Q: Suppose the marginal cost ($$MC) of $$producing a good is $$1$$, and two firms each produce $$3,000$$ units, selling at a price ($$P) of$$ $$5. $$What is each firm's profit?

$$3,000 \times (5 - 1) = 12,000$$

Question 1

Which of the following best describes an oligopoly?

Accepted Answer

A market structure in which only a few sellers offer similar or identical products.

Question 2

Suppose two firms in a duopoly agree to restrict output and charge a high price, but one firm cheats and increases its output. What is the likely outcome for the cheating firm?

Accepted Answer

The cheating firm will earn a higher profit in the short run.

Question 3

Given the following payoff matrix for two firms, A and B, where the payoffs are (A's profit, B's profit):

$$\begin{array}{c|cc}
 & 	ext{B: Low Output} & 	ext{B: High Output} \
\hline
	ext{A: Low Output} & (100, 100) & (60, 120) \
	ext{A: High Output} & (120, 60) & (80, 80) \
\end{array}$$

What is the Nash equilibrium?

Accepted Answer

Both firms choose High Output.

Question 4

Which of the following is an example of the prisoners’ dilemma in real life?

Accepted Answer

Two competing firms both choose to advertise heavily, even though both would be better off if neither advertised.

Question 5

If the marginal cost of producing water is zero and two firms (Jack and Jill) form a cartel, each producing 30 gallons at a price of $60 per gallon, what is each firm's profit?

Accepted Answer

$1,800

Question 6

Which antitrust law first made agreements among oligopolists a criminal conspiracy?

Accepted Answer

The Sherman Antitrust Act of 1890

Question 7

Suppose two airlines, A and B, can either cut fares or leave fares unchanged. If both cut fares, each earns $$400 million. If neither cuts, each earns 600 $$million. If only one cuts, the cutter earns $$800 million and the other earns 200 $$million. What is the dominant strategy for each airline?

Accepted Answer

Cut fares

Question 8

As the number of firms in an oligopoly increases, what happens to the market outcome?

Accepted Answer

The market outcome approaches that of perfect competition.

Question 9

Which of the following best describes the Nash equilibrium in an oligopoly game?

Accepted Answer

Each firm chooses its best strategy given the strategies chosen by the other firms.

Question 10

If a firm practices predatory pricing, what is it attempting to do?

Accepted Answer

Drive competitors out of the market by temporarily charging prices below cost.

Question 11

Suppose the marginal cost ($$MC) of $$producing a good is $$1$$, and two firms each produce $$3,000$$ units, selling at a price ($$P) of$$ $$5. $$What is each firm's profit?

Accepted Answer

$$3,000 	imes (5 - 1) = 12,000$$

Question 12

Which of the following business practices is most likely to be considered resale price maintenance?

Accepted Answer

A manufacturer requires retailers to sell its product at a specified minimum price.

Question 13

In the context of oligopoly, what is the output effect?

Accepted Answer

Selling one more unit increases profit because price exceeds marginal cost.

Question 14

Why is it difficult for oligopolists to maintain collusive agreements?

Accepted Answer

Each firm has an incentive to cheat to increase its own profit.

Question 15

Which of the following is NOT typically prohibited by antitrust laws?

Accepted Answer

Firms competing aggressively on price.

Question 16

If two firms in a duopoly both increase their output beyond the collusive level, what happens to the market price and their profits?

Accepted Answer

Market price falls and each firm's profit decreases.

Question 17

Which of the following best explains why bundling can be controversial under antitrust policy?

Accepted Answer

It may be used to expand market power by tying two products together.

Question 18

In the prisoners’ dilemma, why is cooperation difficult to maintain?

Accepted Answer

Each player has an incentive to pursue their own self-interest, even if it leads to a worse outcome for both.

Question 19

If a small number of firms have a large combined market share in a properly defined market, what does this suggest?

Accepted Answer

Those firms likely have substantial market power.

Question 20

Suppose the market for bottled water is an oligopoly with three firms. If the number of firms increases to ten, what is the likely effect on price and output?

Accepted Answer

Price will decrease and output will increase, approaching the competitive outcome.

Oligopoly: Markets with Few Sellers and Strategic Behavior

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