Chapter 17 Oligopoly Sec02 Multiple Choice

Chapter 17/Oligopoly ❖ 153 Sec02 - Oligopoly - The Economics of Cooperation MULTIPLE CHOICE 1. When firms are faced with making strategic choices in order to maximize profit, economists typically use a. the theory of monopoly to model their behavior. b. the theory of aggressive competition to model their behavior. c. game theory to model their behavior. d. cartel theory to model their behavior. ANS: C 2. 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. ANS: B 3. Game theory is important for the understanding of a. competitive markets. b. monopolies. c. oligopolies. d. all market structures. ANS: C 4. Game theory is necessary for understanding a. all market structures. b. competition and oligopoly, but it is not necessary for understanding monopoly. c. monopoly and oligopoly, but it is not necessary for understanding competition. d. oligopoly, but it is not necessary for understanding monopoly or competition. ANS: D 5. The prisoners' dilemma provides insights into the a. difficulty of maintaining cooperation. b. benefits of avoiding cooperation. c. benefits of government ownership of monopoly. d. ease with which oligopoly firms maintain high prices. ANS: A 6. 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. ANS: D 7. 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. ANS: C 154 ❖ Chapter 17/Oligopoly 8. The prisoners' dilemma is an important game to study because a. most games present zero-sum alternatives. b. it identifies the fundamental difficulty in maintaining cooperative agreements. c. strategic decisions faced by prisoners are identical to those faced by firms engaged in competitive agreements. d. all interactions among firms are represented by this game. ANS: B 9. The prisoners’ dilemma game a. provides insight into why cooperation is individually rational. b. provides insight into why cooperation is difficult. c. is a game in which neither player has a dominant strategy. d. is a game in which exactly one of the two players has a dominant strategy. ANS: B 10. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is one a. in which neither Bonnie nor Clyde confesses. b. in which both Bonnie and Clyde confess. c. that involves neither Bonnie nor Clyde pursuing a dominant strategy. d. that is ideal in terms of Bonnie’s self-interest and in terms of Clyde’s self-interest. ANS: B 11. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is a. a very good outcome for both players. b. a very good outcome for Bonnie, but a bad outcome for Clyde. c. a very good outcome for Clyde, but a bad outcome for Bonnie. d. a bad outcome for both players. ANS: D 12. In a game, a dominant strategy is a. the best strategy for a player to follow only if other players are cooperative. b. the best strategy for a player to follow, regardless of the strategies followed by other players. c. a strategy that must appear in every game. d. a strategy that leads to one player's interests dominating the interests of the other players. ANS: B 13. A dominant strategy is one that a. makes every player better off. b. makes at least one player better off without hurting the competitiveness of any other player. c. increases the total payoff for the player. d. is best for the player, regardless of what strategies other players follow. ANS: D Chapter 17/Oligopoly ❖ 155 Table 17-9 Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare related expenses associated with cigarette smoking. Both cigarette firms have evidence that indicates that cigarette smoke causes lung cancer (and other related illnesses). State prosecutors do not have access to the same data used by cigarette manufacturers and thus will have difficulty recovering full costs without the help of at least one cigarette firm study. Each firm has been presented with an opportunity to lower its liability in the suit if it cooperates with attorneys representing the states. Concede that cigarette smoke causes lung cancer Firm A 14. Concede that cigarette smoke causes lung cancer Argue that there is no evidence that smoke causes cancer Firm B Argue that there is no evidence that smoke causes cancer Firm A profit = $–20 Firm B profit = $–15 Firm A profit = $–50 Firm B profit = $–5 Firm A profit = $–5 Firm B profit = $–50 Firm A profit = $–10 Firm B profit = $–10 Refer to Table 17-9. Pursuing its own best interests, Firm A will concede that cigarette smoke causes lung cancer a. only if Firm B concedes that cigarette smoke causes lung cancer. b. only if Firm B does not concede that cigarette smoke causes lung cancer. c. regardless of whether Firm B concedes that cigarette smoke causes lung cancer. d. None of the above. In pursuing its own best interests, Firm A will in no case concede that cigarette smoke causes lung cancer. ANS: D 15. Refer to Table 17-9. Pursuing its own best interests, Firm B will concede that cigarette smoke causes lung cancer a. only if Firm A concedes that cigarette smoke causes lung cancer. b. only if Firm A does not concede that cigarette smoke causes lung cancer. c. regardless of whether Firm A concedes that cigarette smoke causes lung cancer. d. None of the above; in pursuing its own best interests, Firm B will in no case concede that cigarette smoke causes lung cancer. ANS: D 16. Refer to Table 17-9. If both firms follow a dominant strategy, Firm A's profits (losses) will be a. $-50 b. $-20 c. $-10 d. $-5 ANS: C 17. Refer to Table 17-9. If both firms follow a dominant strategy, Firm B's profits (losses) will be a. $-50 b. $-15 c. $-10 d. $-5 ANS: C 156 ❖ Chapter 17/Oligopoly 18. Refer to Table 17-9. When this game reaches a Nash equilibrium, profits for Firm A and Firm B will be a. $-5 and $-50, respectively. b. $-10 and $-10, respectively. c. $-20 and $-15, respectively. d. $-50 and $-5, respectively. ANS: B Table 17-10 Each year the United States considers renewal of Most Favored Nation (MFN) trading status with Farland (a mythical nation). Historically, legislators have made threats of not renewing MFN status because of human rights abuses in Farland. The non-renewal of MFN trading status is likely to involve some retaliatory measures by Farland. The payoff table below shows the potential economic gains associated with a game in which Farland may impose trade sanctions against U.S. firms and the United States may not renew MFN status with Farland. The table contains the dollar value of all trade-flow benefits to the United States and Farland. United States 19. Don't renew MFN status with Farland Renew MFN status with Farland