Econ 201 Final Exam Chapter 17

Front 1

1. Which of the following statements about oligopolies is not correct?
a. An oligopolistic market has only a few sellers.
b. The actions of any one seller can have a large impact on the profits of all other sellers.
c. Oligopolistic firms are interdependent in a way that competitive firms are not.
d. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenues.

Back 1

d. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenues.

Front 2

2. Which of the following statements is correct?
a. Strategic situations are more likely to arise when the number of decision-makers is very large rather than very small.
b. Strategic situations are more likely to arise in monopolistically competitive markets than in oligopolistic markets.
c. Game theory is useful in understanding certain business decisions, but it is not really applicable to ordinary games such as chess or tic-tac-toe.
d. Game theory is not necessary for understanding competitive or monopoly markets.

Back 2

d. Game theory is not necessary for understanding competitive or monopoly markets.

Front 3

3. In studying oligopolistic markets, economists assume that
a. there is no conflict or tension between cooperation and self-interest.
b. it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly outcome.
c. each oligopolist cares only about its own profit.
d. strategic decisions do not play a role in such markets.

Back 3

c. each oligopolist cares only about its own profit.

Front 4

4. An agreement between two duopolists to function as a monopolist usually breaks down because
a. they cannot agree on the price that a monopolist would charge.
b. they cannot agree on the output that a monopolist would produce.
c. each duopolist wants a larger share of the market in order to capture more profit.
d. each duopolist wants to charge a higher price than the monopoly price.

Back 4

c. each duopolist wants a larger share of the market in order to capture more profit.

Front 5

5. Suppose that Jay-Z and Beyonce are duopolists in the music industry. In January, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By February, each singer is considering breaking the agreement. What would you expect to happen next?
a. Jay-Z and Beyonce will determine that it is in each singer’s best self interest to maintain the agreement.
b. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price will decrease.
c. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will decrease, and the new equilibrium price will increase.
d. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase.

Back 5

b. Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price will decrease.

Front 6

6. As the number of sellers in an oligopoly becomes very large,
a. the quantity of output approaches the socially efficient quantity.
b. the price approaches marginal cost.
c. the price effect is diminished.
d. All of the above are correct.

Back 6

d. All of the above are correct.

Front 7

The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero.

Quantity Price (per year)
0 $180
3,000 $150
6,000 $120
9,000 $ 90
12,000 $ 60
15,000 $ 30
18,000 $ 0


7. If there is only one digital cable TV company in this market, what price would it charge for a premium digital channel subscription to maximize its profit?
a. $30
b. $60
c. $90
d. $150

8. Assume there are two digital cable TV companies operating in this market. If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their agreement will stipulate that
a. each firm will charge a price of $90 and each firm will sell 4,500 subscriptions.
b. each firm will charge a price of $90 and each firm will sell 9,000 subscriptions.
c. each firm will charge a price of $120 and each firm will sell 3,000 subscriptions.
d. each firm will charge a price of $150 and each firm will sell 1,500 subscriptions.

9. Assume there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions. How much profit will each company earn?
a. $610,000
b. $550,000
c. $405,000
d. $205,000

Back 7

7.) c. $90

8.) a. each firm will charge a price of $90 and each firm will sell 4,500 subscriptions.

9.) d. $205,000

Front 8

10. A situation in which firms choose their best strategy given the strategies chosen by the other firms in the market is called
a. a competitive equilibrium.
b. an open-market solution.
c. a socially-optimal solution.
d. a Nash equilibrium.

Back 8

d. a Nash equilibrium.

Front 9

11. In a duopoly situation, the logic of self-interest results in a total output level that
a. equals the output level that would prevail in a competitive market.
b. equals the output level that would prevail in a monopoly.
c. exceeds the monopoly level of output, but falls short of the competitive level of output.
d. falls short of the monopoly level of output.

Back 9

c. exceeds the monopoly level of output, but falls short of the competitive level of output.

Front 10

12. In a typical cartel agreement, the cartel maximizes profit when it
a. behaves as a monopolist.
b. behaves as a duopolist.
c. is flexible in enforcing production targets.
d. behaves as a perfectly competitive firm.

Back 10

a. behaves as a monopolist.

Front 11

16. When strategic interactions are important to pricing and production decisions, a typical firm will
a. set the price of its product equal to marginal cost.
b. consider how competing firms might respond to its actions.
c. generally operate as if it is a monopolist.
d. consider exiting the market.

Back 11

b. consider how competing firms might respond to its actions.

Front 12

17. In the prisoners' dilemma game, self-interest leads
a. each prisoner to confess.
b. to a breakdown of any agreement that the prisoners might have made before being questioned.
c. to an outcome that is not particularly good for either prisoner.
d. All of the above are correct.

Back 12

d. All of the above are correct.

Front 13

18. The likely outcome of the standard prisoners' dilemma game is that
a. neither prisoner confesses.
b. exactly one prisoner confesses.
c. both prisoners confess.
d. Not enough information is given to answer this question.

Back 13

c. both prisoners confess.

Front 14

20. When the prisoners’ dilemma game is generalized to describe situations other than those that literally involve two prisoners, we see that cooperation between the players of the game
a. can be difficult to maintain, but only when cooperation would make at least one of the players of the game worse off.
b. can be difficult to maintain, even when cooperation would make both players of the game better off.
c. always works to the benefit of society as a whole.
d. always works to the detriment of society as a whole.

Back 14

b. can be difficult to maintain, even when cooperation would make both players of the game better off.

Front 15

21. From society’s standpoint, cooperation among oligopolists is
a. desirable, because it leads to less conflict among firms and a wider variety of products for consumers.
b. desirable, because it leads to an outcome closer to the competitive outcome than what would be observed in the absence of cooperation.
c. undesirable, because it leads to output levels that are too low and prices that are too high.
d. undesirable, because it leads to output levels that are too high and prices that are too high.

Back 15

c. undesirable, because it leads to output levels that are too low and prices that are too high.

Front 16

22. The primary purpose of antitrust legislation is to
a. protect small businesses.
b. protect the competitiveness of U.S. markets.
c. protect the prices of American-made products.
d. ensure firms earn only a fair profit.

Back 16

b. protect the competitiveness of U.S. markets.

Front 17

23. The Sherman Antitrust Act prohibits executives of competing companies from
a. fixing prices, but it does not prohibit them from talking about fixing prices.
b. even talking about fixing prices.
c. sharing with one another their knowledge of game theory.
d. failing to stand by agreements that they had made with one another.

Back 17

b. even talking about fixing prices.

Front 18

24. According to the Clayton Act,
a. lawyers are given an incentive to reduce the number of cases involving cooperative arrangements.
b. individuals can sue to recover damages from illegal cooperative agreements.
c. the government was able to incarcerate the CEO of a firm for illegal pricing arrangements.
d. private lawsuits are discouraged.

Back 18

b. individuals can sue to recover damages from illegal cooperative agreements.

Front 19

25. Predatory pricing refers to
a. a firm selling certain products together rather than separately.
b. a monopoly firm reducing its price in an attempt to maintain its monopoly.
c. firms colluding to set prices.
d. All of the above are examples of predatory pricing.

Back 19

b. a monopoly firm reducing its price in an attempt to maintain its monopoly.