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Microeconomics, 10e (Parkin)

Chapter 15 Oligopoly
1 What is Oligopoly?
1) An oligopoly is a market structure in which there are
A) only a few buyers but many sellers.
B) only a few sellers selling either an identical or differentiated product.
C) many sellers selling a differentiated product.
D) a few products sold by many sellers.
Answer: B
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
2) Which of the following is a distinguishing characteristic of oligopoly?
A) A small number of firms compete.
B) No one firm's actions directly affect the actions of the other firms.
C) Firms are free to enter and exit the industry.
D) Natural barriers cannot prevent the entry of new firms.
Answer: A
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
3) When only a small number of producers compete with each other is a defining characteristic
of
A) inelastic supply.
B) monopolistic competition.
C) efficient competition.
D) oligopoly.
Answer: D
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

1
Copyright 2012 Pearson Education, Inc.

4) In oligopolistic markets,
A) there are many firms.
B) there are no barriers to entry.
C) there are only a few firms.
D) all firms are price takers.
Answer: C
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
5) A market structure in which a small number of firms compete is called ________.
A) a monopoly
B) a small-number market
C) an oligopoly
D) monopolistic competition
Answer: C
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
6) The key feature of an oligopoly is that there
A) are many buyers and sellers.
B) is one seller.
C) exists product differentiation.
D) are only a few sellers.
Answer: D
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
7) In an oligopoly
A) there are only a few firms.
B) there is no product differentiation.
C) there is free entry and exit.
D) firms' decisions are unrelated to each other.
Answer: A
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

2
Copyright 2012 Pearson Education, Inc.

8) A market structure in which a small number of producers compete against each other is
A) monopolistic competition.
B) oligopoly.
C) monopoly.
D) perfect competition.
Answer: B
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
9) If firms in an industry differentiated their products and made economic profits in the shortrun, what other characteristic would be important to determine if this is an oligopoly or a
monopolistically competitive market?
A) The number of firms in the market.
B) The number of close substitutes for the good being produced.
C) The number of buyers in the market.
D) If the good being sold is a normal or inferior good.
Answer: A
Topic: Oligopoly
Skill: Recognition
Question history: New 10th edition
AACSB: Reflective Thinking
10) The distinguishing features of oligopoly are ________ and a ________ in the industry.
A) barriers to entry; large number of firms
B) no barriers to entry; few firms
C) barriers to entry; few firms
D) no barriers to entry; large number of firms
Answer: C
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
11) Oligopoly is
A) like monopoly because there are barriers to entry.
B) like perfect competition because oligopoly firms all sell homogeneous goods.
C) like monopolistic competition because oligopoly firms all sell differentiated goods
D) like perfect competition because there are many firms in the industry
Answer: A
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

3
Copyright 2012 Pearson Education, Inc.

12) Which of the following is a distinguishing characteristic of oligopoly?


A) A large number of firms compete.
B) No one firm's actions directly affect the actions of the other firms.
C) Firms are free to enter and exit the industry.
D) Natural or legal barriers prevent the entry of new firms.
Answer: D
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
13) Which of the following is a defining characteristic of oligopoly?
A) barriers to entry
B) selling a homogeneous good
C) selling a differentiated good
D) collusion
Answer: A
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
14) Natural oligopoly is a situation where
A) the level of demand can support only a few firms.
B) there is only one firm.
C) there are only two firms.
D) there are legal barriers to entry.
Answer: A
Topic: Natural Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
15) A natural oligopoly can form
A) if there are economies of scale
B) only if firms sell a differentiated good
C) only if firms sell a homogeneous good
D) if there is only one firm in the industry
Answer: A
Topic: Natural Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

4
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16) In a small town the level of demand is capable of supporting only two gas stations. This
market is
A) a natural duopoly.
B) perfectly competitive because a homogeneous good is being sold.
C) operating as if it was a monopoly.
D) an example of monopolistic competition.
Answer: A
Topic: Natural Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
17) One difference between oligopoly and monopolistic competition is that
A) a monopolistically competitive industry has fewer firms.
B) in monopolistic competition, the products are identical.
C) monopolistic competition has barriers to entry.
D) fewer firms compete in oligopoly than in monopolistic competition.
Answer: D
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
18) Which of the following is a distinguishing characteristic of oligopoly?
A) A large number of firms compete.
B) Each firm's actions influence the profits of all the other firms.
C) Firms are free to enter and exit the industry.
D) Natural barriers cannot prevent the entry of new firms.
Answer: B
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
19) Consider a market in which each firm must predict the price and quantity decisions of other
firms, as well as how those price and quantity decisions will affect the first firm's revenue and
profit. This market is best described as
A) an oligopoly.
B) monopolistic competition.
C) a monopoly.
D) perfect competition.
Answer: A
Topic: Oligopoly
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking
5
Copyright 2012 Pearson Education, Inc.

20) In ________ market structure, a firm's output depends ________.


A) an oligopoly; only on its own marginal revenue and marginal cost curves
B) a monopolistically competitive; in part on its competitors' price and quantity decisions
C) an oligopoly; in part on its competitors' price and quantity decisions
D) a monopolistically competitive; only on its marginal revenue curve
Answer: C
Topic: Oligopoly
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
21) If firms in an industry make output decisions that are partially based on the price and output
decisions of their competitors, then these firms are in ________ market have ________ with the
other firms in the market.
A) an oligopoly; interdependence
B) an oligopoly; no interdependence
C) an oligopoly or monopolistically competitive; interdependence
D) a monopolistically competitive; no interdependence
Answer: A
Topic: Oligopoly
Skill: Recognition
Question history: New 10th edition
AACSB: Reflective Thinking
22) Of the following market structures, which has the fewest number of firms competing against
each other?
A) monopolistic competition
B) oligopoly
C) perfect competition
D) Both answers A and C are correct.
Answer: B
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
23) A duopoly occurs when ________.
A) there are only two producers of a particular good competing in the same market
B) there are two producers of two goods competing in an oligopoly market
C) there are numerous producers of two goods competing in a competitive market
D) the one producer of two goods sells the goods in a monopoly market
Answer: A
Topic: Duopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
6
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24) A duopoly is a form of


A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
Answer: C
Topic: Duopoly
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

In the figure, D is the demand curve for taxi rides in a town, and ATC is the average total cost
curve of a taxi company.
25) In the scenario above, the market is:
A) A natural duopoly
B) A natural oligopoly with three firms
C) A natural monopoly
D) Monopolistically competitive
Answer: A
Topic: Duopoly
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

7
Copyright 2012 Pearson Education, Inc.

26) In an oligopoly market, the Herfindahl-Hirschman Index is usually:


A) Greater than 1,000
B) Below 1,000
C) Between 100 and 1,000
D) Between 200 and 2,000
Answer: A
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
27) An market in which the Herfindahl-Hirschman Index (HHI) is 1,250 is considered to be
A) an oligopoly.
B) monopolistically competitive.
C) a monopoly.
D) perfectly competitive.
Answer: A
Topic: Oligopoly
Skill: Recognition
Question history: New 10th edition
AACSB: Reflective Thinking
28) In the market for batteries, the four largest firms earn 90% of the total revenue and there are
35 firms in the industry. This industry is best described as
A) oligopoly
B) monopoly
C) monopolistic competition
D) perfect competition
Answer: A
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
29) Of the following, the best example of oligopoly is
A) wheat farming.
B) the restaurant industry.
C) the cigarette industry.
D) the clothing industry.
Answer: C
Topic: Oligopoly
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

8
Copyright 2012 Pearson Education, Inc.

30) When producers agree to restrict output, raise the price, and increase profits, the agreement is
called ________.
A) a pricing agreement
B) an oligopoly agreement
C) a collusive agreement
D) a monopoly agreement
Answer: C
Topic: Cartel
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
31) ________ is a group of firms that have colluded to limit their output and raise their price.
A) A cartel
B) An oligopoly
C) A strategy
D) A duopoly
Answer: A
Topic: Cartel
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking
32) Which of the following is characteristic of oligopoly, but NOT of monopolistic competition?
A) The choices made by one firm have a significant effect on other firms.
B) Each firm faces a downward-sloping demand curve.
C) Firms are profit-maximizers.
D) There is more than one firm in the industry.
Answer: A
Topic: Study Guide Question, Oligopoly
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
33) A monopolistically competitive firm is like an oligopolistic firm insofar as
A) both face perfectly elastic demand.
B) both can earn an economic profit in the long run.
C) both have MR curves that lie beneath their demand curves.
D) neither is protected by high barriers to entry.
Answer: C
Topic: Study Guide Question, Oligopoly
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

9
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2 Oligopoly Games
1) Game theory is most useful for analyzing
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
Answer: C
Topic: Game Theory
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
2) Game theory can be used for studying which of the following types of market structure?
A) monopoly
B) monopolistic competition
C) oligopoly
D) perfect competition
Answer: C
Topic: Game Theory
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
3) Game theory is most useful for determining the outcome when ________.
A) the market structure is oligopoly
B) monopolistic competition exists
C) prison terms are involved
D) the market is dominated by a monopoly
Answer: A
Topic: Game Theory
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
4) Game theory is used to explain firms' decisions in
A) a monopoly.
B) an oligopoly.
C) a perfectly competitive market.
D) a monopolistically competitive market.
Answer: B
Topic: Game Theory
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

10
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5) Game theory is applicable to oligopoly behavior because oligopolists


A) use strategic behavior.
B) ignore rival firms.
C) are price takers.
D) can only be profitable if they collude.
Answer: A
Topic: Game Theory
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
6) Game theory is distinctive in that its elements are
A) costs, prices, and profits.
B) revenues, elasticity, and profits.
C) rules, strategies, payoffs, and outcomes.
D) patents, copyrights, and barriers to entry.
Answer: C
Topic: What Is a Game?
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
7) Which group of features is shared by all games?
A) rules, strategies, payoffs, outcome
B) rules, profit, payoffs, outcome
C) profit, strategies, payoffs, cheating
D) rules, cheating, payoffs, outcome
Answer: A
Topic: What Is a Game?
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
8) Game theory is a tool for studying ________.
A) Nash behavior
B) payoff dilemmas
C) rational dilemmas
D) strategic behavior
Answer: D
Topic: Game Theory
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

11
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9) In game theory, strategies include ________.


A) all possible actions of each player
B) only the winning action of each player
C) all possible actions and payoffs of each player
D) the payoff matrix
Answer: A
Topic: Game Theory
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
10) The prisoners' dilemma describes a single-play game that features
A) an outcome in which the participants collude.
B) a large number of rivals cooperating with each other.
C) a situation in which one player has better odds than the other.
D) two players who are unable to communicate with each other.
Answer: D
Topic: Prisoners' Dilemma
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
11) The simplest prisoners' dilemma is a game that, in part, requires
A) two players who are able to communicate with each other.
B) two players who are unable to communicate with each other.
C) monopolistic competition.
D) an oligopoly with one very large firm.
Answer: B
Topic: Prisoners' Dilemma
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
12) In the prisoners' dilemma game, each player
A) has only one possible strategy.
B) can choose from two strategies.
C) can choose from three strategies.
D) can choose from four strategies.
Answer: B
Topic: Prisoners' Dilemma
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

12
Copyright 2012 Pearson Education, Inc.

13) In a prisoner's dilemma game, each person will pick


A) their best outcome given what the other person will do
B) their best outcome.
C) their worse outcome.
D) their best outcome after consulting with the other person
Answer: A
Topic: Nash Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
14) In the prisoners' dilemma game, when each player takes the best possible action given the
action of the other player, ________.
A) a competitive equilibrium is reached
B) one player denies and one player confesses
C) both players deny
D) a Nash equilibrium is reached
Answer: D
Topic: Prisoners' Dilemma
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
15) The outcome of a prisoners' dilemma game with a Nash equilibrium is that ________.
A) both players deny
B) one player denies and one player confesses
C) both players confess
D) there is no equilibrium
Answer: C
Topic: Prisoners' Dilemma
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
16) In a prisoner's dilemma, the Nash equilibrium occurs where
A) neither person ends up with their best outcome
B) both end up with their best outcome
C) only one ends up with his best outcome
D) the one who goes first ends up with his best outcome
Answer: A
Topic: Prisoners' Dilemma
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