Farland Impose trade sanctions Do not impose trade sanctions against U.S. firms against U.S. firms U.S. trade value = $65 b U.S. trade value = $140 b Farland trade value = $75 b Farland trade value = $5 b U.S. trade value = $35 b U.S. trade value = $130 b Farland trade value = $285 b Farland trade value = $275 b Refer to Table 17-10. Pursuing its own best interests, Farland will impose trade sanctions against U.S. firms a. only if the U.S. does not renew MFN status with Farland. b. only if the U.S. renews MFN status with Farland. c. regardless of whether the U.S. renews MFN status with Farland. d. None of the above is correct. In pursuing its own best interests, Farland will in no case impose trade sanctions against U.S. firms. ANS: C 20. Refer to Table 17-10. Pursuing its own best interests, the U.S. will renew MFN status with Farland a. only if Farland does not impose trade sanctions against U.S. firms. b. only if Farland imposes trade sanctions against U.S. firms. c. regardless of whether Farland imposes trade sanctions against U.S. firms. d. None of the above is correct. In pursuing its own best interests, the United States will in no case renew MFN status with Farland. ANS: D 21. Refer to Table 17-10. This particular game a. features a dominant strategy for the U.S. b. features a dominant strategy for Farland. c. is a version of the prisoners' dilemma game. d. All of the above are correct. ANS: D 22. Refer to Table 17-10. If both countries follow a dominant strategy, the value of trade flow benefits for Farland will be a. $5 b. b. $75 b. c. $275 b. d. $285 b. ANS: B Chapter 17/Oligopoly ❖ 157 23. Refer to Table 17-10. If both countries follow a dominant strategy, the value of trade flow benefits for the United States will be a. $35 b. b. $65 b. c. $130 b. d. $140 b. ANS: B 24. Refer to Table 17-10. When this game reaches a Nash equilibrium, the value of trade flow benefits will be a. United States $35 b and Farland $285 b. b. United States $65 b and Farland $75 b. c. United States $140 b and Farland $5 b. d. United States $130 b and Farland $275 b. ANS: B 25. Refer to Table 17-10. If trade negotiators are able to communicate effectively about the consequences of various trade policies (i.e., enter into an agreement about the policy they should adopt), then we would expect the countries to agree to which outcome? a. United States $35 b and Farland $285 b b. United States $65 b and Farland $75 b c. United States $140 b and Farland $5 b d. United States $130 b and Farland $275 b ANS: D 26. Refer to Table 17-10. Assume that trade negotiators meet to discuss trade policy between the United States and Farland. If neither party to the negotiation is able to trust the other party, then a. each should assume that the other will choose a strategy that optimizes total value of the trade relationship. b. the Nash equilibrium will provide the largest possible gains to each party. c. Chinese negotiators should assume that United States negotiators will implement a policy that is in the mutual best interest of both countries. d. each should follow its dominant strategy. ANS: D 158 ❖ Chapter 17/Oligopoly Table 17-11 Two home-improvement stores (Big Box Deluxe and Homes R Us) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits of the two home-improvement stores are shown in the table below. Homes R Us Increase the size of store and parking lot Do not increase the size of store and parking lot Big Box Deluxe Increase the size of store Do not increase the size of and parking lot store and parking lot Big Box Deluxe = $0.50 Big Box Deluxe = $0.20 million million Homes R Us = $0.75 million Homes R Us = $1.70 million Big Box Deluxe = $1.60 Big Box Deluxe = $1.00 million million Homes R Us = $0.30 million Homes R Us = $1.25 million 27. Refer to Table 17-11. Increasing the size of its store and parking lot is a dominant strategy for a. Big Box Deluxe, but not for Homes R Us. b. Homes R Us, but not for Big Box Deluxe. c. both stores. d. neither store. ANS: C 28. Refer to Table 17-11. If both stores follow a dominant strategy, Homes R Us's annual profit will grow by a. $0.30 million. b. $0.75 million. c. $1.25 million. d. $1.70 million. ANS: B 29. Refer to Table 17-11. If both stores follow a dominant strategy, Big Box Deluxe's annual profit will grow by a. $0.20 million. b. $0.50 million. c. $1.00 million. d. $1.60 million. ANS: B 30. Refer to Table 17-11. When this game reaches a Nash equilibrium, annual profit will grow by a. $0.75 million for Homes R Us and by $0.50 million for Big Box Deluxe. b. $1.70 million for Homes R Us and by $0.20 million for Big Box Deluxe. c. $0.30 million for Homes R Us and by $1.60 million for Big Box Deluxe. d. $1.25 million for Homes R Us and by $1.00 million for Big Box Deluxe. ANS: A 31. Refer to Table 17-11. Suppose the owners of Big Box Deluxe and Homes R Us meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. They should both agree to a. increase their store and parking lot sizes. b. refrain from increasing their store and parking lot sizes. c. be more competitive in capturing market share. d. share the context of their conversation with the Federal Trade Commission. ANS: B Chapter 17/Oligopoly ❖ 159 Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. ABC's Decision High output ABC's profit = $3 million Low output ABC's profit = $2.5 million High output XYZ's profit = $3 million XYZ's Decision ABC's profit = $4 million XYZ's profit = $4 million ABC's profit = $3.5 million Low output XYZ's p rofit = $2.5 million 32. XYZ's p rofit = $3.5 million Refer to Figure 17-1. The dominant strategy for ABC is to a. produce high output, and the dominant strategy for XYZ is to produce high output. b. produce high output, and the dominant strategy for XYZ is to produce low output. c. produce low output, and the dominant strategy for XYZ is to produce high output. d. produce low output, and the dominant strategy for XYZ is to produce low output. ANS: A 33. Refer to Figure 17-1. Which of the following statements is correct? a. ABC can potentially earn its highest possible profit if it produces a high level of output, and for that reason it is a dominant strategy for ABC to produce a high level of output. b. The highest possible combined profit for the two firms occurs when both produce a low level of output, and for that reason producing a low level of output is a dominant strategy for both firms. c. Regardless of the strategy pursued by ABC, XYZ’s best strategy is to produce a high level of output, and for that reason