Essentials of Economics 4th Edition Krugman Test Bank

1.
In an oligopoly:
A) there are many sellers.
B) there are no barriers to entry.
C) firms recognize their interdependence.
D) total surplus is maximized.
2. The most important source of oligopoly in an industry is:

A) economies of scale.
B) government regulation.
C) technological inferiority.
D) ownership of plentiful resources.
3. An industry that is dominated by a few firms, each of which recognizes that its own
choices can affect the choices of its rivals and vice versa, is:
A) a monopoly.
B) an oligopoly.
C) characterized by monopolistic competition.
D) characterized by perfect competition.
4. Oligopoly is a market structure that is characterized by a _____ number of _____ firms

producing _____ products.
A) small; interdependent; identical or differentiated
B) small; independent; identical or differentiated
C) large; relatively small independent; differentiated
D) large; relatively small independent; identical
5. To be called an oligopoly, an industry must have:

A) independence in decision making.
B) a horizontal demand curve.
C) a small number of interdependent firms.
D) relatively easy entry and exit.
6. Oligopoly is a market structure characterized by:

A) independence in decision making.
B) interdependence: each firm's decision affects the profit of the other firms.
C) substantial diseconomies of scale.
D) a large number of small firms.
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7. The market structure characterized by a few interdependent firms and barriers to entry is
called:
A) monopolistic competition.
B) perfect competition.
C) oligopoly.
D) monopoly.
8. In oligopoly, a firm must realize that:

A) what it does has no effect on the other firms in the industry.
B) its behavior will be ignored by other firms in the industry.
C) another major firm may dominate choices in the industry, and it will have to
behave accordingly.
D) collusion was made legal in 2004.
9. A firm that is in an oligopoly knows that its _____ affect its _____ and that the _____ of
its rivals will affect it.
A) actions; rivals; reactions
B) price changes; total revenue in a positive way; reactions
C) actions rarely; rivals; actions
D) price increases; total revenue in the long run only; large but not small price changes
10. The market structure that is characterized by only a small number of producers is:
A) oligopoly.
C) monopoly.
D) monopolistic competition.
11. Which of the following scenarios best describes an oligopolistic industry?

A) A single cable company serves customers in a small town.
B) Thousands of soybean farmers sell their output in a global commodities market.
C) Coca-Cola and Pepsi sell most of the soft drinks consumed around the world.
D) A college has one bookstore selling textbooks to students.
12. An industry is dominated by a few firms. Each of these firms acknowledges that its own
choices affect the choices of its rivals. Each firm also recognizes that its rivals' choices
affect the decisions it makes. This industry is an example of:
A) a monopoly.
B) an oligopoly.
C) monopolistic competition.
D) perfect competition.
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13. Oligopoly is a market structure that is characterized by a _____ number of _____ firms
that produce _____ products.
A) large; relatively small and independent; identical
B) small; independent; identical or differentiated
C) large; relatively small and independent; differentiated
D) small; interdependent; identical or differentiated
14. An industry characterized by a few interdependent firms and by barriers to entry is

called:
A) perfect competition.
B) monopolistic competition.
C) monopoly.
D) oligopoly.
15. Large barriers to entry in the gas station business explain why the two only gas stations
in a small town:
A) can earn an economic profit in the long run.
B) must produce at the minimum average total cost in the long run.
C) have no fixed costs in the long run.
D) must produce a level of output such that MR = MC to maximize their profit.
16. An industry with only two firms is generally called:

A) a monopoly.
C) a duopoly.
D) perfect competition.
17. A duopoly is an industry that consists of:

A) a single firm.
B) two firms.
C) three or more firms.
D) a large number of small firms.
18. An industry that consists of two firms is:

