# Quiz 16: Game Theory and Oligopoly

Business

Q 1Q 1

If the LAC curve of a potential entrant into an imperfectly competitive industry lies everywhere above the residual demand curve, the current level of industry output necessarily:
A)maximizes industry profit.
B)falls short of the limit output.
C)is equal to the limit output.
D)exceeds the limit output.

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Multiple Choice

D

Q 2Q 2

Two firms share a market with demand curve Q=90-0.5P. Each has cost function C(q)=900+q

^{2}. Suppose that each firm maximizes its profit taking the other firm's production choice as given. What is the market price? A)60 B)75 C)90 D)45Free

Multiple Choice

C

Q 3Q 3

In a Shopping Mall there are two tobacco stores. They each set a high price for their cigars, they each earn $50,000 a month. If they each set a low price, they each earn $25,000 a month. If one store sets a low price while the other sets a high price, the low- price store earns $70,000 while the
High- price store earns $10. Which of the following is a Nash equilibrium?
A)Both set a high price.
B)One firm sets a low price; the other high.
C)Both set a low price.
D)A mixed- strategy equilibrium.

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Multiple Choice

C

Q 4Q 4

When modeling an oligopoly as a prisoners dilemma problem the optimal strategy
A)is for the firms to collude
B)does not exist
C)is for the firms to agree to collude and then one of them cheat
D)involves one for choosing first and the other one second

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Multiple Choice

Q 5Q 5

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant. The output that maximizes the entrant's profit is:
A)20.
B)10.
C)30.
D)15.

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Multiple Choice

Q 6Q 6

The duopoly market output is:
A)lower than both the monopoly output and the perfectly competitive output.
B)greater than both the monopoly output and the perfectly competitive output.
C)greater than the monopoly output but lower than the perfectly competitive output.
D)lower than the monopoly output but greater than the perfectly competitive output.

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Multiple Choice

Q 7Q 7

Suppose the market has two firms, and market demand is p = 200 - 4y. The cost functions for all firms are C(y

_{i})= 600 + 30y_{i}. The profit for each firm if they collude is: A)303.125. B)103.125. C)403.125. D)203.125.Free

Multiple Choice

Q 8Q 8

In the Cournot model:
A)firms choose quantities.
B)firms minimize costs.
C)firms produce what the government tells them to.
D)firms choose prices.

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Multiple Choice

Q 9Q 9

The difference between Bertrand and Cournot models is that:
A)quantity per firm increases and price decreases with the number of firms.
B)they apply to all possible market structures.
C)the monopoly and perfect competition models are special cases.
D)quantity per firm and price are constant for all markets with two or more firms.

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Multiple Choice

Q 10Q 10

The Cournot model is attractive for all of the following reasons except:
A)quantity per firm and price are constant for all markets with two or more firms.
B)it applies to all possible market structures.
C)quantity per firm increases and price decreases with the number of firms.
D)the monopoly and perfect competition models are special cases.

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Multiple Choice

Q 11Q 11

If two firms that are Cournot competitors merge:
A)the consumers' surplus declines.
B)the industry output will increase.
C)the market price will decrease.
D)more jobs will be created.

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Multiple Choice

Q 12Q 12

The level of output per firm under Bertrand and Cournot equilibriums are:
A)often the same.
B)seldom the same.
C)always the same.
D)never the same.

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Multiple Choice

Q 13Q 13

A particular market is served by two firms. The market demand curve is given by p = 200 - y. Each firm incurs a constant cost per unit of $50. The Cournot MR function for firm 1 is given by:
A)200 - 2y

_{1}. B)(200y_{1 }- y_{2})/y_{1 }- 1. C)200 - 2y_{1}_{ }- y_{2}. D)200 - y_{1 }- y_{2}.Free

Multiple Choice

Q 14Q 14

An oligopolist:
A)has an incentive to compete moderately.
B)is closely watched by the competition authority.
C)has an incentive to produce too much output.
D)has an incentive collude and then cheat on a collusive agreement.

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Multiple Choice

Q 15Q 15

A residual demand function represents the demand for:
A)the next firm to enter a market.
B)the least profitable firm in a market.
C)the last firm to enter a market.
D)statistical errors.