producing a high level of output is a dominant strategy for XYZ. d. Our knowledge of game theory suggests that the most likely outcome of the game, if it is played only once, is for one firm to produce a low level of output and for the other firm to produce a high level of output. ANS: C 34. Refer to Figure 17-1. If this game is played only once, then the most likely outcome is that a. both firms produce a low level of output. b. ABC produces a low level of output and XYZ produces a high level of output. c. ABC produces a high level of output and XYZ produces a low level of output. d. both firms produce a high level of output. ANS: D 160 ❖ Chapter 17/Oligopoly 35. Much of the research on game theory in recent decades was driven by attempts to analyze actions of players during a. the Great Depression of the 1930s. b. World War II. c. the Cold War between the United States and the Soviet Union. d. the ascendancy of the conservative movement in the United States in the 1970s and 1980s. ANS: C 36. Consider a game of the “Jack and Jill” type in which a market is a duopoly and each firm decides to produce either a “high” quantity of output or a “low” quantity of output. If the two firms successfully reach and maintain the cooperative outcome of the game, then a. both the combined profit of the firms and total surplus are maximized. b. the combined profit of the firms is maximized but total surplus is not maximized. c. the combined profit of the firms is not maximized but total surplus is maximized. d. neither the combined profit of the firms nor total surplus is maximized. ANS: B 37. Games that are played more than once generally a. lead to outcomes dominated purely by self-interest. b. lead to outcomes that do not reflect joint rationality. c. encourage cheating on cartel production quotas. d. make collusive arrangements easier to enforce. ANS: D 38. Very often, the reason that players can solve the prisoners' dilemma and reach the most profitable outcome is that a. each player tries to capture a large portion of the market share. b. the players play the game not once but many times. c. the game becomes more competitive. d. self interest results in the Nash equilibrium which is the best outcome for the players. ANS: B 39. In a two-person repeated game, a tit-for-tat strategy starts with a. cooperation and then each player mimics the other player's last move. b. cooperation and then each player is unresponsive to the strategic moves of the other player. c. noncooperation and then each player pursues his or her own self-interest. d. noncooperation and then each player cooperates when the other player demonstrates a desire for the cooperative solution. ANS: A 40. A tit-for-tat strategy starts out a. conciliatory and then encourages an optimal social outcome among the other players. b. unfriendly and then encourages friendly strategies among players. c. friendly, then penalizes unfriendly players, and forgives them if warranted. d. aggressive, then compensates losing players, and eventually forgives unfriendly players. ANS: C Chapter 17/Oligopoly ❖ 161 41. Individual profit earned by Dave, the oligopolist, depends on which of the following? (i) The quantity of output that Dave produces (ii) The quantities of output that the other firms in the market produce (iii) The extent of collusion between Dave and the other firms in the market a. b. c. d. (i) and (ii) (ii) and (iii) (iii) only (i), (ii), and (iii) ANS: D 42. Which of the following statements is (are) true of the prisoners' dilemma? (i) Rational self-interest leads neither party to confess. (ii) Cooperation between the prisoners is difficult to maintain. (iii) Cooperation between the prisoners is individually rational. a. b. c. d. (ii) only (ii) and (iii) (i) and (iii) (i), (ii), and (iii) ANS: A 43. 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. ANS: B Scenario 17-2. Imagine that two oil companies, Lexxon and PB, own adjacent oil fields. Under the fields is a common pool of oil worth $48 million. Drilling a well to recover oil costs $4 million per well. If each company drills one well, each will get half of the oil and earn a $20 million profit ($24 million in revenue - $4 million in costs). Assume that having X percent of the total wells means that a company will collect X percent of the total revenue. 44. Refer to Scenario 17-2. If Lexxon were to drill a second well, what would its profit be if PB did not drill a second well? a. $22 million b. $24 million c. $26 million d. $28 million ANS: B 45. Refer to Scenario 17-2. If Lexxon were to drill a second well and PB also drilled a second well, what would Lexxon's profit be? a. $14 million b. $16 million c. $18 million d. $22 million ANS: B 162 ❖ Chapter 17/Oligopoly 46. Refer to Scenario 17-2. PB's dominant strategy would lead to what sort of well-drilling behavior? a. PB will never drill a second well. b. PB will always drill a second well. c. PB will drill a second well only if Lexxon drills a well. d. PB will drill a second well only if Lexxon does not drill a well. ANS: B 47. Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil worth $30 million. For each well that is drilled, the company that drills the well incurs a cost of $3 million. Each company can drill up to two wells. What is the likely outcome of this game if each company pursues its own self-interest? a. Each company drills one well and experiences a profit of $12 million. b. Each company drills one well and experiences a profit of $10 million. c. Each company drills two wells and experiences a profit of $9 million. d. One company drills two wells and experiences a profit of $14 million; the other company drills one well and experiences a profit of $7 million. ANS: C 48. We know that people tend to overuse common resources. This problem can be viewed as an example of a. a game in which the players succeed in reaching the cooperative outcome. b. the prisoners’ dilemma. c. a situation to which game theory does not apply because of a lack of strategic thinking. d. a situation to which game theory does not apply because of too many decision-makers. ANS: B 49. The paradoxical nature of oligopoly can be demonstrated by the fact that, even though the monopoly outcome is best for the oligopolists, a. they collude to set the output level equal to the Nash equilibrium level of output. b. they have incentives to increase production above the monopoly outcome. c. they do not behave as profit maximizers. d. self-interest juxtaposes the profits earned at the Nash equilibrium. ANS: B 50. Hot-dog vendors on the beach fail to cooperate with one another on the quantity of hot-dogs they should sell to earn monopoly profits. A consequence of their failure is that, relative to the outcome the vendors would like, (i) the quantity of hot dogs supplied is closer to the socially optimal level. (ii) the price of hot dogs is closer to marginal cost. (iii) the hot-dog market at the beach is less competitive. a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) (iii) only ANS: A 51. Why would lack of cooperation between criminal suspects be desirable for society as a whole? a. The suspects are able to choose optimal outcomes for themselves by acting in their own self interest. b. The prisoners' dilemma safeguards the criminals' constitutional rights. c. More criminals will be convicted. d. None of the above is correct. ANS: C Chapter 17/Oligopoly ❖ 163 52. What happens when the prisoners' dilemma game is repeated numerous times in an oligopoly market? (i) The firms may well reach the monopoly outcome. (ii) The firms may well reach the competitive outcome. (iii) Buyers of the oligopolists' product will likely be worse off as a result. a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) (i), (ii), and (iii) ANS: C 53. In game theory, a Nash equilibrium is a. an outcome in which each player is doing his best given the strategies chosen by the other players. b. an outcome in which no player wishes to change their chosen strategy given the strategies chosen by the other players. c. the outcome that occurs when all players have a dominant strategy. d. All of the above are correct. ANS: D Scenario 17-3. Consider two countries, Muria and Zenya, that are engaged in an arms race. Each country must decide whether to build new weapons or to disarm existing weapons. Each country prefers to have more arms than the other because a large arsenal gives it more influence in world affairs. But each country also prefers to live in a world safe from the other country's weapons. The following table shows the possible outcomes for each decision combination. The numbers in each cell represent the country’s ranking of the outcome (4 = best outcome, 1 = worst outcome). Zenya Muria 54. Build new weapons Disarm existing weapons Build new weapons Muria: 2 Zenya: 2 Muria: 1 Zenya: 4 Disarm existing weapons Muria: 4 Zenya: 1 Muria: 3 Zenya: 3 Refer to Scenario 17-3. If Zenya chooses to build new weapons, then Muria will a. disarm in order to prevent the loss of influence in world affairs. b. disarm in order to promote world peace. c. build new weapons in order to prevent the loss of influence in world affairs. d. None of the above are correct. ANS: C 55. Refer to Scenario 17-3. If Zenya chooses to disarm its existing weapons, then Muria will a. disarm in order to increase its influence in world affairs. b. disarm in order to promote world peace. c. build new weapons in order to promote world peace. d. build new weapons in order to increase its influence in world affairs. ANS: D 164 ❖ Chapter 17/Oligopoly 56. Refer to Scenario 17-3. Which of these statements is correct? (i) Muria is better off building new weapons if Zenya builds new weapons. (ii) Muria is better off building new weapons if Zenya disarms existing weapons. (iii) Building new weapons is Muria's dominant strategy. a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) (i), (ii), and (iii) ANS: D 57. Refer to Scenario 17-3. Building new weapons is a dominant strategy for a. Muria, but not for Zenya. b. Zenya, but not for Muria. c. both Muria and Zenya. d. neither Muria nor Zenya. ANS: C 58. Refer to Scenario 17-3. Suppose the two countries agreed to disarm existing weapons. In reality these two countries may have a hard time keeping this agreement due to which of the following reasons? (i) Even though Muria has no incentive to cheat on the agreement, Zenya has an incentive to cheat on the agreement. (ii) Much like the prisoners’ dilemma, both countries are better off reneging on the agreement and building new weapons. (iii) Both countries want to increase their world power by building new weapons. a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) (i), (ii), and (iii) ANS: B Scenario 17-4. Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million. 59. Refer to Scenario 17-4. What will these two companies do if they behave as individual profit maximizers? a. Neither company will advertise. b. Both companies will advertise. c. One company will advertise, the other will not. d. There is no way of knowing without knowing how many customers are stolen through advertising. ANS: B 60. Refer to Scenario 17-4. PM Inc.'s dominant strategy is to a. refrain from advertising regardless of whether Brown Inc. advertises. b. advertise only if Brown Inc. advertises. c. advertise only if Brown Inc. does not advertise. d. advertise regardless of whether Brown Inc. advertises. ANS: D Chapter 17/Oligopoly ❖ 165 61. Refer to Scenario 17-4. In 1971, Congress passed a law that banned cigarette advertising on television. If cigarette companies are profit maximizers, it is likely that a. neither company opposed the ban on advertising. b. Brown Inc. sued the federal government on grounds that the ban constitutes a civil rights violation. c. both companies sued the federal government on grounds that the ban constitutes a civil rights violation. d. both companies retaliated with black-market operations. ANS: A 62. Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and finds a small bag of marijuana and arrests the two. During the interrogation, each is separately offered the following: "If you confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will get 10 years in prison. If you both confess, you will each get 5 years." If neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of marijuana. If each suspected drug dealer follows a dominant strategy, what should he/she do? a. Confess regardless of the partner's decision b. Confess only if the partner confesses c. Don’t confess regardless of the partner's decision d. Don’t confess only if the partner doesn’t confess ANS: A 63. A lack of cooperation by oligopolists trying to maintain monopoly profits a. is desirable for society as a whole. b. is not desirable for society as a whole. c. may or may not be desirable for society as a whole. d. is not a concern due to antitrust laws. ANS: A 64. Oligopolists may well be able to reach their preferred, cooperative outcome if a. the number of oligopolists is large. b. they learn that a Nash equilibrium is in