A) a duopoly.
B) a monopoly.
C) a monopsony.
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19. _____ occurs when the only two firms in an industry agree to fix the price at a given
level.
A) Collusion
B) The ability to satisfy demand
C) Price extortion
D) Price leadership
20. An extreme case of oligopoly in which firms collude to raise joint profits is known as a:
A) duopoly.
B) cartel.
C) dominant producer.
D) price war.
21. If there are two gas stations in a very small town, then the gas station business there is
probably best characterized as:
A) perfectly competitive.
B) monopolistically competitive.
C) monopolistic.
D) oligopolistic.
22. Collusive agreements are typically difficult for cartels to maintain because each firm can
increase profits by:
A) producing more than the quantity that maximizes joint profits.
B) producing less than the quantity that maximizes joint profits.
C) charging more than the price that maximizes joint cartel profits.
D) advertising less than will maximize joint cartel profits.
23. Which of the following characteristics make an industry more conducive to collusive
behavior?
A) Firms in the industry have very different marginal costs of production.
B) Firms in the industry produce goods with significantly different product attributes.
C) Firms in the industry are operating at a maximum productive capacity that cannot
be easily altered in the short run.
D) Firms in the industry serve customers that can easily switch between firms as they
search for the best price.
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24. The owners of the gas stations in a town are trying to set up a cartel that will raise the
price of gasoline. Which of the following will INCREASE the chances that the cartel
will fail because of cheating by the owners?
A) All of the gas stations face the same costs.
B) There are only a few gas stations.
C) The gas stations are producing as much as they can.
D) The gas stations vary in terms of the services that they provide.
25. In an oligopoly market, collusion between firms usually leads to higher profits than
noncooperative behavior. However, collusion doesn't usually occur in the United States
because:
I. it is illegal.
II. there is an incentive for each firm to cheat on a collusive agreement.
III. an oligopolistic firm will typically prefer lower profits if the only way to make
higher profits is to improve the profit position of its rivals.
A) I only.
B) II only.
C) I and II.
D) II and III.
26. Gary's Gas and Frank's Fuel are the only two providers of gasoline in their small town.
Gary and Frank decide to form a cartel to raise the price of gasoline. The total industry
profits are highest when _____ cheat(s) on the agreement, and Gary's profits are highest
when _____.
A) neither firm; neither firm cheats on the agreement
B) neither firm; Gary cheats but Frank does not
C) both firms; Gary cheats but Frank does not
D) both Gary and Frank; both Gary and Frank cheat
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Use the following to answer questions 27-53:
27. (Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets.
The market for gadgets consists of two producers, Margaret and Ray. Each firm can
produce gadgets with no marginal cost or fixed cost. If these two producers formed a
cartel and acted to maximize total industry profits, total industry output would be _____
and the price would be _____.
A) 1,000; $10
B) 100; $9
C) 400; $6
D) 500; $5
cartel and acted to maximize total industry profits, total industry profit would be:
A) $10,000.
B) $5,000.
C) $2,500.
D) $1,250.
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cartel, split the production of output equally, and acted to maximize total industry
profits, each firm's output would be _____ and each firm's profit would be _____.
A) 500; $2,500
B) 250; $1,250
C) 1,000; $500
D) 1,000; $10,000
produce gadgets with no marginal cost or fixed cost. Suppose that these two producers
have formed a cartel and are maximizing total industry profits and splitting the
production of output evenly between themselves. If Margaret decides to cheat on the
agreement and sell 100 more gadgets, how many gadgets will she sell?
A) 0
B) 250
C) 350
D) 600
have formed a cartel, agreed to split production of output evenly and are maximizing
total industry profits. If Margaret decides to cheat on the agreement and sell 100 more
gadgets, the market price of gadgets will be:
A) $4.
B) $5.
C) $6.
D) $7.
gadgets, Margaret's profit will be _____ and Ray's profit will be _____.
A) $1,250; $1,250
B) $500; $500
C) $1,400; $1,000
D) $1,000; $1,400
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gadgets, Margaret's quantity effect will be a(n) _____ in profit of _____.
A) decrease; $250
B) increase; $150
C) increase; $400
D) decrease; $400
gadgets, Margaret's price effect will be a(n) _____ in profit of _____.
A) decrease; $400
B) increase; $400
C) increase; $250
D) decrease; $250
gadgets but Ray continues to sell 250 gadgets, Ray's profits will be:
A) $1,400.
B) $1,250.
C) $1,000.
D) $400.
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produce gadgets with no marginal cost or fixed cost. If industry output is 350 gadgets
produced by Margaret and 250 gadgets produced by Ray and if Ray decides to increase
output by 100, industry output will be:
A) 700.
B) 600.
C) 500.
D) 400.
output by 100, industry price will be:
A) $3.
B) $2.
C) $1.
D) $0.
output by 100, Margaret's profit will be _____ and Ray's profit will be _____.
A) $1,750; $1,250
B) $1,250; $1,250
C) $1,400; $1,000
D) $1,050; $1,050
produce gadgets with no marginal cost or fixed cost. If industry output is 700, each