13
Copyright 2012 Pearson Education, Inc.

17) The prisoners' dilemma has an equilibrium in which


A) both players deny.
B) both players confess.
C) the player who confesses wins.
D) the player who denies wins.
Answer: B
Topic: Prisoners' Dilemma
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
18) In a prisoners' dilemma game, which of the following strategies gives the best outcome for
both prisoners?
A) Both deny (collusion).
B) Both confess (not collude).
C) One confesses while the other denies.
D) none of the above
Answer: A
Topic: Prisoners' Dilemma
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
19) In a prisoners' dilemma game, in the Nash equilibrium
A) both players have another outcome that does not occur but is more favorable.
B) neither player has another outcome that does not occur and is more favorable.
C) one player has another outcome that does not occur and is more favorable.
D) collusion would not alter the outcome.
Answer: A
Topic: Prisoners' Dilemma
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
20) The prisoners' dilemma has an equilibrium that is
A) a Nash equilibrium and both players confess.
B) not a Nash equilibrium and both players confess.
C) a Nash equilibrium and both players deny.
D) not a Nash equilibrium and both players deny.
Answer: A
Topic: Prisoners' Dilemma
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

14
Copyright 2012 Pearson Education, Inc.

21) Ann and Lynn have been arrested by the police, who have evidence that will convict them of
robbing a bank. If convicted, each will receive a sentence of 6 years for the robbery. During
questioning, the police suspect that Ann and Lynn are responsible for a series of bank robberies.
If both confess to the series, each will receive 12 years in jail. If only one confesses, she will
receive 4 years and the one who does not confess will receive 14 years. What is the equilibrium
for this game?
A) both confess
B) Ann confesses and Lynn does not confess
C) Lynn confesses and Ann does not confess
D) neither confess
Answer: A
Topic: Prisoners' Dilemma
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
22) Consider the prisoner's dilemma model where two criminals have two options (confess or
deny), and each criminal must make their decision without speaking to the other criminal first. If
they both confess they each get 3 years, if only one confesses then he gets 1 and his partner gets
10, and if neither confesses then they each get 0. They are in fact both guilty. In this game, the
Nash equilibrium is where
A) both confess
B) neither one confesses
C) only one will confess
D) it is impossible to say
Answer: A
Topic: Prisoners' Dilemma
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

15
Copyright 2012 Pearson Education, Inc.

Confess
Confess

B: 10 years
J: 10 years

Bob
Don't
Confess
B: 20 years
J: 1 year

Joe
Don't
Confess

B: 1 year
J: 20 years

B: 2 years
J: 2 years

23) The table above displays the possible outcomes for Bob and Joe, who have been arrested for
armed robbery and car theft. Which of the following is true?
A) If Joe confesses, Bob should not confess.
B) If Bob confesses, Joe should confess.
C) The dominant equilibrium is that Joe and Bob both serve 2 years.
D) If Joe does not confess, Bob should not confess.
Answer: B
Topic: Prisoners' Dilemma
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

Confess

Confess
A: 3 years
B: 3 years

Player A
Don't confess
A: 10 years
B: 1 year

Player B
Don't
confess

A: 1 year
B: 10 years

A: 2 years
B: 2 years

24) The table above shows the payoff matrix for a prisoners' dilemma game. The Nash
equilibrium is that
A) both prisoners do not confess.
B) both prisoners confess.
C) prisoner A confesses while prisoner B does not confess.
D) prisoner A does not confess while prisoner B confesses.
Answer: B
Topic: Prisoners' Dilemma
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

16
Copyright 2012 Pearson Education, Inc.

25) The table above shows the payoff matrix for a prisoners' dilemma. In the Nash equilibrium,
A) both prisoners get 3 years in jail.
B) both prisoners get 2 years in jail.
C) both prisoners get 1 year in jail.
D) both prisoners get 10 years in jail.
Answer: A
Topic: Prisoners' Dilemma
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
26) The problem for the prisoners in the prisoners' dilemma game in the above table is that
A) the Nash equilibrium is not the best outcome.
B) there is no equilibrium outcome.
C) neither prisoner has a workable strategy.
D) None of the above answers is correct.
Answer: A
Topic: Prisoners' Dilemma
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

Sell

Sell
1: $3
2: $3

Firm 1
Give away
1: $4
2: -$1

Firm 2
Give away

1: -$1
2: $4

1: $2
2: $2

27) Two software firms have developed an identical new software application. They are debating
whether to give the new application away free and then sell add-ons or sell the application at $30
a copy. The payoff matrix is above and the payoffs are profits in millions of dollars. What is Firm
1's best strategy?
A) Give away the application regardless of what Firm 2 does.
B) Sell the application at $30 a copy regardless of what Firm 2 does.
C) Give away the application only if Firm 2 sells the application.
D) Give away the application only if Firm 2 gives away the application.
Answer: A
Topic: Game Theory
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

17
Copyright 2012 Pearson Education, Inc.

28) Two software firms have developed an identical new software application. They are debating
whether to give the new application away free and then sell add-ons or sell the application at $30
a copy. The payoff matrix is above and the payoffs are profits in millions of dollars. What is the
Nash equilibrium of the game?
A) Both Firm 1 and 2 will sell the software application at $30 a copy.
B) Both Firm 1 and 2 will give the software application away free.
C) Firm 1 will give the application away free and Firm 2 will sell it at $30.
D) There is no Nash equilibrium to this game.
Answer: B
Topic: Game Theory, Nash Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
Jane
Advertise Don't advertise
J: $6,000
J: $3,000
Advertise
B: $10,000 B: $20,000
Bob
Don't
J: $12,000
advertise B: $5,000

J $10,000
B: $15,000

29) The payoff matrix of economic profits above displays the possible outcomes for Bob and
Jane who are involved in game of whether or not to advertise. After each player chooses his or
her best strategy and sees the result,
A) only Bob would like to change his decision.
B) neither player would be willing to change his or her decision unless the other player also
changes his or her decision.
C) if Jane does not change her decision, Bob would like to change his.
D) if Bob does not change his decision, Jane would like to change hers.
Answer: B
Topic: Game Theory, Nash Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

18
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R&D

R&D
A: $25
B: $15

Firm A
No R&D
A: -$3
B: $60

Firm
B
No R&D

A: $60
B: -$3

A: $50
B: $35

30) Firms A and B can conduct research and development (R&D) or not conduct it. R&D is
costly but can increase the quality of the product and increase sales. The payoff matrix is the
economic profits of the two firms and is given above, where the numbers are millions of dollars.
A's best strategy is to
A) conduct R&D regardless of what B does.
B) not conduct R&D regardless of what B does.
C) conduct R&D only if B conducts R&D.
D) conduct R&D only if B does not conduction R&D.
Answer: A
Topic: Game Theory
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
31) Firms A and B can conduct research and development (R&D) or not conduct it. R&D is
costly but can increase the quality of the product and increase sales. The payoff matrix is the
economic profits of the two firms and is given above, where the numbers are millions of dollars.
The Nash equilibrium occurs when
A) both A and B conduct R&D.
B) only A conducts R&D.
C) only B conducts R&D.
D) neither A nor B conduct R&D.
Answer: A
Topic: Game Theory, Nash Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

19
Copyright 2012 Pearson Education, Inc.

Thanksgiving
release
Thanksgiving
D: $100
release
F: $80

Disney
Christmas
release
D: $105
F: $95

Fox
Christmas
release

D: $110
F: $100

D: $95
F: $85

32) Disney and Fox must decide when to release their next films. The revenues received by each
studio depends in part on when the other studio releases its film. Each studio can release its film
at Thanksgiving or at Christmas. The revenues received by each studio, in millions of dollars, are
depicted in the payoff matrix above. Which of the following statements correctly describes Fox's
strategy given what Disney's release choice may be?
A) If Disney chooses a Thanksgiving release, Fox should choose a Christmas release.
B) If Disney chooses a Christmas release, Fox should choose a Thanksgiving release.
C) Fox should release on Christmas regardless of what Disney does.
D) Both answers A and B are correct.
Answer: D
Topic: Game Theory
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
33) Disney and Fox must decide when to release their next films. The revenues received by each
studio depends in part on when the other studio releases its film. Each studio can release its film
at Thanksgiving or at Christmas. The revenues received by each studio, in millions of dollars, are
depicted in the payoff matrix above. Which of the following statements correctly describes
Disney's strategy given what Fox's release choice may be?
A) If Fox chooses a Thanksgiving release, Disney should choose a Christmas release.
B) If Fox chooses a Christmas release, Disney should choose a Thanksgiving release.
C) Disney should release on Thanksgiving regardless of what Fox does.
D) Both answers A and B are correct.
Answer: D
Topic: Game Theory
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

20
Copyright 2012 Pearson Education, Inc.

Advertise

Advertise
S: $80
J: $70

Dr. Smith
Don't advertise
S: $60
J: $110

Dr. Jones
Don't
S: $120
advertise J: $60

S: $100
J: $90

34) Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to
advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given
in the payoff matrix above. Which of the following statements correctly describes Dr. Smith's
strategy given what Dr. Jones may do?
A) Dr. Smith should advertise no matter what Dr. Jones does.
B) Dr. Smith should not advertise no matter what Dr. Jones does.
C) Dr. Smith should advertise only if Dr. Jones doesn't advertise.
D) Dr. Smith should advertise only if Dr. Jones advertises.
Answer: A
Topic: Game Theory
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
35) Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to
advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given
in the payoff matrix above. Which of the following statements correctly describes Dr. Jones'
strategy given what Dr. Smith may do?
A) Dr. Jones should advertise no matter what Dr. Smith does.
B) Dr. Jones should not advertise no matter what Dr. Smith does.
C) Dr. Jones should advertise only if Dr. Smith doesn't advertise.
D) Dr. Jones should advertise only if Dr. Smith advertises.
Answer: A
Topic: Game Theory
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

21
Copyright 2012 Pearson Education, Inc.

36) Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to
advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given
in the payoff matrix above. Which of the following statements correctly categorizes the Nash
equilibrium for the game?
A) The game has a Nash equilibrium in which both optometrists advertise.
B) The game has a Nash equilibrium in which both optometrists do not advertise.
C) The game has a Nash equilibrium in which Dr. Smith advertises and Dr. Jones does not
advertise.
D) The game has a Nash equilibrium in which Dr. Smith does not advertise and Dr. Jones does
advertise.
Answer: A
Topic: Nash Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

Work

Work
1: +10
2: +10

Student 1
Don't work
1: +5
2: +5

Student 2
Don't work

1: +5
2: +50

1: 0
2: 0

37) Two students are assigned a group project. Each has the option to work or not work to
achieve a high grade. The payoffs are shown in the above table. Student 1 should
A) work only if student 2 works.
B) work regardless of the decision made by student 2.
C) not work if student 2 works.
D) not work regardless of what student 2 decides.
Answer: B
Topic: Game Theory
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
38) For a Nash equilibrium to be possible, all players must ________.
A) be able to predict their outcomes associated with all possible actions of the other players
B) have a way to communicate with the other players
C) have a strategy which allows for collusion
D) Both (A) and (B)
Answer: A
Topic: Nash Equilibrium
Skill: Conceptual
Question history: New 10th edition
AACSB: Reflective Thinking
22
Copyright 2012 Pearson Education, Inc.

39) In an oligopoly price-fixing game, each player tries to


A) minimize the market shares of its opponents.
B) maximize its own market share.
C) minimize the profits of its opponents.
D) maximize its own profit.
Answer: D
Topic: Price-Fixing Game
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
40) In the oligopoly price-fixing game, the payoffs are the
A) profits of the firms.
B) market shares of the firms.
C) sales of the firms.
D) reputations of the firms.
Answer: A
Topic: Price-Fixing Game
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
41) A group of firms that has entered into a collusive agreement to restrict output and increase
prices and profits is called
A) a compliance.
B) a cartel.
C) an oligopoly.
D) a duopoly.
Answer: B
Topic: Cartel
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
42) In what type of market is a cartel possible?
A) a market in which there are only a few firms and barriers to entry exist
B) a market in which firms sell a homogeneous good
C) a market in which firms sell a differentiated good
D) a market in which there are many firms
Answer: A
Topic: Cartel
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

23
Copyright 2012 Pearson Education, Inc.

43) A cartel usually has a collusive agreement to


A) restrict output.
B) boost output.
C) lower the price.
D) increase the number of firms in the industry.
Answer: A
Topic: Cartel
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
44) A cartel is a group of firms that
A) produce differentiated products.
B) produce products that are complements.
C) agree to restrict output to boost their profit.
D) agree to boost output to boost their profit.
Answer: C
Topic: Cartel
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
45) A cartel is a group of firms which agree to
A) behave competitively.
B) raise the price of their product.
C) lower the price of their product.
D) increase the amount they produce.
Answer: B
Topic: Cartel
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
46) A cartel is an arrangement
A) to flood the market and eliminate competition.
B) to steal industrial processes from rival firms.
C) among firms to decrease output and raise price.
D) by the government to restrict imports.
Answer: C
Topic: Cartel
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

24
Copyright 2012 Pearson Education, Inc.

47) In the United States, a collusive agreement to restrict output and increases prices is
A) legal.
B) the key tool used by oligopolists.
C) illegal.
D) the key tool used by monopolistic competitors.
Answer: C
Topic: Cartel
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
48) Which of the following is true regarding a collusive agreement?
I. It is illegal in the United States.
II. Two or more producers agree to restrict output or raise prices.
III. Firms' profits are never maximized under this sort of agreement.
A) I and II
B) I and III
C) II and III
D) I, II and III
Answer: A
Topic: Cartel
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
49) If two duopolists can collude successfully, then both will
A) earn greater profits than if they did not collude.
B) price at marginal cost.
C) price below average total cost.
D) lower their economic profits.
Answer: A
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
50) If firms in a duopoly can successfully collude,
A) each firm can earn an economic profit.
B) the industry, that is, both firms taken together, can earn the maximum economic profit.
C) the firms achieve a cooperative equilibrium.
D) All of the above answers are true.
Answer: D
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
25
Copyright 2012 Pearson Education, Inc.