their best long-term interests. c. a sufficient number of firms can be persuaded to lower their prices. d. the game they play is repeated a sufficient number of times. ANS: D 65. Martha and Oleg are competitors in a local market and each is trying to decide if it is worthwhile to advertise. If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $15,000 and the other will earn $7,000. To earn the highest profit, Martha a. should advertise, and she will earn $5,000. b. should advertise, and she will earn $15,000. c. should not advertise, and she will earn $10,000. d. has no dominant strategy. ANS: D 166 ❖ Chapter 17/Oligopoly 66. Barb and Sue are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $5,000. If they both advertise on radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $8,000 and the other will earn $3,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $15,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant strategy, then Barb will a. advertise on TV and earn $5,000. b. advertise on radio and earn $7,000. c. not advertise at all and earn $10,000. d. None of the above is correct. Barb and Sue do not have dominant strategies. ANS: A 67. Dave and Andy are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $4,000. If they both advertise on radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $6,000 and the other will earn $5,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $11,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant strategy, then Dave will a. advertise on TV and earn $4,000. b. advertise on radio and earn $7,000. c. advertise on TV and earn $11,000. d. not advertise and earn $10,000. ANS: B 68. George and Jerry are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $3,000. If they both advertise on radio, each will earn a profit of $5,000. If neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and the other advertises on radio, then the one advertising on TV will earn $4,000 and the other will earn $2,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $8,000 and the other will earn $5,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $9,000 and the other will earn $6,000. If both follow their dominant strategy, then George will a. advertise on TV and earn $3,000. b. advertise on radio and earn $5,000. c. advertise on TV and earn $8,000. d. not advertise and earn $10,000. ANS: D 69. Laurel and Janet are competitors in a local market and each is trying to decide if it is worthwhile to advertise. If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $12,000 and the other will earn $2,000. In this version of the prisoners' dilemma, if the game is played only once, Laurel should a. advertise, but if the game is to be repeated many times she should probably not advertise. b. advertise, and if the game is to be repeated many times she should still probably advertise. c. not advertise, but if the game is to be repeated many times she should probably advertise. d. not advertise, and if the game is to be repeated many times she should still not advertise. ANS: A Chapter 17/Oligopoly ❖ 167 Table 17-12. This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). B A 70. Up Down Right (2, 2) (1, 3) Left (3, 1) (0, 0) Refer to Table 17-12. Which of the following statements about this game is true? a. Up is a dominant strategy for A and Right is a dominant strategy for B. b. Up is a dominant strategy for A and Left is a dominant strategy for B. c. Down is a dominant strategy for A and Right is a dominant strategy for B. d. Down is a dominant strategy for A and Left is a dominant strategy for B. ANS: A 71. Refer to Table 17-12. Which outcome is the Nash equilibrium in this game? a. Up-Right b. Up-Left c. Down-Right d. Down-Left ANS: A Table 17-13. This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). B Left Center Right Up (1, 4) (6, 2) (3, 1) A Middle (2, 2) (4, 6) (5, 7) Down (3, 2) (5, 5) (4, 3) 72. Refer to Table 17-13. Which of the following statements regarding this game is true? a. Both players have a dominant strategy. b. Player A has a dominant strategy, but player B does not have a dominant strategy. c. Player A does not have a dominant strategy, but player B does have a dominant strategy. d. Neither player has a dominant strategy. ANS: D 73. Refer to Table 17-13. Which of the following outcomes represents a Nash equilibrium in the game? a. Up-Center b. Middle-Right c. Down-Left d. Down-Center ANS: B 168 ❖ Chapter 17/Oligopoly Table 17-14. This table shows a game played between two players, A and B. The payoffs are given in the table as (Payoff to A, Payoff to B). A 74. Up Middle Down B Center (2, 5) (5, 3) (4, 4) Left (4, 2) (3, 1) (1, 3) Right (3, 3) (5, 2) (6, 1) Refer to Table 17-14. Which of the following statements is true regarding this game? a. Both players have a dominant strategy. b. Neither player has a dominant strategy. c. A has a dominant strategy, but B does not have a dominant strategy. d. B has a dominant strategy, but A does not have a dominant strategy. ANS: D 75. Refer to Table 17-14. This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). Which of the following outcomes represents a Nash equilibrium in the game? a. Middle-Center b. Down-Center c. Up-Left d. More than one of the above is a Nash equilibrium in this game. ANS: A Table 17-15. This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B). Firm B Firm A 76. Q=2 Q=3 Q=2 (10, 10) (12, 8) Q=3 (8, 12) (6, 6) Refer to Table 17-15. In this game, a. neither player has a dominant strategy. b. both players have a dominant strategy. c. Firm A has a dominant strategy, but Firm B does not have a dominant strategy. d. Firm B has a dominant strategy, but Firm A does not have a dominant strategy. ANS: A 77. Refer to Table 17-15. Which of the following outcomes represent the Nash equilibrium in this game? a. Q=2 for Firm A and Q=3 for Firm B. b. Q=3 for Firm A and Q=2 for Firm B. c. There is no Nash equilibrium in this game since neither player has a dominant strategy. d. Both a and b are correct. ANS: D Chapter 17/Oligopoly ❖ 169 Table 17-16. This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 5 units or 6 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B). Firm B Firm A 78. Q=5 Q=6 Q=5 (24, 24) (30, 10) Q=6 (10, 30) (19, 19) Refer to Table 17-16. The dominant strategy For Firm A is to produce a. 5 units and the dominant strategy for Firm B is to produce 5 units. b. 5 units and the dominant strategy for Firm B is to produce 6 units. c. 6 units and the dominant strategy for Firm B is to produce 5 units. d. 