Question 1

The NBA and NCAA are examples of:

Accepted Answer

The NBA and NCAA function as buyer's cartels by keeping the salaries of players lower than they would be in a competitive market. This is achieved through various means such as salary caps and restrictions on player movement.

Question 2

Which of the following factors is NOT significant in leading to the collapse of a cartel?

Accepted Answer

Transparency of action among members is actually crucial in maintaining the stability of the cartel. Cheating by cartel members, new entrants and demand response, and government prosecution and regulation are commonly cited factors that can lead to the collapse of a cartel.

Question 3

Suppose that an industry consists of a two-firm cartel: Firm A and Firm B. Each firm agrees to produce and sell only 100 units of output per week. This level of output maximizes total industry profit. Which of the following is TRUE?

Accepted Answer

If Firm A produces and sells more than 100 units, it could increase its profit by capturing a larger market share, assuming Firm B sticks to the agreed 100 units. However, this would break the cartel agreement and could lead to a price war.

Question 4

Compared to a competitive market, firms operating in a cartel will charge a price that is:

Accepted Answer

Firms operating in a cartel collude to reduce output and increase prices, thereby earning higher profits. This leads to a higher price than the competitive price, as they have reduced the level of competition in the market. Therefore, the correct answer is A.

Question 5

The more successful a cartel is in raising the profits of the firms in the cartel, the:

Accepted Answer

The more successful a cartel is in raising the profits of the firms in the cartel, the more likely there will be cheating. This is because a higher profit margin means there is more incentive for firms to break the agreement and increase their own profits even further.

Question 6

When cartels are successful at driving up prices,:

Accepted Answer

The answer of When cartels are successful at driving up...

Question 7

Scientists are working on techniques to create bacteria that excrete oil as waste. How might OPEC have contributed to this research?

Accepted Answer

The high price of oil charged by OPEC would have made it profitable for scientists and businesses to invest in research to find alternatives to traditional oil sources. This could have led to the development and funding of research for bacteria that excrete oil as waste.

Question 8

Cartels will tend to be more successful when there are ______ for the cartelized good.

Accepted Answer

If there are fewer substitutes available for the cartelized good, consumers will have fewer options to turn to if they don't want to pay the higher prices set by the cartel. This gives the cartel more market power and makes it easier for them to enforce their price agreements.

Question 9

In a competitive market, each firm earns ________ economic profits, whereas firms in a successful cartel will earn ________.

Accepted Answer

In a competitive market, firms earn zero economic profits due to free entry and exit, while a successful cartel restricts output to raise prices, allowing firms to earn positive economic profits.

Question 10

Cheating pays when other firms ________ their promise.

Accepted Answer

Cheating pays when other firms keep their promise because it allows the cheating firm to gain an advantage by not adhering to the agreed terms while others do, thus capturing a larger market share or profit.

Question 11

Which of the following statements is TRUE?

Accepted Answer

When a cartel cheater increases quantity beyond the profit-maximizing quantity of a monopoly, it typically lowers the market price, which can hurt other cartel members by reducing their profits.

Question 12

Another possible source of why cartels break down is the growth potential of the industry. Although industries with a lot of potential are more willing to invest in the time to form a collusive agreement, such growth potential also deters them from making this investment. Why would that be?

Accepted Answer

In high-growth industries, there tend to be more entrants looking to capture a share of the market, which increases the difficulty of maintaining a collusive agreement among a large number of participants. Therefore, the potential for many entrants is a deterrent to forming a cartel.

Question 13

Cartels tend to be more successful when:

Accepted Answer

Cartels tend to be more successful when there are few substitutes for the product, as this limits consumer choice and allows the cartel to exert greater control over the market.

Question 14

If a television factory wanted to conspire with its competitors to raise the price of televisions, which of the following would help stabilize the long-term viability of such a cartel?

Accepted Answer

The answer of If a television factory wanted to conspire...

Question 15

A firm receives the largest profit from cheating on a cartel agreement when:

Accepted Answer

When none of the other cartel members cheats, a firm can increase its output and capture a larger market share at the agreed-upon high price, maximizing its profit.

Question 16

Cheaters in cartels make ________ profit when the other cartel members ________ their promise.

Accepted Answer

Cheaters in cartels make more profit when the other cartel members keep their promise because they can undercut prices or increase output while others restrict theirs, capturing a larger market share.

Question 17

Cartels do not last because their members find them difficult to maintain since:

Accepted Answer

Cartels are difficult to maintain because individual firms have an incentive to secretly cut prices to increase their market share and profits, undermining the cartel's agreed-upon pricing.

Question 18

Which of the following statements is TRUE?

Accepted Answer

The statement that high prices charged by a cartel might lead to new firms entering the industry, reducing the cartel's market power is true. This is because the high prices create an incentive for new firms to enter the market and undercut the cartel's prices, leading to a decrease in the cartel's market share and power. The other statements are not true: A is false as natural resources are often easier to cartelise, B is false as cartels are more successful when there are fewer substitutes, and D is false as high oil prices encourage more production, not less.

Question 19

Which of the following describes how cartel members cheat?

Accepted Answer

Cartel members may agree to limit their production in order to drive up prices and profits. However, individual members may cheat by producing more output than they agreed to, which can disrupt the cartel’s pricing strategy and reduce profits for all members.

Answer: A 
 Cartel members may also cheat by using lower quality or cheaper inputs in production in order to reduce their costs and increase profits. This can lead to lower quality outputs and harm the cartel’s reputation, but individual members may prioritize their own profits over the success of the cartel as a whole.

Answer: B and D are possible ways that cartel members may cheat, but they are less common than cheating on output levels or inputs in production.

Question 20

As the price of oil goes up, what happens to the incentive to develop alternative fuels?

Accepted Answer

When the price of oil goes up, it makes alternative fuels more economically viable and profitable. This serves as an incentive for individuals and companies to invest in developing and implementation of these fuels. Therefore, as the price of oil goes up, it increases the incentive to develop alternative fuels.

Quiz 15: Oligopoly and Game Theory

The NBA and NCAA are examples of:

Which of the following factors is NOT significant in leading to the collapse of a cartel?

Suppose that an industry consists of a two-firm cartel: Firm A and Firm B. Each firm agrees to produce and sell only 100 units of output per week. This level of output maximizes total industry profit. Which of the following is TRUE?

Compared to a competitive market, firms operating in a cartel will charge a price that is:

The more successful a cartel is in raising the profits of the firms in the cartel, the:

When cartels are successful at driving up prices,:

Scientists are working on techniques to create bacteria that excrete oil as waste. How might OPEC have contributed to this research?

Cartels will tend to be more successful when there are ______ for the cartelized good.

In a competitive market, each firm earns economic profits, whereas firms in a successful cartel will earn .

Cheating pays when other firms ________ their promise.

Which of the following statements is TRUE?

Another possible source of why cartels break down is the growth potential of the industry. Although industries with a lot of potential are more willing to invest in the time to form a collusive agreement, such growth potential also deters them from making this investment. Why would that be?

Cartels tend to be more successful when:

If a television factory wanted to conspire with its competitors to raise the price of televisions, which of the following would help stabilize the long-term viability of such a cartel?

A firm receives the largest profit from cheating on a cartel agreement when:

Cheaters in cartels make profit when the other cartel members their promise.

Cartels do not last because their members find them difficult to maintain since:

Which of the following statements is TRUE?

Which of the following describes how cartel members cheat?

As the price of oil goes up, what happens to the incentive to develop alternative fuels?