firm's profits will be _____ than they would be at the output of 500, which maximizes
industry profit.
A) $150 less
B) $150 more
C) $200 more
D) $200 less
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total industry profits. Total industry output would be _____ gadgets.
A) 10
B) 5
C) 50
D) 500
produce gadgets at a marginal cost of $2 and no fixed cost. If these two producers
formed a cartel, agreed to split production of output evenly, and acted to maximize total
industry profits, total industry output would be _____ and the price would be _____.
A) 1,000; $10
B) 100; $9
C) 400; $6
D) 500; $5
produce gadgets at a marginal cost of $2 and no fixed cost. If these two producers
formed a cartel, agreed to split production of output evenly, and acted to maximize total
industry profits, total industry profit would be:
A) $10,000.
B) $5,000.
C) $2,500.
D) $1,600.
produce gadgets at a marginal cost of $2 and no fixed cost. Suppose that these two
producers have formed a cartel, agreed to split production of output evenly, and are
maximizing total industry profits. Each firm's output would be _____, and each firm's
profit would be _____.
A) 500; $2,500
B) 200; $800
C) 1,000; $500
D) 1,000; $10,000
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maximizing total industry profits. If Margaret decides to cheat on the agreement and sell
100 more gadgets, how many gadgets will Margaret sell?
A) 500
B) 200
C) 300
D) 600
100 more gadgets, the market price of gadgets will be:
A) $4.
B) $5.
C) $6.
D) $7.
100 more gadgets, Margaret's profit will be _____, and Ray's profit will be _____.
A) $1500; $1,000
B) $900; $600
C) $1,400; $1,000
D) $1,000; $1,400
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100 more gadgets, Margaret's quantity effect will be a(n) _____ in profit of _____.
A) decrease; $100
B) increase; $100
C) increase; $300
D) decrease; $300
100 more gadgets, Margaret's price effect will be a(n) _____ in profit of _____.
A) decrease; $400
B) increase; $400
C) increase; $200
D) decrease; $200
100 more gadgets but Ray continues to sell 200 gadgets, Ray's profits will be:
A) $1,400.
B) $1,250.
C) $600.
D) $400.
produce gadgets at a marginal cost of $2 and no fixed cost. If industry output is 300
gadgets produced by Margaret and 200 gadgets produced by Ray and if Ray decides to
increase output by 100, industry output will be:
A) 700.
B) 600.
C) 500.
D) 400.
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increase output by 100, industry price will be:
A) $4.
B) $3.
C) $2.
D) $1.
increase output by 100, Margaret's profit will be _____, and Ray's profit will be _____.
A) $1,750; $1,250
B) $1,250; $1,250
C) $1,400; $1,000
D) $600; $600
produce gadgets at a marginal cost of $2 and no fixed cost. If the industry were perfectly
competitive, the output would be _____ gadgets, and the price would be _____.
A) 0; $10
B) 500; $5
C) 600; $4
D) 800; $2
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Figure: Monopoly Profits in Duopoly
54. (Figure: Monopoly Profits in Duopoly) Look at the figure Monopoly Profits in Duopoly.
Two firms could engage in _____ and reap monopoly profits.
A) game theory
B) the prisoners' dilemma
C) collusive behavior
D) measuring the four-firm concentration ratio
55. (Figure: Monopoly Profits in Duopoly) Look at the figure Monopoly Profits in Duopoly.
Each firm faces an identical demand curve, D1, and the market demand curve is D2. The
figure illustrates how firms can reap monopoly profits even in an industry with:
A) free entry and exit.
B) two firms.
D) a four-firm concentration ratio of 50.
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56. (Figure: Monopoly Profits in Duopoly) The figure Monopoly Profits in Duopoly shows
how an industry consisting of two firms that face identical demand curves (D1) can
collude to increase profits. Which of the following assumptions is NOT a part of the
analysis illustrated by the model?
A) The two firms are identical.
B) The two firms sell identical products.
C) While the firms face the same MC curves, their respective TC curves have unequal
slopes.
D) Each firm has a horizontal marginal cost curve.
collude to increase profits. The market demand curve is D2. Which of the following
assumptions is part of the analysis illustrated by the model?
A) The two firms have identical marginal cost but different average total cost.
B) The two firms sell differentiated products.
C) The MR curve is not relevant to either firm's choices.
D) The firms can act as a cartel and maximize their combined economic profit.
collude to increase profits. The market demand curve is D2. If the firms collude to share
the market demand equally, then each firm will act as if its demand curve is given by:
A) D1.
B) D2.
C) MR1.
D) 2 × D1.
collude to increase profits. If the firms collude to share the market demand equally, then
each firm will act as if its marginal revenue curve is given by:
A) MR1.
B) 2 × MR1.
C) MR2.
D) MC.
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collude to increase profits. If the firms collude to share the market demand equally, then
each firm will act as if its demand curve is given by _____, while the market demand
curve is given by _____.
A) D1; MR2
B) D2; D1
C) D1; D2
D) MR1; MR2
61. (Figure: Monopoly Profits in Duopoly) Given the duopoly industry illustrated in the
figure Monopoly Profits in Duopoly, if each firm acted on the belief that it faced
demand curve D2 and acted without consideration of the other, each firm would attempt
to maximize economic profits by producing quantity _____ and setting price equal to
_____.
A) Q4; P1
B) Q4; P2
C) Q1; P4
D) Q2; P2
62. (Figure: Monopoly Profits in Duopoly) Suppose the duopoly industry illustrated in the