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Multiple Choice

Q 16Q 16

Suppose the market has two firms, and market demand is p = 200 - 4y. The cost functions for all firms are C(y

_{i})= 600 + 30y_{i}. The Cournot duopoly price is: A)46.67. B)86.67. C)34.67. D)92.67.Free

Multiple Choice

Q 17Q 17

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40 and no fixed costs. If the Cournot model of oligopoly accurately reflects firm behaviour in this industry, then the aggregate equilibrium output of n + 1 firms can be expressed as:
A)160(n + 1)/(n + 2).
B)20(n + 1).
C)60(n + 1)/(n + 2).
D)160n/(n + 1).

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Multiple Choice

Q 18Q 18

Market demand is given by P = 15 - Q. There are two firms, each with TC = 0.5q

_{i}^{2}. If one firm honors the cartel agreement while the other firm defects, the total output produced by both firms is: A)5. B)9. C)3. D)7.Free

Multiple Choice

Q 19Q 19

The limit price may be defined as:
A)the price that consumers are willing to pay for the monopolist's profit- maximizing output.
B)the price at the tangency between a potential entrant's LAC curve and the market demand curve.
C)the maximum price permitted by law.
D)the highest price existing firms can charge to deter entry.

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Multiple Choice

Q 20Q 20

The Cournot model of oligopoly is one in which competing firms:
A)independently choose prices to maximize individual profits.
B)collusively choose prices to maximize joint profits.
C)independently choose quantities to maximize individual profit.
D)collusively choose quantities to maximize joint profits.

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Multiple Choice

Q 21Q 21

If two firms are in Bertrand competition they:
A)compete in quantities.
B)minimize cost.
C)do not maximize profit.
D)compete in prices.

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Multiple Choice

Q 22Q 22

When modeling an oligopoly as a prisoners dilemma problem the Nash equilibrium
A)involves one for choosing first and the other one second
B)is for the firms to collude
C)is for the firms to agree to collude and then both of them cheat
D)does not exist

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Multiple Choice

Q 23Q 23

Given an oligopolistic industry characterized by a collusive agreement and constant unit costs of production, which of the following statements is true?
A)As the number of firms expands, the incentive to cheat on the collusive agreement increases.
B)As the number of firms falls, aggregate output falls and aggregate profit rises.
C)As the aggregate output rises, aggregate profit does not change.
D)As the number of firms expands, aggregate output rises and aggregate profit falls.

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Multiple Choice

Q 24Q 24

Market demand is given by P = 15 - Q. There are two firms, each with TC = 0.5q

_{i}^{2}. If the firms form a cartel the profits for a firm is: A)20.5. B)24.5. C)22.5. D)26.5.Free

Multiple Choice

Q 25Q 25

Two firms share a market with demand curve Q=90-0.5P. Each has cost function C(q)=900+q

^{2}. Suppose that each firm maximizes its profit taking the other firm's production choice as given. What is the profit of each firm? A)618.75 B)675.50 C)600 D)900Free

Multiple Choice

Q 26Q 26

A Bertrand model of oligopoly is one in which competing firms:
A)collusively choose price in order to maximize individual profits.
B)take a rival's output as given and subsequently choose a price that maximizes individual profits.
C)independently choose quantity in order to maximize individual profits.
D)independently choose prices in order to maximize individual profits.

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Multiple Choice

Q 27Q 27

The level of output per firm under Nash and Cournot equilibriums are:
A)never the same.
B)often the same.
C)always the same.
D)seldom the same.

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Multiple Choice

Q 28Q 28

Market demand is given by P = 15 - Q. There are two firms, each with TC = 0.5q

_{i}^{2}. If one firm honors the cartel agreement while the other firm defects, the output produced by the defecting firm is: A)2. B)4. C)8. D)12.Free

Multiple Choice

Q 29Q 29

In the general version of the Cournot model, the Nash equilibrium
A)is Pareto optimal
B)produces too little output to maximize profits
C)maximizes the profits of the first mover
D)fails to maximize joint profits

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Multiple Choice

Q 30Q 30

The collusive solution is:
A)collectively irrational because each firm could produce more output in the Cournot solution.
B)individually irrational because each firm earns less than it could in the Cournot solution.
C)individually irrational because each firm has a private profit incentive to produce more output.
D)collectively irrational because joint profit incentives render the collusive solution unstable.