6 units and the dominant strategy for Firm B is to produce 6 units. ANS: D 79. Refer to Table 17-16. The Nash equilibrium for this game is a. 5 units of output for Firm A and 5 units of output for Firm B. b. 5 units of output for Firm A and 6 units of output for Firm B. c. 6 units of output for Firm A and 5 units of output for Firm B. d. 6 units of output for Firm A and 6 units of output for Firm B. ANS: D 80. The prisoners' dilemma game a. is a situation in which two players both have dominant strategies which lead to the highest total payoff for the two players. b. has no Nash equilibrium since players, after agreeing to play their dominant strategy, will have an incentive to switch to another strategy. c. has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would agree to if they could cooperate with each other. d. Both a and c are correct. ANS: C 81. In a prisoners' dilemma game, a. the solution when playing the game once will be the same as the solution when the players play the game repeatedly, since agreements cannot be maintained in a prisoners' dilemma. b. if the players play the game repeatedly, the players can achieve a higher payoff, on average, than when they play the game only once. c. repeated play will always result in a better outcome for both players than when the game is played only once. d. the tit-for-tat strategy in repeated play requires players to always select the opposite strategy as their opponent. ANS: B 170 ❖ Chapter 17/Oligopoly Table 17-17. Consider a small town that has two grocery stores from which residents can choose to buy a gallon of milk. The store owners each must make a decision to set a high milk price or a low milk price. The payoff table, showing profit per week, is provided below. The profit in each cell is shown as (Store 1, Store 2). Store 2 Store 1 Low Price High Price Low Price (500, 500) (100, 800) High Price (800, 100) (650, 650) 82. Refer to Table 17-17. If grocery store 2 sets a low price, what price should grocery store 1 set? And what will grocery store 1's payoff equal? a. Low price, $500 b. High price, $800 c. Low price, $100 d. High price, $100 ANS: A 83. Refer to Table 17-17. If grocery store 2 sets a high price, what price should grocery store 1 set? And what will grocery store 1's payoff equal? a. Low price, $800 b. High price, $650 c. Low price, $100 d. High price, $800 ANS: A 84. Refer to Table 17-17. If grocery store 1 sets a low price, what price should grocery store 2 set? And what will grocery store 2's payoff equal? a. Low price, $500 b. High price, $800 c. Low price, $100 d. High price, $650 ANS: A 85. Refer to Table 17-17. If grocery store 1 sets a high price, what price should grocery store 2 set? And what will grocery store 2's payoff equal? a. Low price, $800 b. High price, $100 c. Low price, $500 d. High price, $650 ANS: A 86. Refer to Table 17-17. What is grocery store 1's dominant strategy? a. Grocery store 1 does not have a dominant strategy. b. Grocery store 1 should always set a low price. c. Grocery store 1 should always set a high price. d. Grocery store 1 should set a low price when grocery store 2 sets a low price, and grocery store 1 should set a high price when grocery store 2 sets a high price. ANS: B Chapter 17/Oligopoly ❖ 171 87. Refer to Table 17-17. What is grocery store 2's dominant strategy? a. Grocery store 2 does not have a dominant strategy. b. Grocery store 2 should always set a low price. c. Grocery store 2 should always set a high price. d. Grocery store 2 should set a low price when grocery store 1 sets a low price, and grocery store 2 should set a high price when grocery store 1 sets a high price. ANS: B 88. Refer to Table 17-17. What is the Nash Equilibrium of this price-setting game? a. Grocery store 1: Low price Grocery store 2: Low price b. Grocery store 1: Low price Grocery store 2: High price c. Grocery store 1: High price Grocery store 2: How price d. Grocery store 1: High price Grocery store 2: High price ANS: A Table 17-18. Amy and Heather are two college roommates who both prefer a clean common space in their dorm room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm room's common space. The payoff table for this situation is provided below, where the higher a player’s payoff number, the better off that player is. The payoffs in each cell are shown as (payoff for Amy, payoff for Heather). Heather Amy 89. Clean Don’t Clean Clean (75, 75) (100, 15) Refer to Table 17-18. If Heather chooses to clean, then Amy will a. clean and Heather’s payoff will be 75. b. not clean and Heather’s payoff will be 100. c. clean and Heather’s payoff will be 15. d. not clean and Heather’s payoff will be 20. ANS: B 90. Refer to Table 17-18. If Heather chooses not to clean, then Amy will a. clean, and Amy’s payoff will be 100. b. not clean, and Amy’s payoff will be 20. c. clean, and Amy’s payoff will be 15. d. not clean, and Amy’s payoff will be 75. ANS: B 91. Refer to Table 17-18. If Amy chooses to clean, then Heather will a. clean, and Heather’s payoff will be 75. b. not clean, and Heather’s payoff will be 100. c. clean, and Heather’s payoff will be 15. d. not clean, and Heather’s payoff will be 20. ANS: B Don’t Clean (15, 100) (20, 20) 172 ❖ Chapter 17/Oligopoly 92. Refer to Table 17-18. If Amy chooses to not clean, then Heather will a. clean, and Heather’s payoff will be 20. b. not clean, and Heather’s payoff will be 100. c. clean, and Heather’s payoff will be 75. d. not clean, and Heather’s payoff will be 20. ANS: D 93. Refer to Table 17-18. What is Amy's dominant strategy? a. Amy has no dominant strategy. b. Amy should always choose Clean. c. Amy should always choose Don’t Clean. d. Amy has two dominant strategies, Clean and Don’t Clean, depending on the choice Heather makes. ANS: C 94. Refer to Table 17-18. What is Heather's dominant strategy? a. Heather has no dominant strategy. b. Heather should always choose Clean. c. Heather should always choose Don’t Clean. d. Heather has two dominant strategies, Clean and Don’t Clean, depending on the choice Amy makes. ANS: C 95. Refer to Table 17-18. What is the Nash Equilibrium in this dorm room cleaning game? a. Amy: Clean Heather: Clean b. Amy: Don't Clean Heather: Clean c. Amy: Clean Heather: Don't Clean d. Amy: Don't Clean Heather: Don't Clean ANS: D Chapter 17/Oligopoly ❖ 173 Figure 17-2. John and Michael are roommates. On a particular day, their apartment needs to be cleaned. Each person has to decide whether to take part in cleaning. At the end of the day, either the apartment will be