51) If there is a collusive agreement in a duopoly to maximize profit, then the price will
A) equal the marginal cost of production.
B) equal the average total cost of production.
C) be the same as the price set by a monopoly.
D) be the same as the price set by a competitive industry.
Answer: C
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
52) The maximum economic profit that can be made by a duopoly that colludes is equal to the
________.
A) economic profit made by duopolists who cheat
B) normal profit made by an oligopoly
C) economic profit made by a monopoly
D) normal profit made by firms in perfect competition
Answer: C
Topic: Colluding to Maximize Profits
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
53) Two firms, Alpha and Beta, produce identical computer hard drives. They have identical
costs, and the hard drives they produce are identical. The industry is a natural duopoly. Alpha
and Beta enter into a collusive agreement, according to which they split the market equally. If
both firms comply with the agreement,
A) together they will operate in a way indistinguishable from a monopoly.
B) the price of a hard drive will be equal to marginal cost.
C) each firm will make zero economic profit.
D) the oligopoly will produce more hard drives than a profit-maximizing monopoly would
produce.
Answer: A
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

26
Copyright 2012 Pearson Education, Inc.

54) Two firms, Alpha and Beta, produce identical computer hard drives. They have identical
costs, and the hard drives they produce are identical. The industry is a natural duopoly. Alpha
and Beta enter into a collusive agreement, according to which they split the market equally. If
both firms cheat on the agreement so the market is the same as a competitive market,
A) they will operate in a way indistinguishable from a monopoly.
B) each firm will make zero economic profit.
C) each firm will increase its economic profit.
D) the price of a hard drive will be above marginal cost.
Answer: B
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
55) When two firms collude to maximize profit the total quantity produced by both firms taken
together is determined at the quantity where ________.
A) excess capacity is minimized
B) industry marginal cost equals industry marginal revenue
C) the price equals the industry's marginal cost
D) excess capacity is as large as possible zero
Answer: B
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
56) The maximum total economic profit that can be made by colluding duopolists
A) is less than the economic profit made by a monopolist.
B) equals the economic profit made by a monopolist.
C) exceeds the economic profit made by a monopolist.
D) bears no necessary relation to the economic profit made by a monopolist.
Answer: B
Topic: Colluding to Maximize Profits
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

27
Copyright 2012 Pearson Education, Inc.

57) Two duopoly firms that sell an identical good form a cartel. They decide to collude and fix
the price of their good. In this prisoners' dilemma type situation, the likely outcome is
A) both will cheat.
B) neither one will cheat.
C) only one will cheat.
D) It is impossible to say.
Answer: A
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
58) Two duopoly firms form a cartel. They decide to collude and fix the price of their good.
Each individual firm will earn the highest profit if
A) it cheats and the other sticks with the agreement
B) both stick with the agreement
C) it sticks with the agreement and the other cheats
D) they both cheat
Answer: A
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
59) Cartels are typically subject to cheating by their members because
A) if the other firms stick to the agreement, a firm can increase its profits by cutting its price.
B) barriers to entry do not exist so new entrants will join.
C) the U.S. Justice Department will punish any cartel agreement before the cartel has had a
chance to operate.
D) product differentiation allows the firms in the cartel to cheat.
Answer: A
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
60) Once a cartel determines the profit-maximizing price,
A) each firm faces the temptation to cheat by raising its price.
B) each firm faces the temptation to cheat by lowering its price.
C) changes in the output of any member firm will not affect the market price.
D) entry into the industry by rival firms will not affect the profit of the cartel.
Answer: B
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
28
Copyright 2012 Pearson Education, Inc.

61) In a cartel,
A) each firm has an incentive to decrease its own production below the level set by the cartel.
B) the firms' marginal cost equals the price set by the cartel.
C) each firm has an incentive to lower its price below the level set by the cartel.
D) each firm has an incentive to raise its price above the level set by the cartel.
Answer: C
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
62) In a collusive agreement between two duopolists in an oligopoly, each firm has an incentive
to cheat on the agreement because the firm's price
A) exceeds its marginal cost.
B) exceeds its marginal revenue.
C) is less than its average total cost.
D) None of the above answers is correct.
Answer: A
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
63) A firm might be tempted to cheat on a collusive price-fixing agreement by setting a
________ price and producing ________ than agreed upon.
A) lower; more
B) lower; less
C) higher; more
D) higher; less
Answer: A
Topic: Cartel; Incentive To Cheat
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
64) If both firms in a duopoly cheat on a collusive agreement, the price ________ and both firms
are ________.
A) falls; better off
B) rises; worse off
C) falls; worse off
D) rises; better off
Answer: C
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
29
Copyright 2012 Pearson Education, Inc.

65) In a duopoly with a collusive agreement and in a one-time only game, a firm's profit is
largest if it ________ the agreement and if the other firm ________ the agreement.
A) complies with; complies with
B) complies with; cheats on
C) cheats on; complies with
D) cheats on; cheats on
Answer: C
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
66) The ABC Nail Company has entered into a collusive agreement with the other firm in the
industry, the DC Nail Company. What occurs in the nail industry if ABC decides to cheat on the
agreement?
A) ABC lowers the price of its nails.
B) The total industry output increases.
C) The total profits in the nail industry will decrease.
D) All of the above answers are correct.
Answer: D
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
67) In a duopoly game we observe the following payouts: if the two firms collude they will each
earn $50,000. If one firm cheats then he earns $60,000 and the other firm earns -$10,000. If
both firms cheat then they each earn zero economic profit. In this game what is the Nash
equilibrium?
A) Both firms cheat.
B) Only one firm will cheat.
C) Neither firm will cheat.
D) It is impossible to say.
Answer: A
Topic: Nash Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
Suppose two firms, FastNet and SmartCast are the only fast Internet providers in a city. They
have identical costs and one firm's service is a perfect substitute for the other's. The industry is a
natural duopoly. Suppose that FastNet and SmartCast collude and agree to share the market
equally.

30
Copyright 2012 Pearson Education, Inc.

68) In the scenario above, which of the following actions will maximize the industry's economic
profit?
A) Both firms comply with the agreement.
B) Both firms cheat on the agreement, producing more than the agreed amount.
C) One of the firms complies with the agreement while the other firm cheats, producing more
than the agreed amount.
D) Because the firms are colluding, the profit does not change regardless of whether the firms
comply with agreement or cheat on the agreement.
Answer: A
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
69) In the scenario above, if both firms cheat on the agreement, producing more than the agreed
amount, then:
A) Each firm makes zero economic profit.
B) The outcome is identical to a monopoly.
C) The industry's economic profit is the maximum profit that can be made by the duopoly.
D) Each firm makes a greater economic profit than it would make if it complied with the
agreement.
Answer: A
Topic: Nash Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
70) In the scenario above, in Nash equilibrium:
A) Both firms cheat to produce more than the agreed amount.
B) Both firms comply with the agreement.
C) One firm complies with the agreement while the other cheats to produce more than the agreed
amount.
D) Both firms cheat to produce less than the agreed amount.
Answer: A
Topic: Nash Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

31
Copyright 2012 Pearson Education, Inc.

Cheat

Cheat
A: $0
N: $0

American
Comply
A: -$2,000
N: $4,000

National
Comply

A: $4,000
N: -$2,000

A: $3,000
N: $3,000

71) There are two can companies, American and National, which have entered into a collusive
agreement. The payoff matrix of economic profits is above. If both firms cheat on the collusive
agreement, what amount of economic profit is made by American?
A) $0
B) $3,000
C) $4,000
D) -$2,000
Answer: A
Topic: Duopoly Payoff Matrix
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
72) There are two can companies, American and National, which have entered into a collusive
agreement. The payoff matrix of economic profits is above. If National is able to cheat on the
agreement but American complies with the agreement, what amount of economic profit is made
by National?
A) $2,000
B) $3,000
C) $4,000
D) $6,000
Answer: C
Topic: Duopoly Payoff Matrix
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

32
Copyright 2012 Pearson Education, Inc.

Sears
Don't lower
Lower prices
prices
S: $1 million
S: $5 million
Lower prices
W: $30
W: $5 million
million
Wal-Mart
Don't lower
prices

S: $20 million
S: $30 million
W: $20
W: $1 million
million

73) Sears and Wal-Mart must decide whether to lower their prices, based on the economic profits
shown in the table above. Which of the following is true?
A) This situation is not a prisoners' dilemma.
B) If Sears lowers its prices and Wal-Mart does not, Sears will make a $20 million economic
profit.
C) If Wal-Mart lowers its prices, Sears should keep its prices high.
D) Both Sears and Wal-Mart would jointly be better off if they could each keep their prices high.
Answer: D
Topic: Colluding to Maximize Profits
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
74) Refer to the payoffs in the table above. Sears and Wal-Mart must decide whether to lower
their prices based on the profits shown in the table. This game has
A) no Nash equilibrium.
B) a Nash equilibrium: Sears keeps its prices high and Wal-Mart lowers its prices.
C) a Nash equilibrium: both Sears and Wal-Mart keep prices high.
D) a Nash equilibrium: both Sears and Wal-Mart lower prices.
Answer: D
Topic: Equilibrium of the Duopolists' Dilemma
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

33
Copyright 2012 Pearson Education, Inc.

Monopoly
price

Monopoly
price
A: $5
B: $5

Firm A
Competitive
price
A: $8
B: -$1

Firm
B
Competitive
price

A: -$1
B: $8

A: $0
B: $0

75) The above payoff matrix shows the economic profits (in millions of dollars) of two firms in a
duopoly that have agreed to a cartel agreement to restrict their output and set their prices equal to
the monopoly price. Assuming the game is played once, the equilibrium outcome is where
A) both choose the monopoly price.
B) both choose the competitive price.
C) firm A chooses the monopoly price and firm B chooses the competitive price.
D) firm B chooses the monopoly price and firm A chooses the competitive price.
Answer: B
Topic: Game Theory, Nash Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

Cheat

Cheat
O: $1 M
F: $1 M

Oscar
Comply
O: -$2 M
F: $12 M

Felix
Comply

O: $12 M
F: -$2 M

O: $10 M
F: $10 M

76) Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a
cartel. The payoff matrix above gives the economic profit that each firm can make. If Felix
cheats on the agreement but Oscar complies, Felix makes an economic profit of ________ and
Oscar makes an economic profit of ________.
A) $10 million; $10 million
B) $1 million; $1 million
C) -$2 million; $12 million
D) $12 million; -$2 million
Answer: D
Topic: Game Theory
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

34
Copyright 2012 Pearson Education, Inc.

77) Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a
cartel. The payoff matrix above shows the economic profit that each firm can make. If the game
is played only once, then ________.
A) Felix and Oscar will each make $10 million economic profit
B) Felix will comply and Oscar will make $12 million economic profit
C) Felix and Oscar will each make $1 million economic profit
D) Felix will cheat and Oscar will make -$2 million economic profit
Answer: C
Topic: Game Theory, Nash Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
78) Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a
cartel. The payoff matrix shows the economic profit that each firm can make. If the game is
played repeatedly and Felix and Oscar both use a tit-for-tat strategy, then ________.
A) Felix will make $10 million of economic profit and Oscar will cheat
B) Felix and Oscar will each make $1 million of economic profit
C) Felix will make -$2 million of economic profit and Oscar will cheat
D) Felix and Oscar will each make $10 million of economic profit
Answer: D
Topic: Game Theory
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

35
Copyright 2012 Pearson Education, Inc.

Cut price

Cut price
G: $10
D: $10

Gateway
Hold price
G: $5
D: $20

Dell
Hold price

G: $20
D: $5

G: $15
D: $15

79) Dell and Gateway must decide whether to lower their prices, based on the potential economic
profits shown in the payoff matrix above. (The profits are in millions of dollars.) In the Nash
equilibrium,
A) Dell keeps its prices high and Gateway lowers its prices.
B) both Dell and Gateway lower prices.
C) Gateway keeps its prices high and Dell lowers its prices.
D) both Dell and Gateway keep prices high.
Answer: B
Topic: Game Theory, Nash Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
80) Dell and Gateway must decide whether to lower their prices, based on the potential economic
profits shown in the payoff matrix above. (The profits are in millions of dollars.) In the Nash
equilibrium, Dell's profit is ________ million and Gateway's profit is ________ million.
A) $10; $10
B) $15; $15
C) $5; $20
D) $20; $5
Answer: A
Topic: Game Theory, Nash Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
81) Dell and Gateway must decide whether to lower their prices, based on the potential economic
profits shown in the payoff matrix above. (The profits are in millions of dollars.) If the firms
collude and don't cheat, Dell's profit is ________ million and Gateway's profit is ________
million.
A) $10; $10
B) $15; $15
C) $5; $20
D) $20; $5
Answer: B
Topic: Colluding to Maximize Profits
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
36
Copyright 2012 Pearson Education, Inc.