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Multiple Choice

Q 31Q 31

A best response function:
A)is a strategy that provides the most profit given the strategy of the other firm.
B)is a strategy that provides the most profit given the profit of the other firm.
C)is a strategy that punishes other firms for not cooperating.
D)is a strategy that always provides the most profit to a firm.

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Multiple Choice

Q 32Q 32

In a prisoner's dilemma game:
A)the outcome most preferred by one player is also preferred by the other player.
B)the outcome that makes sense collectively is also most preferred by the players.
C)the outcome that makes sense collectively can be achieved if each player makes a self- interested decision.
D)the outcome most preferred by one player cannot be preferred by the other player.

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Multiple Choice

Q 33Q 33

Two firms share a market with demand curve Q=90-0.5P. Each has cost function C(q)=900+q

^{2}. Suppose that each firm maximizes its profit taking the other firm's production choice as given. What is the quantity supplied in the market? A)60 B)90 C)45 D)75Free

Multiple Choice

Q 34Q 34

Experimental evidence indicates that:
A)the Cournot model best explains oligopolists' behaviour.
B)the Bertrand model best explains oligopolists' behaviour.
C)there is no one best explanation of oligopolists' behaviour.
D)the Collusion model best explains oligopolists' behaviour.

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Multiple Choice

Q 35Q 35

An important weakness of the Bertrand, Collusion, and Cournot models is that they assume the game is:
A)played repeatedly.
B)fair.
C)supervised by government.
D)played once only.

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Multiple Choice

Q 36Q 36

In a Bertrand equilibrium, each firm earns:
A)positive or zero economic profit.
B)zero economic profit.
C)positive economic profit.
D)negative economic profit.

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Multiple Choice

Q 37Q 37

Imperfectly competitive firms may allocate resources inefficiently because they produce at a level of output where:
A)average total cost is at its lowest point.
B)price equals marginal cost.
C)marginal revenue is greater than marginal cost.
D)price is greater than marginal cost.

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Multiple Choice

Q 38Q 38

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant with a fixed cost of $100. The limit output is:
A)40.
B)35.
C)30.
D)25.

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Multiple Choice

Q 39Q 39

A supergame is :
A)a game played by superfirms.
B)a one- shot game.
C)a game providing a lot of excitement to the participants.
D)a game played an infinite number of times.

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Multiple Choice

Q 40Q 40

Suppose that a particular market is served by two firms. The market demand curve is given by p = 100 - y. Each firm incurs a constant cost per unit of $20. The Bertrand solution to this duopoly problem is:
A)p

^{* }= p^{*}^{ }= 70. B)p^{* }= p^{*}^{ }= 50. C)p^{* }= p^{*}^{ }= 20. D)p^{* }= p^{* }= 40. 1 2 1 2 1 2 1 2Free

Multiple Choice

Q 41Q 41

Suppose the market has two firms, and market demand is p = 200 - 4y. The cost functions for all firms are C(y

_{i})= 600 + 30y_{i}. The limit output for this market is: A)18. B)30. C)22. D)26.Free

Multiple Choice

Q 42Q 42

A particular market is served by two firms. The market demand curve is given by p = 200 - y. Each firm incurs a constant cost per unit of $50. The Cournot equilibrium solution is:
A)p

^{* }= p^{*}^{ }= 70. B)y^{* }= y^{*}^{ }= 20. C)y^{* }= y^{*}^{ }= 50. D)p^{* }= p^{* }= 50. 1 2 1 2 1 2 1 2Free

Multiple Choice

Q 43Q 43

Which of the following statements is not true of oligopoly markets?
A)Significant economies of scale often exist in such industries.
B)Firms seek to avoid price competition.
C)Firms often compete through the use of advertising campaigns.
D)Firms act independently and are not worried about the actions of their competitors.

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Multiple Choice

Q 44Q 44

Given an infinitely repeated duopoly game, a particular punishment strategy, imposed when a collusive agreement is breached, is more likely to be successful:
A)the lower the rate of interest.
B)the lower the gain from cheating.
C)the less severe the punishment.
D)the more difficult it is to detect cheating.

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Multiple Choice

Q 45Q 45

A self enforcing agreement is:
A)one that only requires the courts to enforce.
B)one that only exists where the parties mutually agree to the deal.
C)one that only requires the presence of a notary public.
D)one that is a Nash equilibrium.

