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What is the dominant strategy in a second-price auction?


A) bidding below one's true value
B) bidding above one's true value
C) bidding one's true value
D) There is no dominant strategy.

E) A) and D)
F) A) and C)

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Explain how collusion makes firms better off.Given the incentives to collude, briefly explain why every industry does not become a cartel.

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Collusion makes firms better off because...

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Competition from substitute goods is more of a threat when switching costs are high.

A) True
B) False

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Which of the following is not necessarily a consequence of occupational licensing laws?


A) They restrict competition.
B) Consumers pay higher prices for the services of licensed professions.
C) They result in a higher quality of service.
D) They ensure that licensed professionals meet some minimum qualifications.

E) A) and D)
F) All of the above

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Which of the following statements about the prisoner's dilemma is false?


A) The prisoner's dilemma in a one-shot game leads to a noncooperative, equilibrium outcome.
B) The prisoner's dilemma in repeated games could lead to cooperation especially if there is some enforcement mechanism that punishes a player who does not cooperate.
C) Players caught in a prisoner's dilemma act in selfish ways that lead to an equilibrium that is sub-optimal.
D) The prisoner's dilemma game can never reach a Nash equilibrium as long as players do not cooperate.

E) A) and B)
F) C) and D)

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Table 12.2 Table 12.2 Table 12.2 shows the payoff matrix for London Drugs and FutureShop from every combination of pricing strategies for the popular PlayStation 3. At the start of the game, each firm charges a low price and each earns a profit of $7,000. -Refer to Table 12.2.For each firm, is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000? A) Yes, the firms can implicitly collude and agree to charge a higher price. B) No, there is no incentive for each firm to consider any other strategy. C) No, any other strategy hurts consumers. D) Yes, each firm can implicitly agree to increase output and not to deviate from a low price. Table 12.2 shows the payoff matrix for London Drugs and FutureShop from every combination of pricing strategies for the popular PlayStation 3. At the start of the game, each firm charges a low price and each earns a profit of $7,000. -Refer to Table 12.2.For each firm, is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000?


A) Yes, the firms can implicitly collude and agree to charge a higher price.
B) No, there is no incentive for each firm to consider any other strategy.
C) No, any other strategy hurts consumers.
D) Yes, each firm can implicitly agree to increase output and not to deviate from a low price.

E) B) and C)
F) A) and B)

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Explain the difference between a cooperative equilibrium and a noncooperative equilibrium in game theory.

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A cooperative equilibrium is one in whic...

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In which of the following cartels is total cartel profit likely to be the highest?


A) a cartel made up of equal sized firms each producing different quantities of a differentiated product
B) a cartel made up of firms of various sizes each producing different quantities of a homogeneous product
C) a cartel made up of firms of various sizes each producing the same quantity of a differentiated product
D) a cartel made up of identical firms each producing the same quantity of a homogeneous product

E) A) and D)
F) None of the above

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What is the incentive for a firm to join a cartel?


A) to be able to earn profits in the long run but not in the short run
B) to be able to earn larger profits than if it was not part of the cartel
C) to completely insulate itself from competition
D) to produce a larger amount of output than if it was not part of the cartel

E) A) and B)
F) B) and D)

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In the 1930s and 1940s, the Technicolor company was able to leverage its bargaining power over the movie industry because Technicolor was the sole producer of cameras and films needed to produce color films.

A) True
B) False

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An oligopoly firm is similar to a monopolistically competitive firm in that


A) both firms face the prisoner's dilemma.
B) both operate in a market in which there are entry barriers.
C) both firms have market power.
D) both firms are in industries characterized by an interdependent firm.

E) B) and C)
F) None of the above

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Which of the following is not among Porter's competitive forces?


A) power of buyers
B) power of suppliers
C) threat of new entrants
D) changing consumer tastes

E) A) and B)
F) B) and C)

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A prisoner's dilemma leads to a noncooperative equilibrium.

A) True
B) False

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Interdependence of firms is most common in


A) monopolistically competitive industries.
B) monopolistic industries.
C) monopolistically competitive and oligopolistic industries.
D) oligopolistic industries.

E) B) and C)
F) A) and D)

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Consider two oligopolistic industries selling the same product in different locations.In the first industry, firms always match price changes by any other firm in the industry.In the second industry, firms always ignore price changes by any other firm.which of the following statements is true about these two industries, holding everything else constant?


A) Market prices are likely to be higher in the first industry in which firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes.
B) Market prices are likely to be lower in the first industry where firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes.
C) Market prices are likely to be the same in both markets because they are both oligopolistic markets.
D) No conclusions can be drawn about the pricing behavior under these very different firm behaviors.

E) B) and D)
F) None of the above

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Figure 12.4 Figure 12.4 Rainbow Writer (RW) is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs, has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 12.4 shows the decision tree for the Rainbow Writer-Odeon bargaining game. -Refer to Figure 12.4.How will Rainbow Writer respond to Odeon's two possible offers? A) Rainbow Writer will reject either offer. B) Rainbow Writer will only accept an offer of $30 per copy of the software package. C) Rainbow Writer will only accept an offer of $40 per copy of the software package. D) Rainbow Writer will accept either offer. Rainbow Writer (RW) is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs, has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 12.4 shows the decision tree for the Rainbow Writer-Odeon bargaining game. -Refer to Figure 12.4.How will Rainbow Writer respond to Odeon's two possible offers?


A) Rainbow Writer will reject either offer.
B) Rainbow Writer will only accept an offer of $30 per copy of the software package.
C) Rainbow Writer will only accept an offer of $40 per copy of the software package.
D) Rainbow Writer will accept either offer.

E) A) and D)
F) A) and C)

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A supplier of paper napkins to the fast food industry is unlikely to have significant bargaining power.

A) True
B) False

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Which of the following is not part of an oligopolist's business strategy?


A) meeting worker health and safety standards required of all firms
B) deciding the level of total output of a new product
C) determining the amount of advertising a new product needs
D) setting the product's price after considering what rivals will do

E) A) and C)
F) A) and D)

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Collusion would be common in an oligopoly and a monopolistically competitive industry.

A) True
B) False

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Table 12.3 Table 12.3 Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 12.3 shows the profits earned per day by each country. Low output corresponds to producing the OPEC assigned quota and high output corresponds to producing the maximum capacity beyond the assigned quota. -Refer to Table 12.3.Which of the following statements is true? A) The Nash equilibrium is a noncooperative, dominant strategy equilibrium. B) The Nash equilibrium is a cooperative equilibrium. C) The Nash equilibrium is a collusive equilibrium. D) There is no Nash equilibrium in this game because each party pursues its dominant strategy. Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 12.3 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota. -Refer to Table 12.3.Which of the following statements is true?


A) The Nash equilibrium is a noncooperative, dominant strategy equilibrium.
B) The Nash equilibrium is a cooperative equilibrium.
C) The Nash equilibrium is a collusive equilibrium.
D) There is no Nash equilibrium in this game because each party pursues its dominant strategy.

E) C) and D)
F) A) and D)

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