82) A collusive agreement between two duopolists is similar to the prisoners' dilemma because in
both games
A) the best outcome is always achieved.
B) each player's strategy depends on what the other player does.
C) the Nash equilibrium is not the best outcome for the players.
D) All of the above answers are correct.
Answer: C
Topic: Equilibrium of the Duopolists' Dilemma
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
83) Suppose two firms are trying to decide how much to budget for research and development.
Once a new discovery is made, each firm benefits regardless of which firm developed the
innovation. In this R&D game of chicken, the Nash equilibrium will be that
A) either both firms conduct the R&D or neither firm conducts the R&D.
B) thone firm conducts the R&D but which firm does the R&D cannot be determined.
C) both firms conduct the R&D.
D) neither firm conducts the R&D.
Answer: B
Topic: Game Theory, An R&D Game
Skill: Recognition
Question history: New 10th edition
AACSB: Reflective Thinking
84) There are two firms that compete against each other and each needs to decide if they will
undertake research and development to improve their product. The payoffs are as follows:
If Firm 1 does undertake R&D then Firm 2 will earn $25 million if they also do R&D or $50
million if not
If Firm 1 does not undertake R&D then Firm 2 will earn $2 million if they do R&D or $0 million
if not
If Firm 2 does undertake R&D then Firm 1 will earn $10 million if they also do R&D or $20
million if not
If Firm 2 does not undertake R&D then Firm 1 will earn $2 million if they do R&D or $0 million
if not
Regarding this game, which of the following is true?
A) Only one will do R&D but we cannot say which one.
B) Both firms will do R&D.
C) Both firms will not do R&D.
D) Firm 1 will do R&D and Firm 2 will not.
Answer: A
Firm 1
Undertake
Not undertake
Firm 2 Undertake
10, 25
20, 2
Not undertake

2, 50

0, 0

37
Copyright 2012 Pearson Education, Inc.

Topic: R & D Game


Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

38
Copyright 2012 Pearson Education, Inc.

85) In an oligopoly with a collusive agreement, the total industry profits will be smallest when
A) all firms comply with the agreement.
B) one firm cheats on the agreement and the other firms do not cheat.
C) all firms cheat on the agreement.
D) the firms act as a monopoly.
Answer: C
Topic: Study Guide Question, Equilibrium of the Duopolists' Dilemma
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
86) When a cartel maximizes its profit,
A) each firm necessarily produces the same amount.
B) the industry level of output is efficient.
C) industry marginal revenue equals industry marginal cost at the level of total output.
D) total output is greater than it would be without collusion.
Answer: C
Topic: Study Guide Question, Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
3 Repeated Games and Sequential Games
1) In a repeated game, punishments that result in heavy damages are an incentive for players to
adopt the strategies that result in a ________ equilibrium.
A) contestable
B) strategic
C) cooperative
D) winner-share-all
Answer: C
Topic: Cooperative Equilibrium
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
2) An equilibrium in game theory in which the players make and share the monopoly profit is
called
A) the Nash equilibrium.
B) the cooperative equilibrium.
C) a contestable market equilibrium.
D) limit pricing.
Answer: B
Topic: Cooperative Equilibrium
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
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3) From the social perspective, a major criticism of oligopolies is that


A) successful collusion leads to a monopoly-like outcome.
B) price wars usually break out.
C) advertising hardly ever occurs.
D) cartels are unstable.
Answer: A
Topic: Repeated Games
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
4) If a duopolists' collusive price-fixing game can be played repeatedly,
A) one possible equilibrium is that both firms cheat.
B) players can signal their willingness to cooperate.
C) players can punish cheaters in the following game.
D) All of the above answers are correct.
Answer: D
Topic: Repeated Games
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
5) A tit-for-tat strategy can be used in
A) a single-play game or a repeated game.
B) a single-play game but not a repeated game.
C) a repeated game but not a single-play game.
D) neither a repeated game nor a single-play game.
Answer: C
Topic: Repeated Games
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
6) A trigger strategy can be used in
A) a single-play game or a repeated game.
B) a single-play game but not a repeated game.
C) a repeated game but not a single-play game.
D) neither a single-play game nor a repeated game.
Answer: C
Topic: Repeated Games
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

40
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7) A strategy in which a player cooperates in the current period if the other player cooperated in
the previous period, but the player cheats in the current period if the other player cheated in the
previous period is called a
A) tit-for-tat strategy.
B) trigger strategy.
C) duopoly strategy.
D) dominant firm strategy.
Answer: A
Topic: Repeated Games
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
8) A trigger strategy is one in which a player
A) cooperates in the current period if the other player cooperated in the previous period, but
cheats in the current period only if the other player cheated in the previous period.
B) cheats in the current period if the other player cooperated in the previous period, but
cooperates in the current period if the other player cheated in the previous period.
C) cooperates in the current period if the other player has always cooperated, but cheats forever
if the other player ever cheats.
D) cheats in the current period if the other player has always cheated, but cooperates forever if
the other player has ever cooperated.
Answer: C
Topic: Repeated Games
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
9) Sarah's Soothing Diapers, Inc. and Orville's Odorless Diapers, Inc. are duopolists, who have
agreed to collude. Orville has decided that he will comply with the collusive agreement as long
as Sarah cooperated in the previous period. But if Sarah cheated in the previous period, Orville
will punish Sarah by cheating in the current period. Orville's strategy is referred to as a
A) Nash strategy.
B) tit-for-tat strategy.
C) trigger strategy.
D) monkey-see, monkey-do strategy.
Answer: B
Topic: Repeated Games
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

41
Copyright 2012 Pearson Education, Inc.

10) A cooperative equilibrium is most likely to arise in a


A) single-play game with a large number of players.
B) single-play game without communication.
C) repeated game with a large number of players.
D) repeated game with a small number of players.
Answer: D
Topic: Repeated Games
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
11) Which of the following models is the best to explain price wars?
A) A repeated duopoly game
B) A game of chicken
C) Dominant firm oligopoly
D) A sequential entry game in a contestable market
Answer: A
Topic: Games and Price Wars
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
12) With barriers to the entry of new firms,
A) a cartel is guaranteed to earn an economic profit.
B) a cartel's members have no incentive to cheat.
C) the cartel might earn an economic profit.
D) industry supply will expand if the firms form a cartel.
Answer: C
Topic: Games and Price Wars
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
13) Price wars are
A) most likely when there is a monopoly.
B) most likely when there is oligopoly.
C) most likely when there is perfect competition.
D) equally likely in the cases of monopoly, oligopoly, and perfect competition.
Answer: B
Topic: Games and Price Wars
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

42
Copyright 2012 Pearson Education, Inc.

14) A contestable market is similar to a perfectly competitive market in that there


A) are barriers to entry.
B) are no barriers to entry.
C) can be only one firm in the market.
D) will be no entry if the existing firm earns an economic profit.
Answer: B
Topic: Contestable Market
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
15) A market with one or a small number of firms but no barriers to entry is known as
A) a natural monopoly.
B) a contestable market.
C) a perfectly competitive market.
D) monopolistic competition.
Answer: B
Topic: Contestable Market
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking
16) A market in which firms can enter and leave so easily that firms in the market face
competition from potential entrants is called a
A) contestable market.
B) cartel.
C) limit pricing market.
D) monopolistic competition market.
Answer: A
Topic: Contestable Market
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
17) Which of the following statements is TRUE about contestable markets?
A) There are significant barriers to entry.
B) Firms earn large economic profits.
C) Each firm faces a perfectly elastic demand.
D) There are few firms in the industry.
Answer: D
Topic: Contestable Market
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

43
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18) A contestable market is one in which


A) one dominant firm sets the market price, and all other firms are price takers.
B) if a firm cuts its price, all other firms will follow the price cut.
C) one or a small number of firms operate, but faces competition from potential entrants.
D) a group of firms enter into an agreement to restrict output and raise prices.
Answer: C
Topic: Contestable Market
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking
19) A contestable market is one in which there are
A) one or a few firms and entry into the market is costly.
B) one or a few firms and entry into the market is not costly.
C) many firms and entry into the market is costly.
D) many firms and entry into the market is not costly.
Answer: B
Topic: Contestable Market
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
20) Of the following, the best example of firm that might operate in a contestable market is a
A) cable TV company.
B) wheat farmer.
C) ship owner operating on a major waterway.
D) private college operating in a state with many public colleges.
Answer: C
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
21) In a contestable market the Herfindahl-Hirschman Index is ________ and the market
behaves as if it is ________.
A) low; perfectly competitive
B) low; a monopoly
C) high; perfectly competitive
D) high; a monopoly
Answer: C
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

44
Copyright 2012 Pearson Education, Inc.

22) In a sequential contestable market game:


A) A small number of firms can behave like firms in perfect competition.
B) The outcome is always a monopoly equilibrium.
C) The dominant firm always makes a monopoly profit, while other firms make zero economic
profits.
D) A firm that enters the market first is protected from potential entrants by natural barriers.
Answer: A
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
23) A single firm in a contestable market is limited in the amount of economic profit it can earn
because there
A) are barriers to entry.
B) are no barriers to entry.
C) is collusion.
D) are government regulation limiting its profit.
Answer: B
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
24) In a contestable market with one firm in the market, the existing firm will
A) set its price equal to the monopoly price.
B) set its price lower than the monopoly price.
C) set its price higher than the monopoly price.
D) have a demand curve that is horizontal at the price that will attract new firms to enter the
market.
Answer: B
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
25) The price in a contestable market is similar to that in a perfectly competitive market because
A) there are barriers to entry.
B) there are no barriers to entry.
C) there are many firms in the market.
D) the firm can earn an economic profit in the long run.
Answer: B
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
45
Copyright 2012 Pearson Education, Inc.

26) In a contestable market


A) two or more firms are competing.
B) the Herfindahl-Hirschman Index exceeds 1,800.
C) the four-firm concentration ratio exceeds 50 percent.
D) potential entry holds down prices.
Answer: D
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
27) One of the reasons that concentration ratios are not a perfect measure of competitiveness is
that they
A) do not measure how high the industry's prices are.
B) cannot be measured.
C) ignore potential competition.
D) tell nothing about how high prices were in the past.
Answer: C
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
28) The Herfindahl-Hirschman Index will indicate that a contestable market is ________.
A) a sequential market
B) competitive
C) uncompetitive
D) a prisoners' dilemma
Answer: C
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
29) In a contestable market,
A) the HHI is usually quite low.
B) the firm in the market usually earns a large economic profit.
C) the firm in the market may play an entry-deterrence game.
D) there are high barriers to entry.
Answer: C
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

46
Copyright 2012 Pearson Education, Inc.

30) Adkins Air is the only seller offering service directly from Milwaukee to Greensboro. The
market is contestable. Thus the Nash Equilibrium for a game between Adkins Air and a potential
entrant is when the potential entrant
A) enters and Adkins earns a normal profit.
B) enters and Adkins earns an economic profit.
C) does not enter and Adkins earns a normal profit.
D) does not enter and Adkins earns an economic profit.
Answer: C
Topic: Entry-Deterrence Game
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
31) The practice of the only seller in a market charging a price at the highest level that would still
inflict a loss on a new entrant into the market is called
A) limit pricing.
B) collusive pricing.
C) agile pricing.
D) trigger pricing.
Answer: A
Topic: Limit Pricing
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking
32) Limit pricing in a contestable market sets the price at the highest level that ________.
A) maximizes the profit of an entrant
B) maximizes the profit of the existing firm
C) maximizes the profit of both the existing firm and the entering firm
D) inflicts a loss on an entrant
Answer: D
Topic: Limit Pricing
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
33) A strategy of setting price below the monopoly profit-maximizing price but at the highest
level that will still result in a loss for a potential entrant into the market is known as
A) entry pricing.
B) contestable pricing.
C) limit pricing.
D) unlimited pricing.
Answer: C
Topic: Limit Pricing
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking
47
Copyright 2012 Pearson Education, Inc.