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Multiple Choice

Q 46Q 46

An iso- profit curve shows all of the values of firm ones output that produce the same level of profit as a function of
A)the other firm's output
B)input prices
C)the other firm's price
D)output prices

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Multiple Choice

Q 47Q 47

Which of the duopoly models to the parties not choose simultaneously?
A)Cournot
B)Nash
C)Bertrand
D)Stackleberg

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Multiple Choice

Q 48Q 48

A particular market is served by two firms. The market demand curve is given by p = 200 - y. Each firm incurs a constant cost per unit of $50. The Cournot reaction function for firm 1 is given by:
A)p

^{* }= (200 - y^{* })- y_{1}. B)y^{* }= 75 - y^{*}^{ }/2. 1 2 1 2 C)y^{* }= 30 - y^{*}^{ }/2. D)p^{* }= 150 - y^{*}^{ }/2. 1 2 1 2Free

Multiple Choice

Q 49Q 49

The inducement to entry is:
A)the excess of revenue over fixed cost.
B)the excess of revenue over marginal cost.
C)the excess of revenue over total cost.
D)the excess of revenue over variable cost.

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Multiple Choice

Q 50Q 50

Given an infinitely repeated, collusive oligopoly game, all but which of the following criteria should be met when devising a successful punishment strategy to be used in the event of another player's defection?
A)credible threats of punishment
B)negative pay- offs in the non- cooperative equilibrium
C)rapid detection of cheating by a rival
D)severe penalties imposed for cheating

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Multiple Choice

Q 51Q 51

The merger of two firms producing goods that are complements:
A)is usually not encouraged by the competition authority.
B)the quantity produced by each firm will go down.
C)the consumer's surplus decreases.
D)each firm's profit will rise.

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Multiple Choice

Q 52Q 52

Suppose the market has two firms, and market demand is p = 200 - 4y. The cost functions for all firms are C(y

_{i})= 600 + 30y_{i}. The Cournot duopoly profit for each firm is: A)152.79. B)72.79. C)102.79. D)202.79.Free

Multiple Choice

Q 53Q 53

As the number of firms in a Cournot industry increases:
A)the level of output falls.
B)the price of output approaches the competitive level.
C)the firms' incentive to collude increases.
D)the price of output gets higher.

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Multiple Choice

Q 54Q 54

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant. The residual demand is given by:
A)y = 70 - 2p.
B)y = 70 - p.
C)y = 60 - p.
D)y = 60 - 2p.

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Multiple Choice

Q 55Q 55

In a Cournot model, the incentive to cheat on a collusive arrangement:
A)decreases with the number of firms.
B)is independent of the number of firms.
C)is prohibited by law.
D)increases with the number of firms.

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Multiple Choice

Q 56Q 56

In a Shopping Mall there are two tobacco stores. They each set a high price for their cigars, they each earn $50,000 a month. If they each set a low price, they each earn $25,000 a month. If one store sets a low price while the other sets a high price, the low- price store earns $70,000 while the high- price store earns $10. In this game:
A)there is no Nash equilibrium.
B)there are two Nash equilibria.
C)there is only one Nash equilibrium.
D)any combination is a Nash equilibrium.

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Multiple Choice

Q 57Q 57

When modeling an oligopoly as a prisoners dilemma problem an agreement is a Nash equilibrium if
A)if it allows at least one party to cheat
B)if it is not a illegal
C)it is self enforcing
D)both parties are allowed to cheat

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Multiple Choice

Q 58Q 58

The generalized no- entry condition is that potential entrants will enter as long as the inducement to entry is:
A)less than fixed cost squared.
B)greater than fixed cost squared.
C)greater than fixed cost.
D)less than fixed cost.

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Multiple Choice

Q 59Q 59

A particular market is served by two firms. The market demand curve is given by p = 200 - y. Each firm incurs a constant cost per unit of $50. The Cournot profit function for firm 1 in this market is given by:
A)200y

_{1 }- y^{2}^{ }- 40y_{1}. B)150y_{1 }- y_{1}_{y}_{2 }- y^{2}^{ }. 1 1 C)150y_{1 }- y_{2 }- y^{2}^{ }. D)200y_{1 }- y_{1}y_{2 }- y^{2}^{ }. 1 1Free

Multiple Choice

Q 60Q 60

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant. The monopoly output is:
A)50.
B)30.
C)40.
D)60.

