Question 1

In a duopoly if the firms have agreed to jointly maximize profits, then each firm can increase its current individual profits by producing more.

Accepted Answer

If the firms have agreed to jointly maximize profits, then it means that they are acting as a monopolist and will produce at the level where marginal revenue equals marginal cost. In this case, producing more can lead to higher profits for both firms as long as the additional production does not push the market price below the marginal cost of production.

Question 2

Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same.

Accepted Answer

The level of output in an oligopoly is determined by the strategic interactions between firms, including pricing and output decisions. The number of firms in the industry can affect the competitiveness and intensity of these interactions, which can in turn affect the level of output. Therefore, the level of output is not necessarily the same in all oligopolies, whether they consist of 3 firms or 10 firms.

Question 3

A group of firms that collude is called a cartel.

Accepted Answer

This statement is true. A cartel is a group of firms that collude in order to manipulate prices and increase their profits.

Question 4

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.

Accepted Answer

When players have a chance to play repeated games, they have opportunities to punish each other for defecting in previous rounds and also to reward each other for cooperating. This creates an incentive for cooperation, leading to a higher likelihood of cooperation compared to playing the game only once.

Question 5

If the output effect from increased production is larger than the price effect, then an oligopolist would increase production.

Accepted Answer

This is because the oligopolist can increase their overall revenue by expanding output, even if the price they receive for each unit sold decreases slightly.

Question 6

Any market that is served by an oligopoly is in effect served by a monopoly.

Accepted Answer

An oligopoly consists of a few firms dominating the market, whereas a monopoly is characterized by a single firm controlling the entire market. They are distinct market structures with different competitive dynamics.

Question 7

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.

Accepted Answer

While a cartel agreement aims to maximize collective profits by setting high prices, each individual firm has an incentive to cheat on the agreement by slightly undercutting the agreed price to increase its market share and individual profits, thus undermining the cartel's stability.

Question 8

The problems faced by oligopolies with three or more members are entirely different from the problems faced by duopolies.

Accepted Answer

Oligopolies, whether duopolies (with two firms) or with three or more firms, face similar problems such as setting prices, output levels, and making strategic decisions considering the actions of competitors. The complexity and dynamics might vary with the number of firms, but the fundamental economic issues and competitive interactions remain consistent across oligopolies.

Question 9

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.

Accepted Answer

Cartels with a small number of firms have better chances of sustaining cooperation and enforcing agreements among themselves, leading to a higher probability of achieving the monopoly outcome. In contrast, larger cartels face more challenges in coordination and the risk of defection by individual firms.

Question 10

All examples of the prisoner's dilemma game are characterized by one and only one Nash equilibrium.

Accepted Answer

The prisoner's dilemma game can have multiple Nash equilibria depending on the iteration and structure of the game, especially in repeated or iterated versions where strategies evolve over time.

Question 11

For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.

Accepted Answer

Strategic interactions become more important in markets with fewer firms because each firm's actions have a more significant impact on the market and on the other firms. In markets with many firms, individual actions have less impact, reducing the importance of strategic interactions.

Question 12

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

Accepted Answer

An oligopolistic market is characterized by a small number of large firms dominating the market. This results in a market structure with limited competition between the few sellers.

Question 13

As the number of firms in an oligopoly becomes very large, the price effect disappears.

Accepted Answer

As the number of firms in an oligopoly becomes very large, the market becomes more competitive and the price effect becomes less significant as each firm has less market power. This ultimately leads to price equaling marginal cost in the long run.

Question 14

Oligopolies produce more when they collude then when they do not.

Accepted Answer

When oligopolies collude, they tend to restrict output to increase prices and maximize their combined profits, producing less than if they were competing more aggressively with each other.

Question 15

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.

Accepted Answer

In a Nash equilibrium, each firm in an oligopoly chooses its best strategy given the strategies chosen by other firms, often leading to a higher total output compared to the monopoly outcome, where firms agree to produce a lower total output to maximize joint profits.

Question 16

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.

Accepted Answer

This is because the cartel can act as a single entity in the market and collectively set prices and output levels, similar to a monopolist. By doing so, they can maximize profits as the market demand curve will be more elastic than if they were to compete with each other. However, sustaining a cartel is difficult as each member has an incentive to cheat and increase their own profits.

Question 17

When all firms choose their best strategy given the strategies that all the other firms have chosen, the result is a Nash equilibrium.

Accepted Answer

This is the definition of a Nash equilibrium, where no firm has an incentive to change their strategy given the strategies of the other firms.

Question 18

As the number of firms in an oligopoly increases, the magnitude of the price effect increases.

Accepted Answer

As the number of firms in an oligopoly increases, the market becomes more competitive and the magnitude of the price effect decreases. This is because each firm has less market power when there are more competitors, so they cannot raise prices without losing customers to other firms.

Question 19

In a competitive market, strategic interactions among the firms are not important.

Accepted Answer

The answer of In a competitive market, strategic interactions among...

Question 20

Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding oligopolistic markets.

Accepted Answer

The answer of Game theory is just as necessary for...

Quiz 17: Oligopoly