Question 1

A pay-off matrix used in game theory shows:

Accepted Answer

A pay-off matrix in game theory displays the outcomes for different strategies used by firms in an oligopoly. The pay-off matrix shows the potential profits or losses for each firm based on the choices made by other firms in the industry. It is a tool used to analyze strategic decision-making in situations where the outcome depends on the choices of multiple participants.

Question 2

The oligopoly market can be examined by using:

Accepted Answer

Game theory is a useful tool to analyze behavior and outcomes in oligopoly markets, where a few large firms dominate the industry. Competitive market models are not relevant for this type of market, as there is limited competition. Monopoly models are also not applicable, as there is not just one dominant firm in the market.

Question 3

In a price leadership oligopoly model:

Accepted Answer

In a price leadership oligopoly model, one firm is designated as the price leader and sets the price for the industry. The other firms in the industry then follow the price leader's pricing decisions. This is not a collusion between firms, as in a cartel, but rather a form of implicit coordination where firms recognize that following the price leader is in their best interest. The price leader is typically a large, dominant firm that has the power to influence market prices. The other firms in the industry adjust their prices to match the price set by the industry leader.

Question 4

Cartel members have an incentive to cheat on the cartel because:

Accepted Answer

Each member's marginal revenue (MR) is not equal to the cartel's marginal cost (MC), leading them to produce more than their quota to increase individual profits.

Question 5

The purpose of a cartel is to:

Accepted Answer

The purpose of a cartel is to act like a monopoly by controlling the production and pricing of a product or service among its members. This allows them to increase their profits by collectively reducing competition and setting higher prices.

Question 6

The various strategies a firm can follow in an oligopolistic industry can be expressed in terms of:

Accepted Answer

The pay-off matrix is a tool that can help a firm in an oligopolistic industry to identify the best strategy to adopt by considering the potential responses of its competitors to various pricing and output decisions. It allows the firm to see how its choices will impact its profits and the profits of its competitors, and to choose a strategy that will maximize its own profits. Therefore, the pay-off matrix is the best choice for expressing the various strategies a firm can follow in an oligopolistic industry.

Question 7

Which of the following market structures describes an industry in which a group of firms formally agree to control prices and output of a product?

Accepted Answer

A cartel is a group of firms that agrees to restrict output and increase prices in order to increase profits. This is an example of collusion among firms and is illegal in many countries.

Question 8

A cartel:

Accepted Answer

A cartel is a group of firms formally agreeing to control their price and output. However, such an agreement is illegal in many countries as it can lead to reduced competition and higher prices for consumers.

Question 9

Game theory provides a framework for studying:

Accepted Answer

Game theory is particularly useful for studying strategic behavior in an oligopoly, where a small number of firms dominate the market and their actions affect each other's profits. It provides a way to analyze how firms will interact and make decisions in situations where their outcomes depend on the choices of other firms.

Question 10

A cartel maximises industry profit by:

Accepted Answer

A cartel maximizes industry profit by producing where marginal revenue (MR) equals marginal cost (MC), similar to a monopoly, to maximize profits by equating additional revenue from selling one more unit to the additional cost of producing that unit.

Question 11

A group of firms that collude to limit competition is called a/an:

Accepted Answer

A group of firms that collude to limit competition is known as a cartel. The firms work together to control production, prices, and output levels to increase profits, which can lead to higher prices for consumers.

Question 12

The cartel is a group of firms:

Accepted Answer

A cartel is a group of firms that formally agree to control their price and output in order to increase their profits. This is typically done by limiting production in order to raise prices and reduce competition. Cartels are generally illegal and are often subject to government regulation or other forms of intervention.

Question 13

When the behaviour of other firms must be taken into account by another firm in the industry,economists often examine this using:

Accepted Answer

Game theory is specifically designed to analyze situations where the behavior of one participant depends on the behavior of others. In this case, the behavior of one firm in the industry depends on the behavior of the other firms, making game theory the appropriate tool for analysis.

Question 14

Suppose an oil cartel has an agreement to restrict members' production in order to maintain a price of $40 per barrel.A single cartel member may want to cheat and exceed its quota so that it can:

Accepted Answer

By exceeding its quota and producing more oil, the cartel member can sell more barrels at the agreed-upon price of $40 per barrel and thus earn more revenue and profit. However, cheating can also undermine the stability of the cartel and lead to a breakdown of the agreement, which could ultimately hurt all members' long-term profits.

Question 15

Game theory includes which of the following rules?

Accepted Answer

Game theory by nature involves strategic decision-making with the aim of maximizing one's own gains. As such, it is essential that those involved in the game have a clear objective in mind, whether it is winning the game itself or achieving some other outcome. A is incorrect because game theory is not limited to the context of competitive markets. B is incorrect because not all pay-offs in game theory are negative. And C is incorrect because game theory is all about strategies - specifically, how to formulate and execute them in a way that maximizes one's own payoff.

Question 16

Cartel pricing refers to the output and price choice of a cartel.This choice most closely resembles:

Accepted Answer

Cartel pricing is most closely related to a monopoly, as the cartel acts as a single entity controlling the output and price in the market. This is in contrast to a more competitive industry (where individual firms compete independently) or a duopoly (where two firms control the market). A godfather oligopoly is not a recognized economic term.

Question 17

Suppose that a firm raises the price of its product by 10 per cent.Although they have no requirement or agreement to do so,the other firms decide to raise their prices accordingly.This situation is best described as:

Accepted Answer

Price leadership occurs when one firm sets its price first, and other firms in the market follow suit, even without formal agreements.

Question 18

Game theory explains:

Accepted Answer

Game theory is most commonly applied in strategic situations, such as those faced by firms in an industry. It helps them understand the likely responses of competitors and to develop effective strategies. Therefore, strategic responses of firms is the best choice.

Question 19

In order to make oil profits as large as possible,OPEC meets to set oil production quotas for its members.OPEC is best classified as a:

Accepted Answer

OPEC is best classified as a cartel because it is a group of producers who work together to limit output and raise prices in order to increase their profits.

Question 20

An increase in marginal cost that remains within the gap of the marginal revenue curve of a kinked demand oligopolist will:

Accepted Answer

The kinked demand curve model suggests that an increase in marginal cost will not lead to a change in price or output because the firm will still face the same level of demand at the current price level. As long as the new marginal cost falls within the range of the kink point, the firm will continue to produce the same quantity and charge the same price. Therefore, the correct answer is A, keep price and output the same.

Quiz 9: Monopolistic competition and oligopoly