Question 1

Which of the following best describes an oligopoly market structure?

Accepted Answer

A market with a small number of firms and natural or legal barriers to entry.

Question 2

Suppose a city licenses only two taxi firms, even though demand and costs could support more. What type of oligopoly is this?

Accepted Answer

Legal oligopoly

Question 3

In the context of game theory, what is 'common knowledge'?

Accepted Answer

Information known by all players, and known by all to be known by all, and so forth.

Question 4

Which of the following is a defining feature of a cartel in an oligopoly?

Accepted Answer

Firms collude to limit output and raise prices.

Question 5

Consider the prisoners’ dilemma. If both prisoners act rationally to maximize their own payoff, what is the Nash equilibrium?

Accepted Answer

Both confess to the crime.

Question 6

In a duopoly price-fixing game, if both firms cheat on a collusive agreement, what is the likely outcome?

Accepted Answer

Both firms make zero economic profit, similar to perfect competition.

Question 7

If a cartel sets output where marginal cost equals marginal revenue, which equation represents the profit-maximizing condition?

Accepted Answer

$$MC = MR$$

Question 8

Suppose two firms in a cartel can either comply or cheat. If one cheats and the other complies, what happens to the profits of each?

Accepted Answer

The cheating firm increases its profit, while the complying firm incurs a loss.

Question 9

Which of the following is NOT a necessary assumption for game theory analysis in oligopoly?

Accepted Answer

Players act irrationally and ignore the actions of others.

Question 10

In the context of oligopoly, what does 'interdependence' mean?

Accepted Answer

Each firm's profit depends on the actions of every other firm in the market.

Question 11

If two airlines (American and United) simultaneously choose the number of passengers to fly, which concept from game theory best describes their interaction?

Accepted Answer

Noncooperative game

Question 12

Which of the following is true about the Nash equilibrium in the duopolists’ dilemma?

Accepted Answer

Both firms cheat and make zero economic profit.

Question 13

A dominant strategy is defined as:

Accepted Answer

A strategy that is best for one player, regardless of the strategies chosen by other players.

Question 14

In a payoff matrix for a prisoners’ dilemma, which outcome is Pareto optimal but not a Nash equilibrium?

Accepted Answer

Both players deny.

Question 15

Suppose the marginal cost curves of two firms in a cartel are $$MC_1$$ and $$MC_2. $$What is the cartel’s marginal cost curve?

Accepted Answer

The horizontal sum of $$MC_1$$ and $$MC_2$$

Question 16

If a firm in a cartel increases its output while the other complies, what happens to the market price and the profits of both firms?

Accepted Answer

Market price falls; the cheating firm increases profit, the complying firm incurs a loss.

Question 17

Which real-world organization is an example of an international cartel?

Accepted Answer

Organization of Petroleum Exporting Countries (OPEC)

Question 18

In an oligopoly, why might firms face a temptation to cooperate?

Accepted Answer

Because interdependence means each firm’s profit depends on others’ actions.

Question 19

Which of the following best explains why collusive agreements are illegal in the United States?

Accepted Answer

They restrict output, raise prices, and reduce competition.

Question 20

Suppose two firms are considering whether to invest in R&D, which is costly but benefits both if successful. According to the 'game of chicken' scenario, what is the Nash equilibrium?

Accepted Answer

One firm invests in R&D, the other does not.

Oligopoly: Market Structure, Game Theory, and Strategic Behavior

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