Chapter 17 Oligopoly True False

Chapter 17 Oligopoly TRUE/FALSE 1. The essence of an oligopolistic market is that there are only a few sellers. ANS: T 2. Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding oligopolistic markets. ANS: F 3. In a competitive market, strategic interactions among the firms are not important. ANS: T 4. For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger. ANS: F 5. Suppose three firms form a cartel and agree to charge a specific price for their output. Each individual firm has an incentive to maintain the agreement because the firm’s individual profits will be the greatest under the cartel arrangement. ANS: F 6. If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the same level of output as they would produce in a Nash equilibrium. ANS: F 7. Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same. ANS: F 8. Cartels with a small number of firms have a greater probability of reaching the monopoly outcome than do cartels with a larger number of firms. ANS: T 9. As the number of firms in an oligopoly becomes very large, the price effect disappears. ANS: T 10. If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the cartel is equal to what it would be if the market were a monopoly. ANS: T 11. As the number of firms in an oligopoly increases, the magnitude of the price effect increases. ANS: F 12. All examples of the prisoner’s dilemma game are characterized by one and only one Nash equilibrium. ANS: F 129 130 ❖ Chapter 17/Oligopoly 13. If two players engaged in a prisoner’s dilemma game are likely to repeat the game, they are more likely to cooperate than if they play the game only once. ANS: T 14. The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members. ANS: T 15. In the prisoners' dilemma game, one prisoner is always better off confessing, no matter what the other prisoner does. ANS: T 16. In the prisoners' dilemma game, confessing is a dominant strategy for each of the two prisoners. ANS: T 17. The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that the two prisoners play in the prisoners' dilemma. ANS: T 18. In the case of oligopolistic markets, self-interest makes cooperation difficult and it often leads to an undesirable outcome for the firms that are involved. ANS: T 19. When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes both parties to cooperate. ANS: T 20. A tit-for-tat strategy, in a repeated game, is one in which a player starts by cooperating and then does whatever the other player did last time. ANS: T 21. One way that public policy encourages cooperation among oligopolists is through antitrust law. ANS: F 22. The Sherman Antitrust Act prohibits competing firms from even talking about fixing prices. ANS: T 23. Resale price maintenance prevents retailers from competing on price. ANS: T 24. Some business practices that appear to reduce competition, such as resale price maintenance, may have legitimate economic purposes. ANS: T 25. In 2007 the U.S. Supreme Court ruled that it was not necessary illegal for manufacturers and distributors to agree on minimum retail prices. ANS: T Chapter 17/Oligopoly ❖ 131 26. Tying can be thought of as a form of price discrimination. ANS: T 27. Policymakers should be aggressive in using their powers to place limits on firm behavior, because business practices that appear to reduce competition never have any legitimate purposes. ANS: F