34) A strategy called "limit pricing" sets the price


A) below the competitive level.
B) at the monopoly level.
C) at the lowest level that inflicts a loss on the entrant.
D) at the highest level that inflicts a loss on the entrant.
Answer: D
Topic: Limit Pricing
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
35) Limit pricing is a strategy used by a firm to
A) deter entry.
B) enhance short run profits.
C) raise its prices.
D) lower its costs.
Answer: A
Topic: Limit Pricing
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
36) Price wars can be the result of
A) a cooperative equilibrium.
B) a firm playing a tit-for-tat strategy in which last period the competitors complied with a
collusive agreement.
C) new firms entering the industry and immediately agreeing to abide by a collusive agreement.
D) new firms entering an industry and all firms then finding themselves in a prisoners' dilemma.
Answer: D
Topic: Study Guide Question, Price Wars
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
37) Limit pricing refers to
A) the fact that a monopoly firm always sets the highest price possible.
B) how the price is determined in a kinked demand curve model of oligopoly.
C) a situation in which a firm might lower its price to keep potential competitors from entering
its market.
D) None of the above
Answer: C
Topic: Study Guide Question, Limit Pricing
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

48
Copyright 2012 Pearson Education, Inc.

4 Antitrust Law
1) Antitrust law is law that
A) does not allow individuals to open trust savings accounts.
B) prohibits competition in certain industries.
C) prohibits certain kinds of market behavior by firms.
D) allows firms under special circumstances to be a monopoly.
Answer: C
Topic: Antitrust Law
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
2) When the government prohibits certain kinds of market behavior such as monopoly and
monopolistic practices it generally does so through
A) regulatory agencies such as the Interstate Commerce Commission or the Federal
Communications Commission.
B) antitrust law.
C) the police powers of the states.
D) use of the capture theory of regulation.
Answer: B
Topic: Antitrust Law
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
3) A law that prohibits certain kinds of market behavior such as monopoly and monopolistic
practices is ________.
A) a consumer surplus law
B) a trust law
C) an antitrust law
D) an anti-monopoly law
Answer: C
Topic: Antitrust Law
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

49
Copyright 2012 Pearson Education, Inc.

4) Antitrust laws attempt to


A) support prices at high levels so firms can earn profits.
B) establish minimum wages.
C) prevent monopolies or collusion.
D) enforce fair trade laws.
Answer: C
Topic: Antitrust Law
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
5) In part, an antitrust laws
A) provide for strict product liability.
B) prohibit charging prices that customers think are too high.
C) require firms with profits to pay dividends.
D) prohibit monopolistic practices.
Answer: D
Topic: Antitrust Law
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
6) Antitrust law is the law that regulates ________ and prevents them from becoming ________.
A) oligopolies; monopolies
B) monopolies; oligopolies
C) monopolistically competitive firms; oligopolies
D) oligopolies; monopolistically competitive firms
Answer: A
Topic: Antitrust Law
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
7) The main purpose of antitrust law is to
A) prohibit monopoly practices such as restricting output.
B) regulate advertising.
C) encourage the formation of cartels.
D) regulate the stock and bond markets.
Answer: A
Topic: Antitrust Law
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

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Copyright 2012 Pearson Education, Inc.

8) The first antitrust law passed was the ________.


A) Federal Trade Commission Act
B) Sherman Act
C) Clayton Act
D) Robinson-Patman Amendment
Answer: B
Topic: Sherman Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
9) The Sherman Act,
A) which deregulated banking, was enacted in 1890.
B) which deregulated banking, was enacted in 1980.
C) the first antitrust law, was enacted in 1890.
D) the first antitrust law, was enacted in 1980.
Answer: C
Topic: Sherman Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
10) The beginning of antitrust law is found in the
A) 1914 Clayton Act.
B) 1890 Sherman Act.
C) 1947 Taft-Hartley Act.
D) 1950 Cellar-Kefauver Act.
Answer: B
Topic: Sherman Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
11) The Sherman Act
A) was the first federal tariff.
B) prohibited attempts to monopolize.
C) outlawed natural monopolies.
D) abolished tariffs.
Answer: B
Topic: Sherman Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

51
Copyright 2012 Pearson Education, Inc.

12) The Sherman Act of 1890 was passed to prohibit


A) combinations, trusts, or conspiracies to restrict interstate or international trade.
B) monopolization or attempts to monopolize interstate or international trade.
C) Both of the above.
D) Neither of the above.
Answer: C
Topic: Sherman Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
13) The Sherman Act makes it illegal to
A) increase market share.
B) merge firms in the same industry.
C) attempt to monopolize an industry.
D) price below competitors.
Answer: C
Topic: The Sherman Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
14) The second federal antitrust law was passed in 1914. This antitrust law is the
A) Clayton Act.
B) Robinson-Patman Amendment.
C) Cellar-Kefauver Amendment.
D) Taft-Hartley Act.
Answer: A
Topic: Clayton Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
15) The Clayton Act of 1914 was passed to prohibit, in part,
A) price discrimination if the effect is to substantially lessen competition or create monopoly.
B) unfair methods of competition and unfair or deceptive business practices.
C) combinations, trusts, or conspiracies that restrict interstate or international trade.
D) business practices that allow one firm to profit at the expense of another whenever the first
firm is a monopoly.
Answer: A
Topic: Clayton Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

52
Copyright 2012 Pearson Education, Inc.

16) The Clayton Act of 1914 prohibits ________ if it substantially lessens competition or creates
a monopoly.
A) people from serving on the board of directors of competing firms
B) contracts that force other goods to be bought from the same firm
C) Both of the above.
D) Neither of the above.
Answer: C
Topic: Clayton Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
17) The Federal Trade Commission is an agency charged with
A) regulating interstate commerce.
B) enforcing product safety laws.
C) regulating international commerce.
D) enforcing antitrust laws.
Answer: D
Topic: Antitrust Law
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
18) Which of the following business practices, if proven to exist, is always illegal under U.S.
antitrust law?
A) tying arrangements
B) price fixing among competitors
C) exclusive dealing
D) all of the above
Answer: B
Topic: Price Fixing
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
19) Which of the following is always a violation of the antitrust law?
A) Price fixing among competitors
B) Resale price maintenance
C) Tying arrangements
D) Predatory pricing
Answer: A
Topic: Price Fixing
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

53
Copyright 2012 Pearson Education, Inc.

20) When is price fixing among competitors not a violation of the antitrust laws?
A) Price fixing among competitors is always a violation of the antitrust law.
B) When a cartel can maximize profit without behaving like a monopoly
C) When price fixing leads to a more efficient outcome
D) When price fixing does not result in predatory pricing
Answer: A
Topic: Price Fixing
Skill: Recognition
Question history: Modified 10th edition
AACSB: Reflective Thinking
21) Suppose that two soft drink manufacturers, Fizzy Pop and Spritzy Soda, agree to charge the
same prices for their soft drinks. This practice is
A) always legal under the antitrust laws.
B) legal as long as Herfindahl-Hirschman index is less than 1,000.
C) legal as long as the firms had a cost justification for setting prices.
D) always illegal under the antitrust laws.
Answer: D
Topic: Price Fixing
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
22) If McDonald's, Wendy's, and Burger King agree with each other not to sell hamburgers for
less than $2.95 apiece, all three could be found guilty of
A) an interlocking directorship under the Clayton Act.
B) price fixing under the Sherman Act.
C) a deceptive business practice under the Clayton Act.
D) None of the above answers is correct.
Answer: B
Topic: Price Fixing
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

54
Copyright 2012 Pearson Education, Inc.

23) Which of the following is illegal under the Sherman Act?


I. A competitor agrees with another competitor on the price at which the product will be sold.
II. A manufacturer refuses to supply a retailer who does not accept the manufacturer's guidance
on the price.
A) only I
B) only II
C) both I and II
D) neither I nor II
Answer: A
Topic: Resale Price Maintenance
Skill: Conceptual
Question history: Modified 10th edition
AACSB: Reflective Thinking
24) Under current guidelines the Federal Trade Commission will likely challenge
A) all mergers if the Herfindahl-Hirschman index (HHI) is 1800 or higher.
B) a merger if the HHI is 1800 or higher and the merger increases the HHI by 50 points or more.
C) a merger if the HHI is 1800 or higher and the merger increases the HHI by 100 points or
more.
D) a merger if the HHI is 1800 or higher and the merger increases the HHI by 200 points or
more.
Answer: B
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
25) Under current guidelines the Federal Trade Commission will likely challenge
A) all mergers if the Herfindahl-Hirschman index (HHI) is greater than 1000.
B) a merger if the HHI is between 1000 and 1800 and the merger increases the HHI by 50 points
or more.
C) a merger if the HHI is between 1000 and 1800 and the merger increases the HHI by 100
points or more.
D) a merger if the HHI is between 1000 and 1800 and the merger increases the HHI by 200
points or more.
Answer: C
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

55
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26) A merger will be challenged by the FTC in a market where the Herfindahl-Hirschman Index
(HHI) is ________, and the merger would increase it to ________.
A) 1,900; 1,980.
B) 1,700; 1,760
C) 800; 950
D) 2,000; 2,040
Answer: A
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
27) Under Federal Trade Commission merger guidelines, an industry with a HerfindahlHirschman index (HHI) of 100 points is considered
A) competitive.
B) moderately concentrated.
C) concentrated.
D) a monopoly.
Answer: A
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
28) As the Federal Trade Commission currently interprets the Herfindahl-Hirschman index
(HHI), an industry is considered to be moderately concentrated if the HHI value is
A) between 100 and 1,000.
B) between 1,000 and 1,800.
C) between 1,000 and 3,800.
D) between 3,000 and 6,000.
Answer: B
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
29) A market in which the Herfindahl-Hirschman Index is 900 is regarded by the Federal Trade
Commission as
A) moderately concentrated.
B) concentrated.
C) competitive.
D) monopolistic.
Answer: C
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
56
Copyright 2012 Pearson Education, Inc.

30) As the Federal Trade Commission currently interprets the Herfindahl-Hirschman index
(HHI), an industry is considered to be concentrated if the HHI value is above
A) 100.
B) 1,000.
C) 1,800.
D) 5,000.
Answer: C
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
31) In 1986, PepsiCo announced its intention to buy 7-Up for $380 million and Coca-Cola said it
would buy Dr Pepper for $470 million. Because the Herfindahl-Hirschman index for carbonated
soft drinks is ________, the Federal Trade Commission ________ the mergers.
A) low; allowed
B) low; blocked
C) high; allowed
D) high; blocked
Answer: D
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
32) In the market for bottled water, Fresh Springs has a 30 percent share of the market, Swiss
Springs has a 27 percent share, L'eau de France has a 13 percent share, and Mountain Water has
a 10 percent share. The rest of the market consists of 20 firms with a 1 percent share of the
market each. What is the value of the Herfindahl-Hirschman index?
A) 2,418
B) 80
C) 1,918
D) 2,818
Answer: C
Topic: Current Merger Rules
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

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33) An industry is made up of 8 firms with the following percent market shares: 29, 20, 11, 10, 9,
8, 7, 6. What is the Herfindahl-Hirschman index in this industry?
A) 70
B) 100
C) 1462
D) 1692
Answer: D
Topic: Current Merger Rules
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
34) An industry is made up of 8 firms with the following percent market shares: 29, 20, 11, 10, 9,
8, 7, 6. The firms with 8 and 7 percent market share are proposing to merge. What is the new
Herfindahl-Hirschman index if the merger takes place?
A) 225
B) 1462
C) 1692
D) 1804
Answer: D
Topic: Current Merger Rules
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
35) Suppose that two clothing manufacturers, Frederick's Fashions and Stephan's Styles,
announce that they plan to merge. The Herfindahl-Hirschman index is currently 1,500. After the
merger, the HHI will rise to 1,560. This market is
A) highly concentrated and so the government will definitely challenge the merger.
B) moderately concentrated and because the merger increases the HHI by more than 50 points,
the government will definitely challenge the merger.
C) moderately concentrated, but because the merger increases the HHI by less than 100 points,
the government will probably not challenge the merger.
D) competitive and so the government will not challenge the merger.
Answer: C
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

58
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36) There are twenty five dealers in the local market for new cars. The largest dealership has a
market share of 12 percent; the second and third largest have 10 percent and 9 percent,
respectively; the fourth and fifth largest have 5 percent and 4 percent, respectively; and the
remaining twenty dealerships each have a 2 percent market share. What is value of the
Herfindahl-Hirschman index (HHI) for this market?
A) 42
B) 82
C) 266
D) 446
Answer: D
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
37) There are twenty five dealers in the local market for new cars. The largest dealership has a
market share of 12 percent; the second and third largest have 10 percent and 9 percent,
respectively; the fourth and fifth largest have 5 percent and 4 percent, respectively; and the
remaining twenty dealerships each have a 2 percent market share. If the second largest dealership
merged with the fifth largest, that would increase the Herfindahl-Hirschman index (HHI) by
A) 14 points.
B) 60 points.
C) 80 points.
D) 196 points.
Answer: C
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
38) If the Herfindahl-Hirschman index (HHI) among the firms in the long distance
telecommunications market were equal to 1455, when would the Federal Trade Commission
probably challenge a proposed merger between any two of the firms?
A) It would challenge if the HHI would increase by more than 50 points.
B) It would challenge if the HHI would increase by more than 100 points.
C) It would challenge no matter what happened to the HHI because the market has so few firms.
D) It would not challenge because the HHI is less than 1800.
Answer: B
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

