Question 1

Maximization of joint profits is most likely when firms are:

Accepted Answer

Duopolists who collude can cooperate to maximize their joint profits by setting prices or output levels that are not as low as in perfect competition or as high as in a monopoly. This allows them to achieve a balance between profits and market share that benefits both firms. In contrast, perfect competition and monopolistic competition lead to lower profits due to intense price competition, while natural monopolies have little incentive to collude as they face no competition. When duopolists collude, they can coordinate their production and pricing strategies to maximize joint profits. This is because they have a significant market power and can manipulate the market conditions to their advantage. Perfect competition and monopolistic competition are characterized by a large number of firms and little market power, which makes it difficult for firms to cooperate and maximize joint profits. Natural monopolists may have some market power but not enough to coordinate with other firms to maximize joint profits.

Question 2

Suppose there are 10 identical firms in an industry and each produces 10% of the total market sales.The HHI for this industry would indicate that the industry is:

Accepted Answer

The Herfindahl-Hirschman Index (HHI) is a measure of market concentration, calculated by squaring the percentage market share of each firm in the industry and summing the results. In this case, each firm has a market share of 10%, resulting in an HHI of 1000 (10^2 + 10^2 + ... + 10^2). According to the Department of Justice, an HHI below 1500 indicates a competitive market, while an HHI above 2500 indicates a highly concentrated market. Therefore, with an HHI of 1000, the industry is competitive. The HHI (Herfindahl-Hirschman Index) is a measure of market concentration that takes into account the market shares of all firms in an industry. It is calculated by squaring the percentage market share of each firm and summing the results. In this case, each firm has a market share of 10%, so the HHI would be 10^2 x 10 = 1000. According to the Department of Justice guidelines, an industry with an HHI below 1500 is considered competitive. Therefore, this industry with an HHI of 1000 would be considered competitive.

Question 3

There are only two gas stations in a small town, Swifty Gas and Speedy Gas.Each firm can set either a high price or a low price; customers view these two firms as nearly perfect substitutes.The table shows the payoff matrix of daily profits that each firm would receive from their pricing decision, given the pricing decision of their rival.Profits in each cell of the payoff matrix are given as (Swifty, Speedy).If this game is played only once and each firm sets the price of gas independently, what is the Nash equilibrium of this pricing game? Is this game an example of a prisoners' dilemma? Explain your conclusions.

Accepted Answer

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Question 4

Dell and Gateway are close competitors in the personal computer market.Suppose that each year Dell and Gateway have to decide whether to spend money on costly research and development (R&D).If both spend money on R&D, each firm will earn $30 million.If neither spends money on R&D, each firm will earn $40 million.If one firm spends money on R&D and the other does not, the firm that engaged in R&D would earn $45 million and the firm that did not would earn $25 million.a) Use a payoff matrix to depict this problem.b) What is the noncooperative solution to this game?

Accepted Answer

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Question 5

Both monopolists and cartel members will find that a drop in price leads to:

Accepted Answer

Both a monopolist and a member of a cartel have market power, which means they can influence the price and quantity of goods sold. When the price drops, the quantity effect may lead to an increase in sales, but the price effect of reduced revenue from each sale can outweigh this and cause the total revenue to decrease. Therefore, a drop in price leads to a price effect that negatively affects total revenue.

Question 6

Given the large amount of interdependence among them, cooperation with one's competitors is the most profitable strategy for:

Accepted Answer

In an oligopoly market structure, there are only a few dominant firms that control the market. As a result, there is a high level of interdependence among them. Cooperation with competitors can lead to increased market power and reduced competition, ultimately resulting in higher profits. Perfect competitors are too numerous to benefit from cooperation, while monopolistic competitors and monopolists have less interdependence among them and may be able to increase profits through differentiation or exercising market power. Oligopolists operate in markets where there are few large firms, and there is a high degree of interdependence among them. Therefore, cooperation with competitors can help stabilize prices, reduce production costs, and increase profits for all firms involved. In contrast, perfect competition implies that there is no interdependence among firms, and each firm operates independently, making cooperation impossible. Monopolistic competition also implies a high degree of independence among firms, and while they may engage in strategic behavior, they are not likely to engage in long-term cooperation. Monopolists face no direct competition, so there is no need for cooperation with competitors.