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Multiple Choice

Q 61Q 61

The best collusive outcome occurs when the sum of the firms' output is:
A)a Nash equilibrium.
B)equal to the competitive outcome.
C)equally divided among the firms.
D)equal to the monopoly outcome.

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Multiple Choice

Q 62Q 62

Two firms in a collusive duopoly that have an identical and constant MC will each produce:
A)one- half of the competitive output.
B)the competitive output.
C)the monopoly output.
D)one- half of the monopoly output.

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Multiple Choice

Q 63Q 63

In a Cournot oligopoly, each firm:
A)maximizes profit subject to its competitor's output.
B)is caught in a prisoner's dilemma.
C)maximizes profit without regard to its competitors.
D)maximizes profit subject to its competitor's price.

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Multiple Choice

Q 64Q 64

An industry's market structure is determined in part by:
A)the aggressiveness of the firms.
B)demand conditions.
C)the magnitude of barriers to entry.
D)the magnitude of set- up costs.

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Multiple Choice

Q 65Q 65

In a repeated game with a credible punishment a collusive equilibrium may revert to a Cournot equilibrium if
A)marginal costs increase
B)interest rates rise
C)output prices decrease
D)taxes increase

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Multiple Choice

Q 66Q 66

Market demand is given by P = 15 - Q. There are two firms, each with TC = 0.5q

_{i}^{2}. If one firm honors the cartel agreement while the other firm defects, the market price is: A)16. B)8. C)12. D)10.Free

Multiple Choice

Q 67Q 67

Two firms share a market with demand curve Q=90-0.5P. Each has cost function C(q)=900+q

^{2}. Suppose that each firm maximizes its profit taking the other firm's production choice as given. Suppose that firm 2 produces 20 units of output. How much should firm 1 produce in order to maximize profits, given that q_{2}= 20? A)45/3 B)23/3 C)23/2 D)45/2Free

Multiple Choice

Q 68Q 68

Market demand is given by P = 15 - Q. There are two firms, each with TC = 0.5q

_{i}^{2}. If one firm honors the cartel agreement while the other firm defects, the profits to the defecting firm are: A)20.. B)26. C)22. D)24.Free

Multiple Choice

Q 69Q 69

Under a Cournot equilibrium, each firm will produce:
A)the same output as a monopolist.
B)as much output as possible.
C)as little output as possible.
D)the same output as each other firm.

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Multiple Choice

Q 70Q 70

Given constant unit costs of production, which of the following solutions to the duopoly problem generates the greatest benefits to consumers?
A)Collusive equilibrium
B)Nash equilibrium in quantities
C)Cournot equilibrium
D)Bertrand equilibrium

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Multiple Choice

Q 71Q 71

A particular market is served by three firms. The market demand curve is given by p = 200 - y. Each firm incurs a constant cost per unit of $40. Firm 3's Cournot reaction function is given by:
A)y

^{* }= (160 - y_{1}_{ }- y_{3})/2. B)p^{* }= 130 - (p_{2 }+ p_{3})/2. 3 3 C)y^{* }= (160 - y_{1}_{ }- y_{2})/2. D)y^{* }= 200 - p_{3 }- y_{2 }- y_{1}. 3 3Free

Multiple Choice

Q 72Q 72

Suppose the market has two firms, and market demand is p = 200 - 4y. The cost functions for all firms are C(y

_{i})= 600 + 30y_{i}. The equilibrium number of firms this market can support under Cournot is: A)2. B)5. C)3. D)4.Free

Multiple Choice

Q 73Q 73

Oligopolists have clear incentives to:
A)merge with their competitors.
B)collude and cheat on collusive agreements.
C)collude.
D)cheat on collusive agreements.

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Multiple Choice

Q 74Q 74

The level of output per firm under Nash and Bertrand equilibriums are:
A)often the same.
B)seldom the same.
C)never the same.
D)always the same.

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Multiple Choice

Q 75Q 75

Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant. The inducement to entry is:
A)225.
B)275.
C)250.
D)200.

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Multiple Choice

Q 76Q 76

Existing firms may seek to inhibit potential entrants by:
A)reacting before entry and positioning after.
B)reducing fixed costs.
C)positioning before entry and reacting after.
D)adopting the Cheerios defense.