59
Copyright 2012 Pearson Education, Inc.

39) If the Herfindahl-Hirschman index (HHI) among the firms in the long distance
telecommunications market is equal to 1855, when would the Federal Trade Commission
probably challenge a proposed merger between any two of the firms?
A) It would challenge if the HHI would increase by more than 50 points.
B) It would challenge if the HHI would increase by more than 100 points.
C) It would challenge no matter what happened to the HHI because the market has so few firms.
D) It would not challenge because the HHI is less than 2000.
Answer: A
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
40) If the Herfindahl-Hirschman Index (HHI) among the firms in the long distance
telecommunications market is equal to 855, when would the Federal Trade Commission probably
challenge a proposed merger between any two of the firms?
A) It would challenge if the HHI would increase by more than 50 points.
B) It would challenge if the HHI would increase by more than 100 points.
C) It would challenge no matter what happened to the HHI because the market has so few firms.
D) It would not challenge because the HHI is less than 1000.
Answer: D
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
41) The local pizza delivery industry currently has a Herfindahl-Hirschman index (HHI) value of
999 and two of the competing pizza shops have considered merging. Because the merger would
raise the HHI by 55 points, the Federal Trade Commission would likely
A) not challenge the merger.
B) challenge the merger.
C) allow the merger under the condition that HHI does not rise by more than 55 points as
promised.
D) allow the merger under the condition that the HHI remain at the premerger level of 999.
Answer: A
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

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42) The FTC looks at the HHI to assess mergers. A proposed merger will increase the HHI by
50. The FTC will block this merger if the current HHI is
A) greater than 1800
B) less than 1800
C) greater than 1000
D) less than 1000
Answer: A
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
43) The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 1575
and two of the competing banks have considered merging. Because the merger would raise the
HHI by 55 points, the Federal Trade Commission would likely
A) challenge the merger.
B) not challenge the merger.
C) allow the merger under the condition that HHI does not rise by more than 55 points as
promised.
D) allow the merger under the condition that the HHI remain at the premerger level of 1575.
Answer: B
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
44) The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 1575
and two of the competing banks have considered merging. Because the merger would raise the
HHI by 215 points, the Federal Trade Commission would likely
A) challenge the merger.
B) not challenge the merger.
C) allow the merger under the condition that HHI does not rise by more than 215 points as
promised.
D) allow the merger under the condition that the HHI remain at the premerger level of 1575.
Answer: A
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

61
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45) The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 1875
and two of the competing banks have considered merging. Because the merger would raise the
HHI by 25 points, the Federal Trade Commission would likely
A) challenge the merger.
B) not challenge the merger.
C) allow the merger under the condition that HHI does not rise by more than 25 points as
promised.
D) allow the merger under the condition that the HHI remain at the premerger level of 1875.
Answer: B
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
46) The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 1945
and two of the competing banks have considered merging. Because the merger would raise the
HHI by 55 points, the Federal Trade Commission would likely
A) challenge the merger.
B) not challenge the merger.
C) allow the merger as long as the HHI did not increase by more than 55 points as promised.
D) allow the merger under the condition that the HHI remain at the premerger level of 1875.
Answer: A
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
47) Suppose the Herfindahl-Hirschman Index (HHI) in the market for chocolate is 2,200. Two
companies want to merge. The FTC will challenge the merger if it increases the HHI by at least
A) 150 points.
B) 100 points.
C) 40 points.
D) 50 points.
Answer: D
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

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Market share in the Widget industry


Market
Firm name
share
Big W
50
Widico
40
Widgotech
9
Widgette
1
48) In the table above, the Herfindahl-Hirschman Index in the widget industry is
A) 100 points.
B) 742 points.
C) 2842 points.
D) 4182 points.
Answer: D
Topic: Current Merger Rules
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
49) Using the market shares in the table above, if Widgotech buys Widgette the HHI will
A) stay the same.
B) rise by 1 point.
C) rise by 10 points.
D) rise by 18 points.
Answer: D
Topic: Current Merger Rules
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
50) Using the market shares in the table above, if Big W wants to buy Widgette, the Federal
Trade Commission will probably
A) approve the merger because the industry is moderately concentrated and the increase in the
Herfindahl-Hirschman index (HHI) is small enough.
B) block the merger because the industry is moderately concentrated (HHI between 1,000 and
1,800) and the increase in the HHI is too much.
C) approve the merger because the industry is concentrated (HHI exceeds 1,800) but the increase
in the HHI is small enough.
D) block the merger because the industry is concentrated (HHI exceeds 1,800) and the increase
in the HHI is too much.
Answer: D
Topic: Current Merger Rules
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

63
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51) Which of the following statements about the Sherman Act is correct?
A) The Sherman Act was the second federal antitrust law.
B) The Sherman act legalized monopolization if the company behaved "reasonably" once it
became a monopoly.
C) The Sherman Act outlawed natural monopolies.
D) The Sherman Act made restriction of interstate trade illegal.
Answer: D
Topic: Study Guide Question, Sherman Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
52) The Hirschman-Herfindahl index (HHI) in an industry is 50. A merger is proposed that will
raise the HHI to 100. In this case, the
A) Sherman Act will prohibit the merger.
B) Federal Trade Commission will challenge the merger.
C) Federal Trade Commission will not challenge the merger.
D) rule of reason will prevent the merger if it represents a horizontal merger.
Answer: C
Topic: Study Guide Question, Current Merger Rules
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

64
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5 News Based Questions


1) Two firms make most of the consumer alkaline batteries in the country: Duracell and
Energizer. The market for batteries is most likely
A) a monopoly.
B) an oligopoly.
C) perfectly competitive.
D) monopolistically competitive.
Answer: B
Topic: Oligopoly
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
2) Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S.
Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete
to appear on the cover of a cereal box. Both Kellogg's and General Mills have signed athletes in
2008, Michael Phelps and Nastia Liukin, respectively. What does this suggest about the outcome
of the oligopoly game?
A) The highest profits are when both companies sign
B) The best outcome, in terms of profit, is where both companies sign
C) The Nash equilibrium must be that both companies sign
D) The Nash equilibrium must be that both companies sign and this always leads to the highest
profits
Answer: C
Topic: Nash Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication

65
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3) Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S.
Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete
to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5
million in economic profit. If only firm signs, they earn $8 million in economic profit and the
other firm incurs an economic loss of $1 million. If neither firm signs, they break even. What
are the strategies in this game?
A) Do not sign exclusive contract with an Olympian gold-medal athlete to appear on the cover of
a cereal box and make $8 million in profit
B) Sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a
cereal box and do not sign exclusive contract with an Olympian gold-medal athlete to appear on
the cover of a cereal box
C) Sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a
cereal box and make $8 million in profit
D) Make $5 million or $8 million in profit
Answer: B
Topic: Game Theory
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
4) Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S.
Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete
to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5
million in economic profit. If only firm signs, they earn $8 million in economic profit and the
other firm incurs an economic loss of $1 million. If neither firm signs, they break even. Which
of the following pairs of payoffs would NOT appear together in a square of the payoff matrix?
A) $5 million; $5 million
B) $0 million; $0 million
C) $8 million; $5 million
D) -$1 million; $8 million
Answer: C
Topic: Game Theory
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

66
Copyright 2012 Pearson Education, Inc.

5) Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S.
Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete
to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5
million in economic profit. If only firm signs, they earn $8 million in economic profit and the
other firm incurs an economic loss of $1 million. If neither firm signs, they break even. What is
the outcome of this game if it is only played once?
A) Neither Kellogg's nor General Mills will sign an athlete
B) Kellogg's will sign an athlete and General Mills will not sign an athlete
C) Both Kellogg's and General Mills will sign an athlete
D) General Mills will sign an athlete and Kellogg's will not sign an athlete
Answer: C
Topic: Game Theory, Nash Equilibrium
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
6) In 2008, a former Intel engineer has been charged with stealing trade secrets worth $1 billion.
Intel owns 80 percent of the worldwide market for microprocessors, AMD has the rest.
Conducting R&D is very expensive so suppose that each of these firms can either steal R&D or
develop their own R&D. If both firms develop their own R&D, economic profit will be $50
million each. If one company steals R&D, that firm earns $100 million in economic profit while
the other firm earns $10 million. If both firms steal R&D, each firm breaks even. What is the
outcome of this game?
A) Both firms will conduct R&D
B) Both firms will steal R&D
C) The outcome will be a dominant strategy equilibrium
D) Only one firm will conduct R&D, but we cannot predict which firm will conduct R&D
Answer: D
Topic: Game Theory, An R&D Game
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
7) In 2008, a former Intel engineer has been charged with stealing trade secrets worth $1 billion.
Intel owns 80 percent of the worldwide market for microprocessors, AMD has the rest. The
microprocessor market is most like an example of:
A) Monopoly
B) Oligopoly
C) Perfect competition
D) Monopolistic competition
Answer: B
Topic: Oligopoly
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

67
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8) In 2008, a former Intel engineer has been charged with stealing trade secrets worth $1 billion.
Intel owns 80 percent of the worldwide market for microprocessors, AMD has the rest.
Conducting R&D is very expensive so suppose that each of these firms can either steal R&D or
develop their own R&D. If both firms develop their own R&D, economic profit will be $50
million each. If one company steals R&D, that firm earns $100 million in economic profit while
the other firm earns $10 million. If both firms steal R&D, each firm breaks even. What is NOT
true about this game?
A) The outcome will not be a dominant strategy equilibrium
B) A strategy is to steal R&D
C) A firm will make more profit if it steals R&D
D) A strategy is to conduct R&D
Answer: C
Topic: Game Theory, An R&D Game
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
9) Russia, Iran and Qatar made the first serious moves in October 2008 toward forming an
OPEC-style cartel on natural gas. What is the goal of a cartel?
A) Restrict output
B) Raise prices
C) Increase sales
D) Increase profits
Answer: D
Topic: Cartel
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
10) Russia, Iran and Qatar made the first serious moves in October 2008 toward forming an
OPEC-style cartel on natural gas. Each of the countries can comply with the cartel agreement or
to cheat on the cartel agreement. If all countries comply, the economic profit for each will be
$140 million. If one country cheats, that country earns $200 million in economic profit and the
other countries will have economic losses of $10 million. If all countries cheat, they break even.
What are the strategies in this game?
A) Comply with the cartel agreement or to cheat on the cartel agreement
B) Comply with the agreement and earn $140 million in profit
C) Cheat on the cartel agreement and earn -$10 million in profits
D) Earn between $140 and $200 million in profits
Answer: A
Topic: Game Theory
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

