing the states. -Refer to Table 17-26. When this game reaches a Nash equilibrium, profits for Firm A and Firm B will be A) $-12 and $-100, respectively. B) $-24 and $-24, respectively. C) $-60 and $-40, respectively. D) $-100 and $-12, respectively. -Refer to Table 17-26. When this game reaches a Nash equilibrium, profits for Firm A and Firm B will be


A) $-12 and $-100, respectively.
B) $-24 and $-24, respectively.
C) $-60 and $-40, respectively.
D) $-100 and $-12, respectively.

E) None of the above
F) C) and D)

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The essence of an oligopolistic market is that there are only a few sellers.

A) True
B) False

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Table 17-4 The table shows the town of Mauston's demand schedule for gasoline. For simplicity, assume the town's gasoline seller(s) incur no costs in selling gasoline. Table 17-4 The table shows the town of Mauston's demand schedule for gasoline. For simplicity, assume the town's gasoline seller(s) incur no costs in selling gasoline. -Refer to Table 17-4. If the market for gasoline in Mauston is a monopoly, then the profit-maximizing monopolist will charge a price of A) $7 and sell 150 gallons. B) $5 and sell 250 gallons. C) $3 and sell 350 gallons. D) $0 and sell 500 gallons. -Refer to Table 17-4. If the market for gasoline in Mauston is a monopoly, then the profit-maximizing monopolist will charge a price of


A) $7 and sell 150 gallons.
B) $5 and sell 250 gallons.
C) $3 and sell 350 gallons.
D) $0 and sell 500 gallons.

E) None of the above
F) A) and B)

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The prisoners' dilemma is an important game to study because


A) most games present zero-sum alternatives.
B) it identifies the fundamental difficulty in maintaining cooperative agreements.
C) strategic decisions faced by prisoners are identical to those faced by firms engaged in competitive agreements.
D) all interactions among firms are represented by this game.

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

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When firms have agreements among themselves on the quantity to produce and the price at which to sell output, we refer to their form of organization as a


A) Nash arrangement.
B) cartel.
C) monopolistically competitive oligopoly.
D) perfectly competitive oligopoly.

E) None of the above
F) A) and B)

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Table 17-15 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) . Table 17-15 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) . -Refer to Table 17-15. Which of the following statements regarding this game is true? A) Both players have a dominant strategy. B) Player A has a dominant strategy, but player B does not have a dominant strategy. C) Player A does not have a dominant strategy, but player B does have a dominant strategy. D) Neither player has a dominant strategy. -Refer to Table 17-15. Which of the following statements regarding this game is true?


A) Both players have a dominant strategy.
B) Player A has a dominant strategy, but player B does not have a dominant strategy.
C) Player A does not have a dominant strategy, but player B does have a dominant strategy.
D) Neither player has a dominant strategy.

E) B) and C)
F) C) and D)

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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.

A) True
B) False

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