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Multiple Choice

Q 77Q 77

The Limit- Output model depends on all of the following except:
A)a natural monopoly.
B)a natural barrier to entry.
C)the entrant's residual demand.
D)the Sylos postulate.

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Multiple Choice

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Essay

Q 79Q 79

True/False. When all firms in the industry charge the same price, this is evidence of collusion. Explain.

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True False

Q 80Q 80

A penalty shot in soccer ( football in most of the world)requires that the keeper remain stationary until the shot is made. During a penalty shot in hockey, the goalie is permitted to move as soon as the offensive player touches the puck. Explain how this could be modeled using economic duopoly models and predict which penalty shot results in more goals.

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Essay

Q 81Q 81

There are only two souvenir vendors at the Super Bowl. They choose their quantities simultaneously. They will not sell in the same market again. Are they likely to collude or not? Why?

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Essay

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True False

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Essay

Q 84Q 84

Suppose two firms form a cartel . Each have constant, but different, marginal costs. Explain why one firm will pay the other firm to produce no output.

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Essay

Q 85Q 85

Two firms share a market with demand curve Q=120-0.5P. Each has cost function C(q)=1000+q

^{2}. Suppose that each firm maximizes its profit taking the other firm's production choice as given.Free

Essay

Q 86Q 86

Suppose two firms, A and B, compete as duopolists. Each firm has a marginal cost of $5 and a fixed cost of zero. Market demand for the duopolists' homogeneous product is given by Q = 100 - 2P.
i)Suppose that the duopolists behave according to Cournot's model. Find Firm A's reaction function given the output of Firm B, and Firm B's reaction function given the output of Firm A.
ii)Compute the Cournot equilibrium quantities for firms A and B.
iii)Now suppose that the two firms work together and form a successful cartel. Find the equilibrium price and quantity in the market.

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Essay

Q 87Q 87

Consider a two- firm industry producing two differentiated products. For simplicity assume that production is costless. Suppose the demand functions for firm 1 and 2's products are given by
q

_{1 }= a - bp_{1 }+ cp_{2 }q_{2 }= a - bp_{2 }+ cp_{1}where p_{i}_{ }is the price charged by firm i, i = 1, 2 and b > c. Assume that firms are profit maximizers and simultaneously choose prices. Find the equilibrium level of prices, i)Assuming that the firms cannot collude (they choose prices independently). ii)Assuming that the firms can collude(they can choose prices jointly).Free

Essay

Q 88Q 88

Suppose there are n identical firms in an industry. Each firm's variable cost is $1 and fixed cost is $0.04. The firms compete in quantities. The inverse demand function of this industry is p = 2 - (y

_{1}_{ }+ y_{2}_{ }+ ... + y_{n}) i)Suppose that the number of firms, n, is fixed. What is the output level of each firm in equilibrium? What are the equilibrium price and profits per firm? ii)If there is free entry into the industry, what will be the long- run equilibrium number of firms?Free

Essay

Q 89Q 89

Two firms produce a homogenous product. Let p denote the product's price. The output level of firm 1 is denoted by q

_{1}, and the output level of firm 2 by q_{2}. The aggregate industry output is denoted by Q with Q = q_{1}+q_{2}. The aggregate industry (inverse)demand is given by p = 10 - Q. The cost functions of the two firms are c_{1}(q_{1})= 4q_{1 }and c_{2}(q_{2})= 4q_{2}. i)Assume that the firms choose their output levels simultaneously (i.e., we have Cournot competition). What are the equilibrium output levels and profits of each firm in this case? ii)Suppose that firm 2 finds a cheaper way to produce the same product. The new cost function of firm 2 is c_{2}(q_{2})= q_{2}. Assuming that the firms choose their output levels simultaneously, find the equilibrium output levels and profits of each firm.Free

Essay

Q 90Q 90

Initially there is one firm in a market for cars. The firm has a linear cost function: C(q)= 2q. The market inverse demand function is given by P(Q)= 9 - Q.
i)What price will the firm charge? What quantity of cars will the firm sell? How much profit will the firm make?
Now, a second firm enters the market. The second firm has an identical cost function.
ii)What will the Cournot equilibrium output for each firm be? How much profit will each firm make in the Cournot game?
iii)Which type of market do consumers prefer: monopoly or Cournot duopoly? Why?

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