68
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11) Russia and Qatar made the first serious moves in October 2008 toward forming an OPECstyle cartel on natural gas. The two strategies these countries face are to comply with the cartel
agreement or to cheat on the cartel agreement. If both countries comply, the economic profit for
each will be $140 million. If one country cheats, that country earns $200 million in economic
profit and the other country will have an economic loss of $10 million. If all countries cheat,
they break even. What is the outcome of this game if it is only played once?
A) Each country will comply with the cartel agreement
B) Two countries will comply and one will cheat, but we cannot predict which one will cheat
C) One country will comply and two will cheat, but we cannot predict which ones will cheat
D) None of the countries will comply with the cartel agreement
Answer: D
Topic: Game Theory, Nash Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
12) Russia and Qatar made the first serious moves in October 2008 toward forming an OPECstyle cartel on natural gas. The two strategies these countries face are to comply with the cartel
agreement or to cheat on the cartel agreement. If all countries comply, the economic profit for
both will be $140 million. If one country cheats, that country earns $200 million in economic
profit and the other country has an economic loss of $10 million. If all countries cheat, they
break even. What is the the likely outcome of this game if it is repeated as a tit-for-tat game?
A) If there are periods of cheating and colluding, then profits will be less than profits will be
lower than if they always colluded
B) If the countries never collude, the outcome will be the monopoly outcome
C) If there are periods of cheating and colluding, then profits will be less than profits will be
higher than if they always colluded
D) If the countries always collude, the outcome will be the perfectly competitive outcome
Answer: C
Topic: Repeated Games
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
13) The EU's antitrust chief in November 2008 fined car glass producers Asahi, Pilkington,
Saint-Gobain and Soliver more than 1.3 billion euros ($1.66 billion) for price-fixing, the largest
sum ever levied by the EU for a cartel. What is the reason why Asahi, Pilkington, Saint-Gobain
and Soliver would price fix?
A) Restrict output
B) Increase profits
C) Raise prices
D) Increase sales
Answer: B
Topic: Price Fixing
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
69
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14) The EU's antitrust chief in November 2008 fined car glass producers Asahi, Pilkington,
Saint-Gobain and Soliver more than 1.3 billion euros ($1.66 billion) for price-fixing, the largest
sum ever levied by the EU for a cartel. What are the economic justifications of making price
fixing illegal?
A) Consumers suffer because of decreased consumer surplus and the outcome is inefficient
because of deadweight loss
B) An oligopoly cartel can maximize profit and behave like a natural monopoly
C) The cartel increases quantity supplied in the market causing a shortage
D) The cartel increases quantity supplied in the market causing a surplus and therefore harming
other producers
Answer: A
Topic: Price Fixing
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
15) The EU's antitrust chief in November 2008 fined car glass producers Asahi, Pilkington,
Saint-Gobain and Soliver more than 1.3 billion euros ($1.66 billion) for price-fixing, the largest
sum ever levied by the EU for a cartel. Price fixing is a violation of ________.
A) Price fixing legislation
B) Antitrust law
C) Federal Trade Commission
D) Division of the U.S. Department of Justice
Answer: B
Topic: Antitrust Law
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
16) The EU's antitrust chief in November 2008 fined car glass producers Asahi, Pilkington,
Saint-Gobain and Soliver more than 1.3 billion euros ($1.66 billion) for price-fixing, the largest
sum ever levied by the EU for a cartel. Cartels tend to arise in ________ markets.
A) Monopolistic
B) Perfectly competitive
C) Oligopolistic
D) Monopolistically competitive
Answer: C
Topic: Cartel
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication

70
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17) Iran called on OPEC in November 2008 to cut production by a further 1 million to 1.5
million barrels per day when it meets in Cairo later this month. Why would OPEC, a cartel,
restrict production?
A) To decrease demand
B) To increase supply
C) To decrease quantity supplied
D) To increase profits
Answer: D
Topic: Cartel
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
6 Essay Questions
1) Describe the characteristics of an oligopoly.
Answer: There are a small number of firms that act interdependently. They are tempted to form a
cartel and collude to increase profits. They can compete on price only (if they produce identical
products) or compete on price, product quality and marketing (if they produce slightly different
products). Natural or legal barriers prevent the entry of new firms.
Topic: Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Communication
2) What is a natural oligopoly? How does it arise? Give an example.
Answer: A natural oligopoly is an industry in which a small number of large firms can supply
the entire market at a lower price than could a larger number of smaller firms. Natural oligopoly
arises when economies of scale and limited market demand create natural barriers to entry. For
example, suppose the minimum efficient scale for a taxi company is 30 rides per day and the
ATC at this level of output is $10 per ride. If the quantity of taxi rides demanded at $10 is 60
rides per day, there is only room in the market for two taxi companies. With more taxi
companies, either the price would have to fall below $10 per ride or the ATC would have to rise
above $10 per ride. In both cases the firms would incur an economic loss and would exit until
only two firms are left.
Topic: Natural Oligopoly
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Communication

71
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3) "Because firms in an oligopoly are so large, they do not need to consider each other's actions."
Is the previous statement correct or incorrect? Explain your answer.
Answer: The statement is incorrect. Oligopoly is an industry in which only a few firms compete.
Because there are only a few firms, the hallmark of oligopoly is mutual interdependence, that is,
one firm's action will affect the other firms. The fact that in oligopoly each firm's actions affect
its rivals is unlike the case in perfect competition or monopolistic competition, in which there are
so many firms that one firm's actions have no effect on its rivals, or monopoly, in which there is
only one firm and hence no rivals.
Topic: Oligopoly
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
4) What market structures other than oligopoly have the characteristic of one firm's actions
affecting the actions of its competitors? Explain your answer.
Answer: No other market structure has the characteristic that one firm's actions can affect the
actions of its competitors. In monopoly, there are no competitors to affect. And in perfect
competition and monopolistic competition, there are so many competitors that any one firm's
actions have no measurable impact on its competitors. Oligopoly is unique in that it is the only
market structure in which one firm's actions affect the actions of its competitors.
Topic: Oligopoly
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
5) What is a cartel?
Answer: A cartel is a group of firms acting together to limit output, raise price and increase
economic profit. Cartels are illegal in the United States. Cartels operate in a market structure
with oligopolies. If firms can stick to the cartel agreement, the firms can earn an economic profit.
However, cartels tend to break down because firms are tempted to cheat on their cartel partners
and increase their own profit at the expense of their partners.
Topic: Cartel
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Communication
6) Is collusion possible in monopolistic competition? Why or why not?
Answer: Collusion is not possible in monopolistic competition. It is not possible because there
are many firms in monopolistic competition, reaching an agreement to restrict output and boost
price is impossible.
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 14
AACSB: Communication

72
Copyright 2012 Pearson Education, Inc.

7) Explain what a cartel is and the difficulties faced in maintaining a cartel.


Answer: A cartel is a group of firms acting together to decrease output, raise price, and increase
economic profit. The difficulty faced by a cartel is the fact that each member has the incentive to
cheat on the cartel and increase its output. If a member increases its output and the rest of the
cartel members do not, the cheating member's profits will increase substantially. Each member
reasons that if it is the only cheater, it can significantly increase its profit and so each firm has an
incentive to cheat.
Topic: Cartel
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
8) In the United States, why are cartels among firms usually kept secret?
Answer: Cartels are typically kept secret because they are illegal. In the United States and many
other countries, it is illegal for firms to collude to form a cartel. It is illegal because firms collude
in order to restrict output, raise prices, and capture consumer surplus so that they increase their
economic profit.
Topic: Cartel
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
9) "If firms in an oligopoly enter into a collusive agreement to operate as a monopoly, the
industry produces the most output and if they operate as perfect competitors, the industry
produces the least output." Is the previous statement correct or incorrect? Why?
Answer: The statement is incorrect; it reverses the outcomes. If the firms in an oligopoly operate
as a monopoly, the industry produces the least output and if they operate as perfect competitors,
the industry produces the most output.
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
10) "If firms in duopoly collude and operate as a monopoly, the industry produces more output
compared to the Nash equilibrium." True or false? Explain.
Answer: The statement is false. In the Nash equilibrium, both firms cheat and output is the same
as in perfect competition. If the firms operate as a monopoly, the industry's profit-maximizing
level of output is below the competitive level.
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication

73
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11) What is the best outcome for society: When firms in an oligopoly enter into a collusive
agreement to operate as a monopoly or when they act as perfect competitors? Briefly explain
your answer.
Answer: The best outcome for society is when the firms act as perfect competitors. Perfect
competition produces the efficient quantity of output. A monopoly restricts the quantity of output
it produces and creates a deadweight loss, which harms society So society is better off if the
firms compete rather than collude and operate as a monopoly.
Topic: Colluding to Maximize Profits
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
12) What is game theory and what light does it shed on the issues faced by duopolists?
Answer: Game theory is a tool economists use to analyze the behavior of oligopolistic firms
because game theory is a tool to study strategic behavior. Game theory shows that because these
firms are interdependent, the decisions they make to promote their own self-interest can wind up
harming all the firms. The dilemma faced by duopolists is illustrated using game theory: Firms
looking to earn for themselves the maximum possible profit can wind up earning less profit than
if they had behaved less self-interestedly and more cooperatively.
Topic: Game Theory
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
13) What is a Nash equilibrium? Is this equilibrium necessarily the best outcome for the players?
Give an example.
Answer: John Nash proposed the concept of an equilibrium in a game where each player takes
the best possible action given the action of other players. A Nash equilibrium is not necessarily
the best one for the players. This result can be seen in the prisoners' dilemma. Typically the
prisoners' dilemma is a game where two prisoners are given rules and payoffs to encourage them
to confess to a crime. The prisoners, acting in their own self interest, confess to the crime to
minimize their jail time and so confession is the Nash equilibrium. But if the players can
communicate with each other, they can improve their position. If they can communicate, they
both deny the crime and so both wind up doing less time in jail.
Topic: Nash Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
14) "A Nash equilibrium occurs when both parties to a game end up worse off as a result of the
decisions that are made." Is the previous definition of a Nash equilibrium correct or incorrect?
Answer: The definition is incorrect. A Nash equilibrium is an equilibrium in which each player
takes the best possible action given the action of the other player.
Topic: Nash Equilibrium
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
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15) What is the real dilemma facing the prisoners in the prisoners' dilemma game?
Answer: The real dilemma facing the prisoners in the prisoners' dilemma game is that when each
prisoner plays his or her best strategy, the best outcome is not achieved.
Topic: Equilibrium of the Prisoners' Dilemma
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
16) OPEC, the Organization of Petroleum Exporting Countries, was formed in Baghdad in 1960.
Since its formation, this cartel has suffered from a major problem with respect to the quota
(limit) of output it assigns each member nation. What is OPEC's goal and what sort of quota do
you think the cartel assigns? How and why do nations cheat on their quota? What happens when
a nation cheats on its quota?
Answer: In order to keep oil prices high, as has been the case since 2003, OPEC creates a target
level of output designed to achieve a particular high price. OPEC's goal is to set a price high
enough so that its member nations earn the maximum economic profit. Once the target output is
set, OPEC assigns a production quota to each member. As long as each member adheres to its
quota the price will remain high and stable. However, from time to time, individual nations cheat
on the agreement by producing more oil than they are allowed. Nations cheat because they
realize that if they alone cheat, the impact on oil prices will be slight but the impact on their
profit will be large. Once this oil shows up on world markets, the supply of oil increases and
prices begin to fall. Then, once prices begin to fall other members might begin to start selling
more oil too in order to get the highest price they can before a collapse takes place. If every
nation cheats, the supply will increase more than if just a few do and the collapse in price
becomes a self-realizing prophecy.
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
17) Why do most collusive agreements have difficulty surviving?
Answer: Most collusive agreements have difficulty surviving because each firm individually can
increase its profits by lowering its price and increasing its output. Because of this fact, the
incentive to cheat on the agreement is great for all firms.
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication

75
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18) Why do firms in an oligopoly find it difficult to cooperate and not cheat on a cartel
agreement?
Answer: Firms in an oligopoly have large market shares. When they change their output or
price, the firm affects not only its own revenue and profit but also the revenue and profit of other
firms. For example, if a firm cheats on a cartel agreement by lowering its price, it will capture a
larger market share. The competitors' total revenue and profit decrease, but the cheating firm's
profit increases. If the firms cooperate, they could act like a monopoly and have the maximum
joint profit but each firm has the temptation to cheat and produce more than its share. This
temptation is strong because cheating will increase the cheater's revenue and profit substantially.
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
19) What is the dilemma faced by firms in collusive agreement to restrict output and boost price?
Answer: Because there are just a few large firms in an oligopoly, output and pricing decisions
made by one firm affect the demand for other firms' goods. To maximize the total joint profit, the
firms must cooperate, act like a monopoly so as to restrict output and earn monopoly profits.
Each firm, though, has an incentive to cheat on an agreement to restrict output because if it
increases production it can (temporarily, at least) earn higher profits. But if all firms increase
production, total profits will fall and the market will move toward the competitive equilibrium.
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
20) Does an oligopoly produce the efficient quantity of output or does it create a deadweight
loss? Do the firms want to produce the efficient quantity of output? Explain your answer.
Answer: An oligopoly might or might not produce the efficient quantity of output. It produces
the efficient quantity if the firms cheat on any agreement to collude by increasing their output so
that it winds up the same as the perfectly competitive amount. In this case, price equals marginal
cost and the outcome is efficient. There is no deadweight loss. From the firms' perspectives, this
outcome is undesirable because the firms make zero economic profit, that is, only a normal
profit.
If the firms can play repeated games, detecting and punishing overproduction, the oligopoly is
more likely to restrict output to the monopoly level. This outcome is inefficient because marginal
cost does not equal marginal benefit. A deadweight loss is created. From the firms' perspective,
this outcome is more desirable because the firms make an economic profit.
The firms' goal is to maximize their economic profit. Because their profit is higher if they
successfully collude and limit their production, the firms do not want to produce the efficient
quantity of output.
Topic: Efficiency of Oligopoly
Skill: Conceptual
Question history: Modified 10th edition
AACSB: Communication

