Question 1

In the context of the price competition between Walmart and Target, which of the following statements best describes the concept of Nash equilibrium?

Accepted Answer

Both Walmart and Target lower prices, each acting in their own self-interest.

Question 2

Suppose Walmart and Target are considering whether to lower their prices. If Target lowers its price and Walmart does not, what is the likely outcome for Target?

Accepted Answer

Target will earn $20 million more in profit.

Question 3

Which of the following best explains why cartels are inherently unstable?

Accepted Answer

Each firm has an incentive to expand its output beyond the agreed level.

Question 4

If two firms in a duopoly both choose to keep prices high, what is the likely result according to game theory?

Accepted Answer

They maximize joint profits but risk one firm cheating.

Question 5

In a cartel, what is the main incentive for a firm to cheat?

Accepted Answer

To increase its own output and capture a larger share of the market.

Question 6

Which of the following is NOT a characteristic of a Nash equilibrium in the context of price competition?

Accepted Answer

Both firms always maximize joint profits.

Question 7

Suppose Walmart lowers its price and Target keeps its price high. What is the likely outcome for Target?

Accepted Answer

Target loses market share and profits.

Question 8

If both Walmart and Target lower their prices, what is the likely effect on their profits compared to if both kept prices high?

Accepted Answer

Both firms earn less profit than if they kept prices high.

Question 9

Which of the following best describes the prisoner's dilemma in the context of price competition?

Accepted Answer

Firms acting in their own self-interest end up with lower profits than if they cooperated.

Question 10

If a cartel sets a price above marginal cost, what is the incentive for individual firms?

Accepted Answer

To increase output and capture more profit.

Question 11

Which of the following outcomes is NOT a Nash equilibrium in the Walmart-Target price competition scenario?

Accepted Answer

Target keeps prices high and Walmart lowers prices.

Question 12

If both firms in a cartel cheat by increasing output, what is the likely effect on the market price?

Accepted Answer

The market price will decrease.

Question 13

Which equation represents the condition for profit maximization for a firm in a cartel?

Accepted Answer

$$MR = MC$$

Question 14

If a firm in a cartel faces a marginal cost below the cartel price, what is its best response?

Accepted Answer

Increase output to maximize profit.

Question 15

Suppose Walmart and Target could legally collude and keep prices high. What would be the likely effect on consumer surplus?

Accepted Answer

Consumer surplus would decrease.

Question 16

Which of the following strategies is most likely to break down a cartel agreement?

Accepted Answer

A firm secretly increases its output.

Game Theory, Oligopoly, and Cartel Behavior in Microeconomics

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