completely clean (if one or both roommates take part in cleaning), or it will remain dirty (if neither roommate cleans). With happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as follows: John's Decision Clean Don't clean John's happiness = 7 John's happiness = 10 Clean Michael's Decision M ichael's happiness = 8 M ichael's happiness = 3 John's happiness = 3 John's happiness = 6 Don't clean M ichael's happiness = 10 96. M ichael's happiness = 4 Refer to Figure 17-2. The dominant strategy for John is to a. clean, and the dominant strategy for Michael is to clean. b. clean, and the dominant strategy for Michael is to refrain from cleaning. c. refrain from cleaning, and the dominant strategy for Michael is to clean. d. refrain from cleaning, and the dominant strategy for Michael is to refrain from cleaning. ANS: D 97. Refer to Figure 17-2. In pursuing his own self-interest, Michael will a. refrain from cleaning whether or not John cleans. b. clean only if John cleans. c. clean only if John refrains from cleaning. d. clean whether or not John cleans. ANS: A 98. Refer to Figure 17-2. If this game is played only once, then the most likely outcome is that a. John and Michael both clean. b. John cleans and Michael does not clean. c. Michael cleans and John does not clean. d. neither John nor Michael cleans. ANS: D 99. Refer to Figure 17-2. In pursuing his own self-interest, John will a. refrain from cleaning whether or not Michael cleans. b. clean only if Michael cleans. c. clean only if Michael refrains from cleaning. d. clean whether or not Michael cleans. ANS: A 174 ❖ Chapter 17/Oligopoly 100. Refer to Figure 17-2. The possible outcome in which both John and Michael clean is analogous to which of the following outcomes of the duopoly game? a. The duopolists collude to achieve the monopoly outcome. b. The duopolists collude to achieve the monopolistically-competitive outcome. c. The outcome is the one that is most preferable for consumers of the duopolists’ product. d. The outcome is the one that is least preferable for both the duopolists and for the consumers of their product. ANS: A Figure 17-3. Katie and Taylor are roommates. On a particular day, their lawn needs to be mowed. Each person has to decide whether to take part in mowing the lawn. At the end of the day, either the lawn will be mowed (if one or both roommates take part in mowing), or it will remain unmowed (if neither roommate mows). With happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as follows: Katie's Decision Mow Katie's happ iness = 7 Don't mow Katie's happiness = 10 Mow Taylor's Decision Taylor's happiness = 7 Katie's happiness = 5 Taylor's happiness = 2 Katie's happiness = 4 Don't mow Taylor's happiness = 8 Taylor's happiness = 4 101. Refer to Figure 17-3. The dominant strategy for Taylor is to a. mow, and the dominant strategy for Katie is to mow. b. mow, and the dominant strategy for Katie is to refrain from mowing. c. refrain from mowing, and the dominant strategy for Katie is to mow. d. refrain from mowing, and there is no dominant strategy for Katie. ANS: D 102. Refer to Figure 17-3. If this game is played only once, then which of the following outcomes is the most likely one? a. Katie and Taylor both mow. b. Katie mows and Taylor does not mow. c. Taylor mows and Katie does not mow. d. All of the above outcomes are equally likely. ANS: B 103. Refer to Figure 17-3. In pursuing her own self-interest, Taylor will a. refrain from mowing whether or not Katie mows. b. mow only if Katie mows. c. mow only if Katie refrains from mowing. d. mow whether or not Katie mows. ANS: A Chapter 17/Oligopoly ❖ 175 104. Refer to Figure 17-3. In pursuing her own self-interest, Katie will a. refrain from mowing whether or not Taylor mows. b. mow only if Taylor mows. c. mow only if Taylor refrains from mowing. d. mow whether or not Taylor mows. ANS: C Table 17-19. The Chicken Game is named for a contest in which drivers test their courage by driving straight at each other. John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul). Paul John Turn Drive Straight Turn (10, 10) (20, 5) Drive Straight (5, 20) (0, 0) 105. Refer to Table 17-19. If Paul chooses Turn, what will John choose to do and what will John’s payoff equal? a. Turn, 10 b. Drive Straight, 20 c. Turn, 5 d. Drive Straight, 0 ANS: B 106. Refer to Table 17-19. If Paul chooses Drive Straight, what will John choose to do and what will John’s payoff equal? a. Turn, 5 b. Drive Straight, 0 c. Turn, 20 d. Drive Straight, 5 ANS: A 107. Refer to Table 17-19. If John chooses Turn, what will Paul choose to do and what will Paul's payoff equal? a. Turn, 10 b. Drive Straight, 20 c. Turn, 5 d. Drive Straight, 0 ANS: B 108. Refer to Table 17-19. If John chooses Drive Straight, what will Paul choose to do and what will Paul's payoff equal? a. Turn, 5 b. Drive Straight, 0 c. Turn, 10 d. Drive Straight, 200 ANS: A 109. Refer to Table 17-19. What is Paul's dominant strategy? a. Paul has no dominant strategy. b. Paul should always choose Turn. c. Paul should always choose Drive Straight. d. Paul has more than one dominant strategy. ANS: A 176 ❖ Chapter 17/Oligopoly 110. Refer to Table 17-19. What is John's dominant strategy? a. John has no dominant strategy. b. John should always choose Turn. c. John should always choose Drive Straight. d. John has two dominant strategies. ANS: A 111. Refer to Table 17-19. How many Nash equilibria are there in this Chicken game? a. 0 b. 1 c. 2 d. 3 ANS: C 112. Refer to Table 17-19. What is (are) the Nash equilibrium (equilibria) in this Chicken game? a. John: Turn Paul: Turn b. John: Turn Paul: Drive Straight c. John: Drive Straight Paul: Turn d. Both b and c are Nash equilibria ANS: D 113. In the prisoners’ dilemma, a. the prisoners easily collude in order to achieve the best possible payoff for both. b. only one player has a dominant strategy. c. when each player chooses his dominant strategy the players achieve the best joint outcome. d. when each player chooses his dominant strategy the players reach a Nash equilibrium. ANS: D 114. In the game in which two oil companies own adjacent oil fields, the companies will not use the oil efficiently because a. neither company has a dominant strategy in the game. b. the companies collude and produce a quantity of oil that is less than the socially-efficient quantity. c. the pool from which they recover the oil is a common resource. d. the pool from which they recover the oil is not large enough to allow both companies to earn a positive profit. ANS: C 115. An equilibrium occurs in a game when a. price equals marginal cost. b. quantity supplied equals quantity demanded. c. all independent strategies counterbalance all dominant strategies. d. all players follow a strategy that they have no incentive to change. ANS: D Chapter 17/Oligopoly ❖ 177 116. The players in a two-person game are choosing between Strategy X and Strategy Y. If the second player chooses Strategy X, the first player's best outcome is to select X. If the second player chooses Strategy Y, the first player's best outcome is to select X. For the first player, Strategy X is called a a. dominant strategy. b. collusive strategy. c. repeated-trial strategy. d. cartel strategy. ANS: A 117. Suppose that two poker players believe that they are superior players to the rest of the people at their table. Further suppose that the two players make an agreement to concede hands to each other in order to drive the other players from the game first. Economists would model such behavior as a. monopolistic competition. b. game theory. c. predatory pricing. d. a dominant strategy. ANS: B 118. After initial success, the OPEC cartel saw the price of oil and the revenues of its members decline due, in part, to a. the low elasticity of demand for oil in the short run. b. the large number of buyers from each member nation. c. surging demand for oil in the early 1980s. d. OPEC members failing to produce their agreed-upon production levels. ANS: D Table 17-20. Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for repair work and a high price. The annual economic profit from each strategy is indicated in the table. The profits are shown as (Matt, Brian) in each cell. Brian Low Price High Price Low Price (1500, 1500) (5000, 200) Matt High Price (200, 3000) (4000, 4000) 119. Refer to Table 17-20. Which of the following statements is correct? a. Matt's dominant strategy is to charge a low price. b. Brian's dominant strategy is to charge a high price. c. The dominant strategy for both Brian and Matt is to charge a low price. d. Matt's dominant strategy is to charge a high price. ANS: A 120. Refer to Table 17-20. Which of the following statements is correct if Brian and Matt will play this game only once? a. The Nash equilibrium is the high price. b. A Nash equilibrium cannot be established unless Brian and Matt collude. c. A Nash equilibrium cannot be established without the players repeating the game. d. The Nash equilibrium price is the low price. ANS: D 178 ❖ Chapter 17/Oligopoly Table 17-21. Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs, and thus increase their profits, if they reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm’s product, but each firm also believes that if neither firm advertises, the costs savings will outweigh the lost sales. Listed in the table below are the individual profits for each firm. Firm B Breaks the agreement and advertises Maintains the agreement and does not advertise Breaks the agreement and advertises Firm A profit = $9,000 Firm B profit = $4,000 Firm A profit = $11,000 Firm B profit = $3,500 Firm A Maintains the agreement and does not advertise Firm A profit = $8,000 Firm B profit = $6,000 Firm A profit = $10,000 Firm B profit = $5,000 121. Refer to Table 17-21. Suppose that the two firms, A and B, make an agreement to withhold any advertising for one month in order to lower each firm’s costs and raise each firm’s profits. If the firms reach the Nash equilibrium, a. both firms will choose not to advertise. b. firm A will choose not to advertise, but firm B will break the agreement and choose to advertise. c. firm B will choose not to advertise, but firm A will break the agreement and choose to advertise. d. both firms will break the agreement and choose to advertise. ANS: D 122. Refer to Table 17-21. At the Nash equilibrium, how much profit will Firm A earn? a. $8,000 because firm A will maintain the agreement not to advertise, but firm B will break the agreement and choose to advertise. b. $9,000 because each firm will break the agreement and choose to advertise. c. $10,000 because each firm will maintain the agreement and choose not to advertise. d. $11,000 because firm B will maintain the agreement not to advertise, but firm A will break the agreement and choose to advertise. ANS: B 123. Refer to Table 17-21. At the Nash equilibrium, how much profit will Firm B earn? a. $3,500 because firm B will maintain the agreement not to advertise, but firm A will break the agreement and choose to advertise. b. $4,000 because each firm will break the agreement and choose to advertise. c. $5,000 because each firm will maintain the agreement and choose not to advertise. d. $6,000 because firm A will maintain the agreement not to advertise, but firm B will break the agreement and choose to advertise. ANS: B 124. In which of the following games is it clearly the case that the cooperative outcome of the game is good for the two players and good for society? a. Two guilty criminals have been captured by the police, and each prisoner decides whether to confess or to remain silent. b. Two airlines dominate air travel between City A and City B, and each airline decides whether to charge a “high” airfare or a “low” airfare. c. Two duopoly firms account for all of the production in a market, and each firm decides whether to produce a “high” amount of output or a “low” amount of output. d. Two oil companies own adjacent oil fields over a common pool of oil, and each company decides whether to drill one well or two wells. ANS: D Chapter 17/Oligopoly ❖ 179 125. In which of the following games is it clearly the case that the cooperative outcome of the game is good for the two players and bad for society? a. Two oil companies own adjacent oil fields over a common pool of oil, and each company decides whether to drill one well or two wells. b. Two airlines dominate air travel between City A and City B, and each airline decides whether to charge a “high” airfare or a “low” airfare on flights between those two cities. c. Two superpowers decide whether to build new weapons or to disarm. d. In all of the above cases, the cooperative outcome of the game is good for the two players and bad for society ANS: B 126. Nobel prize-winner Thomas Schelling a. opposed the use of game theory as a means of analyzing strategic situations. b. used mathematics to give precise formulations to game theory. c. described drug addiction as a “game against oneself.” d. had his life portrayed in the movie A Beautiful Mind. ANS: C | Economists