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21) Why would a profit maximizing monopolist in a contestable market set its price at a level
below that which maximizes short run profits?
Answer: A firm in a contestable market is not protected by barriers to entry. Thus while it is
currently the only firm in the market, it might worry that other firms will enter the market. In this
case, setting a relatively lower price is known as limit pricing. It is a pricing strategy that deters
entry by sending a signal to potential entrants that entering the industry would result in economic
losses.
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
22) How is a contestable market similar to a perfectly competitive one?
Answer: A contestable market is similar to a perfectly competitive market in that there is free
entry and exit. As a result, the active firm(s) cannot earn an economic profit in the long-run
because potential entrants will enter any time economic profits exceed zero.
Topic: Contestable Market
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
23) What is the Sherman Act and what is its purpose?
Answer: The Sherman Act of 1890 was the first major piece of federal antitrust legislation. It
prohibits two things. First, it prohibits any combination, trust, or conspiracy to restrict interstate
or international trade. Second, it prohibits monopolization or any attempt to monopolize
interstate or international trade.
Topic: Sherman Act
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
24) Does section 2 of the Sherman Act make it a felony to "attempt" to monopolize an industry
or must the attempt succeed before it is a felony?
Answer: Section 2 of the Sherman Act makes attempting to monopolize an industry a felony. It
is not necessary for the attempt to succeed.
Topic: Sherman Act
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
25) "The Clayton Act repealed the Sherman Act so that only the Clayton Act remains in force." Is
the previous statement correct or incorrect?
Answer: The statement is incorrect. The Sherman Act remains part of the law of the land.
Topic: Clayton Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Communication
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26) What are the actions that are prohibited according to the Clayton Act and its amendments?
What conditions must be met for these actions to be prohibited?
Answer: The Clayton Act prohibits certain practices only if they substantially lessen competition
or create monopoly. These practices are:
1) Price discrimination.
2) Tying arrangements.
4) Requirements contracts.
5) Exclusive dealing.
6) Territorial confinement.
7) Acquiring a competitor's shares or assets.
8) Becoming a director of a competing firm.
Topic: Clayton Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Communication
27) What is meant by the term "exclusive dealing"? Give an example of an exclusive deal. When
is it illegal?
Answer: Exclusive dealing is a contract that prevents a firm from selling competing items. For
instance, Taco Bell has a contract with Pepsi that only Pepsi products will be sold at Taco Bell.
Hence Pepsi has arranged an exclusive deal with Taco Bell. Exclusive deals are illegal under the
Clayton Act only if they substantially lessen competition or create a monopoly.
Topic: Clayton Act
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
28) If Sony required all its retailers not to sell televisions from other companies, Sony would be
engaging in what kind of activity? Is Sony's requirement legal or does it violate the Clayton Act?
Answer: Sony is engaged in an exclusive deal. The question of whether Sony's requirement is
legal depends on whether it substantially lessens competition or creates a monopoly. If it does
either, it is illegal under the Clayton Act. If it does neither, it is legal under the Clayton Act.
Topic: Clayton Act
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
29) Explain how the courts have ruled on price fixing.
Answer: Price fixing among competitors is always a violation of the antitrust law. This type of
price fixing, in and of itself, is a violation of the law. If the government can prove the existence
of price fixing, the accused firms are guilty because there are no mitigating circumstance
allowed. Price fixing in the form of resale price maintenance is legal as long as it is not
anticompetitive.
Topic: Price Fixing
Skill: Recognition
Question history: Modified 10th edition
AACSB: Communication
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30) If price fixing by competitors is necessary because without it a firm will go bankrupt, is the
price fixing legal?
Answer: No, price fixing by competitors is always illegal. Regardless of whether a firm will go
bankrupt or not, this sort of price fixing is illegal.
Topic: Price Fixing
Skill: Conceptual
Question history: Modified 10th edition
AACSB: Communication
31) What is resale price maintenance? Is resale price maintenance legal in the United States?
Answer: Resale price maintenance occurs when a manufacturer agrees with a distributor on the
price at which the product will be resold. For instance, Sony could arrange with Best Buy the
price for which Sony televisions are sold. Resale price maintenance (also called vertical price
fixing) agreements are illegal under the Sherman Act. But it isn't illegal for a manufacturer to
refuse to supply a retailer who doesn't accept guidance on what the price should be.
Topic: Resale Price Maintenance
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Communication
32) What are the current merger guidelines as developed and administered by the Federal Trade
Commission?
Answer: The current merger guidelines are based on the Herfindahl-Hirschman index, which is
the sum of the squares of the market shares of the fifty largest firms in an industry. If the HHI is
less than 1000, the market is considered unconcentrated and mergers will usually go
unchallenged. If the HHI is greater than 1000 but less than 1800, the market is considered
moderately concentrated and mergers may be challenged if the HHI would rise by more than 100
points. If the HHI exceeds 1800, the market is considered concentrated and mergers may be
challenged if the HHI rises by more than 50 points.
Topic: Current Merger Rules
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Communication
33) In a market with a Herfindahl-Hirschman Index of 2,000, according to their guidelines will
the Department of Justice challenge a merger that would increase the index by 50?
Answer: Yes, according to their guidelines the Department of Justice will challenge a merger
that increases the Herfindahl-Hirschman Index by more than 50 points if the initial index is
greater than 1,800.
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication

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34) "If an industry's Herfindahl-Hirschman Index is below 1,000, a merger between any two
firms in that industry will be disallowed." Comment on the accuracy of the previous statement.
Answer: The statement is incorrect in at least three dimensions. First, the lower the HerfindahlHirschman Index, the more competitive the industry and hence the more likely the government
will allow a merger to occur. Second, even if the Herfindahl-Hirschman Index is high, a merger
that increases it only a small bit will not be challenged. And third, the Herfindahl-Hirschman
Index is only part of the information considered when the government is determining whether to
challenge a merger.
Topic: Current Merger Rules
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Communication
7 Numeric and Graphing Questions
Price
(dollars
per unit)
30
25
20
15
10
5
0

Quantity
demanded
(units)
0
10
20
30
40
50
60

1) The table above has the market demand schedule in an industry that has two firms in it. The
marginal cost of this product is zero because these two firms have exclusive ownership of the
resource and it does not cost any additional amount to produce additional units.
a) If the firms cooperate with each other so that they operate as a monopoly, what price will they
charge and what (total) output will they produce?
b) If the firms cannot cooperate but instead behave as perfect competitors, what will be the price
and the (total) output they produce?
Answer:
a) As a monopoly, the price will be $15 and the total output will be 30 units. This price and
output combination is where they maximize their total profit because it is here that the marginal
revenue equals zero. (The marginal revenue equals zero because this is the price and output
combination for which total revenue is maximized and marginal revenue equals zero when total
revenue is maximized.)
b) The perfectly competitive price is equal to marginal cost. Because marginal cost is equal to
zero, the price will be $0 and the output will be 60 units.
Topic: Cartel
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
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2) Suppose the industry for washing machines has only four firms. The market shares are: Firm
A, 40 percent; Firm B, 20 percent; Firm C 20, percent; and Firm D, 20 percent.
a) What is the Herfindahl-Hirschman Index (HHI)?
b) If Firms C and D were to announce a merger, would the Department of Justice oppose the
merger?
Answer:
a) The HHI is 2,800.
b) Yes, the Department of Justice would oppose the merger. If the merger occurred, the new HHI
would be 3,600. The merger would increase the HHI by 800 points. The Department of Justice's
guidelines are to challenge a merger if the initial HHI exceeds 1,800 and the merger raises the
HHI by more than 50 points. The merger considered in the problem easily falls under these
guidelines.
Topic: Current Merger Rules
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

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Firm
A
B
C
D
E
F
G
H
I
J

Marginal share
(percent)
15
15
15
10
10
10
10
5
5
5

3) A market has ten firms, whose market shares are given in the table above.
a) If firms I and J wanted to merge, according to the Department of Justice guidelines, would the
Department of Justice challenge the merger?
b) If firms A and B wanted to merge, according to the Department of Justice guidelines, would
the Department of Justice challenge the merger?
Answer:
a) The decision whether to challenge the merger depends, in part, on the market's HerfindahlHirschman Index (HHI). The HHI for the market initially is 1,150. Thus the Department of
Justice guidelines say it will challenge a merger if the merger raises the HHI by 100 or more
points. If firms I and J merge, the HHI becomes 1,200. The Department of Justice will not
challenge this merger.
b) If firms A and B merge, the HHI becomes 1,600. The Department of Justice will challenge this
merger.
Topic: Current Merger Rules
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

82
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4) The Herfindahl-Hirschman Index is used as a guideline to determine if a market is competitive


or concentrated. Calculate the index value for each market described below.
a) 100 firms, each of which produces 1 per cent of market output
b) 50 firms, each of which produces 2 per cent of market output
c) 25 firms, each of which produces 4 per cent of market output
d) 20 firms, each of which produces 5 per cent of market output
e) 10 firms, each of which produces 10 per cent of market output
f) 5 firms, each of which produces 20 per cent of market output
g) 2 firms, each of which produces 50 per cent of market output
Answer:
a) 100 1 = 100
b) 50 4 = 200
c) 25 16 = 400
d) 20 25 = 500
e) 10 100 = 1,000
f) 5 400 = 2,000
g) 2 2,500 = 5,000
Topic: Current Merger Rules
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills
8 True or False
1) Oligopoly differs from perfect competition because a single competitive firm's behavior does
not affect the behavior of its competitors while the behavior of a single oligopolistic firm does
affect the behavior of its rivals.
Answer: TRUE
Topic: Oligopoly
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
2) Economies of scale and limited demand can form a natural barrier to entry that can create a
natural oligopoly.
Answer: TRUE
Topic: Oligopoly
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

83
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3) Game theory is a tool for studying competitive behavior between firms in monopolistic
competition because of the mutual interdependence among the firms.
Answer: FALSE
Topic: Game Theory
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
4) In the prisoners' dilemma game, each player has only one possible strategy.
Answer: FALSE
Topic: Prisoners' Dilemma
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
5) In a Nash equilibrium, each player takes the best possible action given the actions of the other
players.
Answer: TRUE
Topic: Game Theory, Nash Equilibrium
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
6) In game theory, a Nash equilibrium is the equilibrium that always yields the best result.
Answer: FALSE
Topic: Game Theory, Nash Equilibrium
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
7) Collusive agreements tend to break apart because the incentive to cheat is so great.
Answer: TRUE
Topic: Cartel; Incentive To Cheat
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
8) A contestable market is a market in which there are one or a few firms and entry into the
market is not costly.
Answer: TRUE
Topic: Contestable Market
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

84
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9) Limit pricing is a strategy which is intended to deter entry into an industry.


Answer: TRUE
Topic: Limit Pricing
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
10) The first federal antitrust law ever passed was the Sherman Act.
Answer: TRUE
Topic: Sherman Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
11) The Clayton Act of 1914 was passed to prohibit, in part, price discrimination if the effect is
to substantially lessen competition or create monopoly.
Answer: TRUE
Topic: Clayton Act
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
12) Tying arrangements are always held to be illegal under U.S. antitrust law.
Answer: FALSE
Topic: Tying Contracts
Skill: Recognition
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking
13) The sum of the squares of the market share for the fifty largest firms in a market is the basis
of the government's current merger guidelines.
Answer: TRUE
Topic: Current Merger Policies
Skill: Conceptual
Question history: Previous edition, Chapter 15
AACSB: Reflective Thinking

85
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9 Extended Problems
1) Nimbus, Inc., and Cleansweep, Inc., are the only producers of flying brooms. Each firm has
two strategies: Spend 30,000 galleons a year on research and development (R&D) or spend
nothing on R&D. If neither firm spends on R&D, Nimbus' economic profit is 80, 000 galleons
and Cleansweep's economic profit is 40,000 galleons. If each firm conducts R&D, market shares
are maintained, but each firm's profit is lower by the amount spent on R&D. If Nimbus conducts
R&D and Cleansweep does not, Nimbus makes an economic profit of 120,000 galleons, while
Cleansweep incurs an economic loss of 20,000 galleons. If Cleansweep con-ducts R&D and
Nimbus does not, Cleansweep makes a profit of 60,000 galleons while Nimbus loses 10,000
galleons.
a) Construct a payoff matrix for the game that Nimbus and Cleansweep must play.
b) Find the Nash equilibrium. In the Nash equilibrium, what is each firm's equilibrium profit?
c) What is the cooperative outcome? Would the firms make more economic profit if they collude
to achieve the cooperative outcome?
Answer:

a) The payoff matrix is above. The profits are in thousands of galleons.


b) The Nash equilibrium is for both firms to conduct R&D. Nimbus makes 50,000 galleons and
Cleansweep makes 10,000 galleons.
c) The cooperative outcome is for both firms not to conduct R&D. If Nimbus and Cleansweep
collude and neither of them cheats, Nimbus makes 80,000 galleons and Cleansweep makes
40,000 galleons. So each firm makes more economic profit compared to the Nash equilibrium.
Topic: Game Theory
Skill: Analytical
Question history: Previous edition, Chapter 15
AACSB: Analytical Skills

86
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