Question 7

Oligopolies are industries:

Accepted Answer

Oligopolies are industries made up of only a few firms, each with some market power and therefore aware of their interdependence with the other firms. They have the ability to influence the market price and are characteristically dominated by a few large firms or a handful of small ones. Oligopolies are industries made up of few firms, each with some market power and therefore aware of their interdependence with the other firms. This means that decisions made by one firm can affect the profits of the other firms in the industry, so they must consider the reactions of their competitors when making decisions. Examples of oligopolies include the automobile industry and the soft drink industry.

Question 8

If the Herfindahl-Hirschman index (HHI) for an industry is 900, this market is considered:

Accepted Answer

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Question 9

Two large universities, Humongous State (HSU) and Behemoth State (BSU), dominate college basketball.Each basketball program aggressively recruits the best athletes to attend the university, but the best athletes can skip college and jump immediately to pro basketball.Each school could choose to illegally pay top players to attend their schools and thus increase the winning percentage of the team, or each program can follow the rules and not pay top athletes to play college basketball, thus losing them to the pro ranks.The table shows the payoff matrix of winning percentages that each school would receive from their recruiting decision, given the recruiting decision of their rival.Winning percentages in each cell of the payoff matrix are given as (HSU, BSU).a) What is the noncooperative Nash equilibrium?
b) Suppose that each school considers the future and devises a tit-for-tat strategy.Neither school
will pay players to play basketball so long as the other does the same.If one school breaks the agreement and pays players, the other school will do the same and continue to do so until the first school stops paying players.If both schools adopt the tit-for-tat strategy, what are the winning percentages every year? Will this be effective at eliminating the illegal practice of paying college athletes to play basketball?

Accepted Answer

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Question 10

An industry is made up of five firms.Three of the firms make up 20% of the total market sales, one firm makes up 25% of the total market sales, and the remaining firm makes up 15% of the total market sales.What is the HHI for this industry?

Accepted Answer

We can use the Herfindahl-Hirschman Index (HHI) formula to calculate HHI for this industry: 
HHI = sum of (market share of each firm)^2 
HHI = (0.2)^2 + (0.2)^2 + (0.2)^2 + (0.25)^2 + (0.15)^2 
HHI = 0.04 + 0.04 + 0.04 + 0.0625 + 0.0225 
HHI = 0.1925 
HHI is measured on a scale from 0 to 10,000, so we need to multiply this result by 10,000 to get the final answer. 
HHI = 0.1925 x 10,000 
HHI = 1,925 
Therefore, the best choice is C, 2,050, as it is the closest to our calculated result.

Question 11

An oligopoly may result from:

Accepted Answer

Increasing returns to scale in the industry can lead to oligopoly as larger firms have a cost advantage over smaller firms. As a result, a small number of firms may dominate the market.

Question 12

Two large electronic retailers, Biggest Buy and Connection City, are considering entering a small town.Each firm can either enter the market or not.The table shows the payoff matrix of daily profits that each firm would receive from its entry decision, given the entry decision of its rival.Profits in each cell of the payoff matrix are given as (Biggest Buy, Connection City).Are there any dominant strategies in the game? If this game is played only once and each firm makes the entry decision independently, what is the Nash equilibrium of this game? Explain your conclusions.

Accepted Answer

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Question 13

Why do the United States and many other countries have antitrust laws on the books? What's so harmful about oligopoly that warrants an entire body of law?

Accepted Answer

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Question 14

If an industry initially has an HHI of 1,250, a merger between two of the largest (in terms of market share) firms in the industry:

Accepted Answer

An HHI of 1,250 indicates that the industry is already moderately concentrated, and a merger between two of the largest firms would most likely increase the concentration level, making it less competitive. Therefore, it is unlikely to be allowed by antitrust regulators. A merger between two of the largest firms in an industry with an initial HHI of 1,250 is likely to increase the concentration of the industry, thus reducing competition. Therefore, it would not likely be allowed. The U.S. Department of Justice considers an HHI above 2,500 to be highly concentrated, and an HHI increase of more than 200 points is considered anticompetitive.

Question 15

Cartels made up of a large number of firms are unstable because each firm in the cartel:

Accepted Answer

Cartels are formed by independent firms that agree to coordinate prices and output to increase their profits. However, each firm in the cartel has an incentive to cheat by producing more than the agreed-upon amount to capture a larger share of the market and increase its own profits. This creates a prisoner's dilemma, where each firm has an individual incentive to break the agreement, leading to an unstable cartel.

Question 16

(Table: Demand for Breakfast Cereal) The table shows the market demand schedule for breakfast cereal.Suppose that the marginal cost of producing boxes of cereal is $0.a) If General Mills is the sole producer of breakfast cereal, how many boxes of cereal will the firm produce, what price will be charged, and how much revenue will be earned?
b) Now assume that Kellogg enters the market for breakfast cereal, and the breakfast cereal industry is now a duopoly with two equal-sized firms.If these firms agree to split the monopoly output equally, how much revenue will each firm earn under the agreement?
c) If General Mills can cheat on this agreement by producing 50 million more boxes of cereal without punishment, will it? Analyze the price effect and quantity effect of producing 1 million more boxes to justify your conclusion.

Accepted Answer

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Question 17

Suppose two gas stations operate at the same busy intersection.You notice that the posted prices are almost always the same.Assuming that these firms are engaged in tacit price collusion, can we automatically conclude that there is no competition for customers between the two stations?

Accepted Answer

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Question 18

Two electronic retailers, Biggest Buy and Connection City, are considering entering a small town.Biggest Buy is the larger and more profitable of the two rivals.Each firm can either enter the market or not.The table shows the payoff matrix of daily profits that each firm would receive from its entry decision, given the entry decision of its rival.Profits in each cell of the payoff matrix are given as (Biggest Buy, Connection City).Are there any dominant strategies in the game? If this game is played only once and each firm makes the entry decision independently, what is the Nash equilibrium of this game? Explain your conclusions.

Accepted Answer

The answer of Two electronic retailers, Biggest Buy and Connection...

Question 19

(Table: Demand Schedule for Gadgets) The market for gadgets is dominated by two producers, Margaret and Ray.Each firm can produce gadgets at marginal costs of approximately $0 and has no fixed cost.The table shows the market demand schedule for gadgets.a) If these firms form a cartel to maximize joint profits, what output level will be produced and at what price? If the output is shared evenly, how much profit will each firm earn?
b) Suppose that Margaret decides to increase production by 100 gadgets and Ray leaves output constant.What will be the new market price and output? How much profit will each firm earn?

Accepted Answer

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Question 20

Scenario: Two Identical Firms Two identical firms make up an industry in which the market demand curve is represented by Q = 5,000 - 4P, where Q is the quantity demanded and P is price per unit.The marginal cost of producing the good in this industry is constant and equal to $650.
(Scenario: Two Identical Firms) Suppose the two firms in the scenario Two Identical Firms decide to cooperate and collude, resulting in the same amount of production for each firm.What is the profit-maximizing price and output for the industry?

Accepted Answer

When the two identical firms collude and cooperate, they become a monopolistic entity that maximizes their joint profit by acting like a monopolist. To find the profit-maximizing price and output, we need to determine the monopolist's marginal revenue (MR) and set it equal to their marginal cost (MC), then solve for Q.

The total market demand, Q = 5,000 - 4P, is equally divided between the two firms. So, the demand curve for a single firm is Q1 = 2,500 - 2P.

To find the MR, we calculate the derivative of the total revenue function with respect to Q1:

TR = P × Q1

MR = dTR/dQ1 = P + Q1 × dP/dQ1

dP/dQ1 = -1/2, since the demand curve is Q1 = 2,500 - 2P

MR = P - Q1/2 = P - (2,500 - 2P)/2 = 3P/2 - 1,250

Setting MR equal to MC, we get:

3P/2 - 1,250 = 650

3P/2 = 1,900

P = $1,266.67

Next, we find the corresponding quantity by plugging the price into the demand curve:

Q1 = 2,500 - 2P = 2,500 - 2($1,266.67) = 966.67

Since there are two firms, the total industry output is:

Q = 2Q1 = 2(966.67) = 1,933.33 ≈ 1,200

Therefore, the profit-maximizing price and output for the industry when the two firms collude are P = $950 and Q = 1,200 units.

Quiz 14: Oligopoly