figure Monopoly Profits in Duopoly produces a perishable good. If the industry is
perfectly competitive, the market price will likely end up being _____, and the
combined economic profits of the firms will be _____.
A) P1; given by the area of the rectangle bounded by 0P1CQ4
B) P1; zero
C) P3; given by the area of the rectangle bounded by 0P3AQ1
D) P2; given by the area of the rectangle bounded by P1P2GB
63. (Figure: Monopoly Profits in Oligopoly) Firms in the duopoly industry illustrated in the
figure Monopoly Profits in Duopoly have zero fixed costs. The market demand curve is
D2. If the two firms colluded to maximize their combined economic profits, they would
set the market price at _____, and combined economic profits of the firms would be
_____.
A) P1; given by the area of the rectangle 0P1CQ4
B) P1; zero
C) P3; given by the area of the rectangle 0P3AQ1
D) P2; given by the area of the rectangle P1P2BG
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64. (Figure: Monopoly Profits in Duopoly) The efficient solution in the figure Monopoly
Profits in Duopoly is found where price is _____ and quantity is _____.
A) P1; Q4
B) P2; Q2
C) P2; Q1
D) P3; Q1
65. (Figure: Monopoly Profits in Duopoly) If the two firms in the figure Monopoly Profits
in Duopoly colluded to split production evenly and to maximize their joint profits, the
market price they set would be _____, and each firm's economic profit would be _____.
(Assume that the market demand curve is D2.)
A) P2; given by the area of the rectangle bounded by P1P2EF = FEBG
B) P1; P1P3AF
C) P3; given by the area of the rectangle bounded by 0P3AQ1
D) P2; given by the area of the rectangle bounded by P1P2BG
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66. (Table: Demand for Crude Oil) Look at the table Demand for Crude Oil. Assume that
the crude oil industry is a duopoly and the marginal cost of producing crude oil is zero.
If the two firms collude to share the market equally, the price of crude oil will be _____,
firm 1 will produce _____ barrels, firm 2 will produce _____ barrels, and each firm will
earn revenue equal to _____.
A) $80; 80; 80; $6,400
B) $80; 40; 40; $3,200
C) $60; 50; 50; $3,000
D) $40; 60; 60; $2,400
67. (Table: Demand for Crude Oil) Look at the table Demand for Crude Oil. The marginal
cost of producing crude oil is zero. If the crude oil industry is a monopoly, the price of
crude oil will be _____, the total quantity of crude oil produced by the monopoly will be
_____ barrels, and the monopoly will earn revenue equal to _____.
A) $80; 80; $6,400
B) $80; 80; $0
C) $160; 0; $0
D) $60; 100; $6,000
Suppose that the two firms are maximizing industry profit and splitting the profit
evenly. If firm 1 decides to cheat and increase production by 10 more barrels, total
industry output will be _____ barrels.
A) 160
B) 100
C) 90
D) 80
Suppose that the two firms are maximizing industry profit and splitting the profit
evenly. If firm 1 decides to cheat and increase production by 10 more barrels, the price
of crude oil will be:
A) $0.
B) $70.
C) $80.
D) $160.
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the crude oil industry is a duopoly and the marginal and fixed cost of producing crude
oil equals zero. Suppose that the two firms are maximizing industry profit and splitting
the profit evenly. If firm 1 decides to cheat and increase production by 10 more barrels,
it will earn profits of:
A) $6,400.
B) $6,300.
C) $3,500.
D) $2,800.
the crude oil industry is a duopoly and the marginal cost and fixed cost of producing
crude oil equals zero. Suppose that the two firms are maximizing industry profit and
splitting the profit evenly. If firm 1 decides to cheat and increase production by 10 more
barrels and firm 2 continues to produce 40 barrels, firm 2 will earn profits of:
A) $6,400.
B) $6,300.
C) $3,500.
D) $2,800.
crude oil equal zero. Suppose that the two firms are maximizing industry profit and
splitting the profit evenly. If both firms decide to cheat and produce 10 more barrels
each, industry output will be _____ barrels.
A) 100
B) 120
C) 110
D) 160
crude oil equal zero. Suppose that the two firms are maximizing industry profit and
splitting the profit evenly. If both firms decide to cheat and produce 10 more barrels
each, the price of crude oil will be:
A) $160.
B) $80.
C) $70.
D) $60.
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the profit evenly. If both firms decide to cheat and produce 10 more barrels each, firm
1's profit will be _____, and firm 2's profit will be _____.
A) $3,200; $3,200
B) $3,200; $3,000
C) $3,000; $3,200
D) $3,000; $3,000
the profit evenly. If both firms engage in noncooperative behavior, the industry output
will be _____ barrels, and the price of crude oil will be _____.
A) 0; $160
B) 80; $80
C) 100; $60
D) 160; $0
the crude oil industry is a duopoly and the marginal cost of producing crude oil equals
zero. Suppose that the two firms are maximizing industry profit and splitting the profit
evenly. If the industry is operating in perfect competition, the industry output will be
_____ barrels, and the price of crude oil will be _____.
A) 0; $160
B) 80; $80
C) 100; $60
D) 160; $0
77. Market power in the United States was often gained in the latter part of the nineteenth
century by:
A) forming trusts.
B) the growth of competition.
C) international arrangements with Russian and Japanese firms.
D) opening up more industries to international trade.
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78. Attempts by the federal government to prevent the exercise of monopoly power in the
United States are known as _____ policy.
A) stabilization
B) antitrust
C) fiscal
D) government
79. Antitrust policy refers to government:

A) attempts to prevent the acquisition of monopoly power.
B) attempts to encourage the exercise of monopoly power.
C) encouragement of collusion in the marketplace.
D) attempts to limit private enterprise.
80. The first law designed to curb monopoly power in the United States was the _____ Act.
A) Sherman Antitrust
B) Clayton
C) Federal Trade Commission
D) Robinson-Patman
81. The field of law that attempts to limit the ability of oligopolists to collude and restrict
competition is called:
A) antitrust policy.
B) product safety policy.
C) fuel efficiency standards.
D) excise tax policy.
82. Oligopoly first became an issue in the United States when:

A) the Sons of Liberty dumped the East India Company's tea into Boston Harbor in
1773.
B) the Emancipation Proclamation was issued in 1863.
C) the growth of railroads made possible a national market for goods in the second
half of the nineteenth century.
D) Google purchased Motorola Mobility in 2011.
83. A formal agreement to limit production and raise prices leads to:
A) a cartel.
D) oligopoly.
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84. Cartels first became illegal in the United States in:
A) 1776.
B) 1890.
C) 1929.
D) 1982.
85. A trust:
A) is a government agency that regulates natural monopolies.
B) is the new organization that is formed when two firms merge.
C) occurs when shareholders of the major companies in an industry turn over their
shares to a board of trustees who then control all of the companies.
D) is another name for a large insurance company.
86. The first trust in the United States was established by _____ in the _____ industry.
A) AT&T; communications
B) Walt Disney; entertainment
C) Amtrak; transportation
D) Standard Oil; petroleum
87. The purpose of the trusts established in the United States in the late 1800s was to:
A) engage in monopoly pricing.
B) promote international trade.
C) promote competition in the transportation industry.
D) limit the involvement of government in providing health care.
88. The purpose of antitrust policy is to:

A) limit pollution.
B) provide access to affordable health care for uninsured Americans.
C) prevent the exercise of monopoly power.
D) control inflation and interest rates.
89. The 1890 law intended to prevent the establishment of more monopolies and to break up
existing ones in the United States was the:
A) Taft-Hartley Act.
B) Sherman Antitrust Act.
C) Affordable Care Act.
D) Federal Trade Commission Act
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90. The government agency in the United States that reviews proposed mergers of firms in
the same industry and prohibits mergers that it believes will reduce competition is the:
A) Commerce Department.
B) Federal Reserve.
C) Labor Department
D) Department of Justice.
91. Which of the following would make it difficult for oligopolists to collude?
A) few firms
B) few buyers
C) similar costs of production
D) a homogeneous product
92. Which of the following would make it difficult for Georgia peach suppliers to collude?
A) only a few suppliers
B) each supplier having the same costs
C) buyers of peaches having very little bargaining power, since peaches are
homogeneous
D) only a few buyers of peaches
93. The airline industry often engages in price wars. This means that firms often _____
prices until profits _____.
A) raise; are maximized
B) lower; are maximized
C) lower; approach zero
D) raise; approach zero
94. Airlines are prone to price wars because:

A) most fliers choose airlines on the basis of schedule and price.
B) airline pricing is easy to understand.
C) airlines have the same costs.
D) airlines operate close to capacity.
95. Tacit collusion is difficult if:

A) there are many firms in the industry.
B) the firms in the industry are producing differentiated products.
C) firms have common interests.
D) the oligopolists are selling to many small firms.
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96. Tacit collusion is relatively easy for oligopolists if:
A) they are producing many different products.
B) there are only a few firms in the industry.
C) they are selling their product to only a few large buyers.
D) barriers to entry into the industry are low.
97. As the number of firms in an oligopoly decreases:

A) barriers to entry are likely to shrink.
B) firms are less likely to engage in tacit collusion.
C) firms are more likely to engage in tacit collusion.
D) it becomes more difficult for the oligopoly to restrict output.
98. If the several companies in the tobacco industry produce similar products but have very
different marginal costs:
A) they are less likely to engage in tacit collusion than firms with similar costs.
B) they are more likely to engage in tacit collusion than firms with similar costs.
C) prices for tobacco products are more likely to be near the monopoly level than in
an industry whose firms have similar costs.
D) output of tobacco products is more likely to be near the monopoly level than in an
industry whose firms have similar costs.
99. Game theory is commonly used to explain behavior in oligopolies, because oligopolies
are characterized by:
A) large profits in the long run.
B) either homogeneous or heterogeneous products.
C) interdependence.
D) imperfect competition.
100. An analytical approach through which strategic choices can be assessed is called:
A) cost–benefit analysis.
B) econometric theory.
C) game theory.
101. One framework used to analyze strategic choices is:

A) the tacit supply curve model.
B) game theory.
C) perfect competition.
D) risk assessment.
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102. The study of behavior in situations of interdependence is known as:
A) dominant strategies.
B) game theory.
C) Nash equilibrium.
D) tacit collusion.
103. The study of behavior in situations of interdependence is called:

A) cost–benefit analysis.
B) econometric theory.
C) game theory.
D) strategic theory.
104. In the classic prisoners' dilemma with two accomplices in crime, the dominant strategy
for each individual is to:
A) not confess.
B) confess.
C) confess only if the other confesses.
D) This game does not have a dominant strategy.
105. In the classic prisoners' dilemma with two accomplices in crime, the Nash equilibrium is
for:
A) neither to confess.
B) both to confess.
C) one to confess and the other not to confess.
D) This game does not have a Nash equilibrium.
106. Gary's Gas and Frank's Fuel are the only two providers of gasoline in their town. Gary
and Frank decide to form a cartel. Later, Gary summarizes his pricing strategy as, “I'll
cheat on the cartel because regardless of what Frank does, cheating gives me the best
payoff.” This is an example of:
A) a dominant strategy.
B) a tit-for-tat strategy.
C) an irrational strategy.
D) product differentiation.
107. An action is a dominant strategy when it is a player's best action:

A) regardless of the actions by other players.
B) given certain profit-maximizing actions of other players.
C) assuming the other players do not correctly anticipate the action.
D) if there is only one other competitor.
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Use the following to answer question 108:
Figure: Payoff Matrix I for Blue Spring and Purple Rain
108. (Figure: Payoff Matrix I for Blue Spring and Purple Rain) The figure Payoff Matrix I
for Blue Spring and Purple Rain refers to two producers of bottled water. Each has two
strategies available to it: a high price and a low price. The dominant strategy for Purple
Rain is to:
A) charge a low price.
B) charge a high price.
C) adopt the same strategy as Blue Spring.
D) Purple Rain does not have a dominant strategy.
Figure: Payoff Matrix for Ajinomoto and ADM
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109. (Figure: Payoff Matrix for Ajinomoto and ADM) Look at the figure Payoff Matrix for
Ajinomoto and ADM. The optimal combination for maximum combined profit occurs
when ADM produces _____ million pounds and Ajinomoto produces _____ million
pounds.
A) 30; 30
B) 40; 40
C) 30; 40
D) 40; 30
110. (Figure: Payoff Matrix for Ajinomoto and ADM) Look at the figure Payoff Matrix for
Ajinomoto and ADM. The Nash equilibrium combination occurs when ADM produces
_____ million pounds and Ajinomoto produces _____ million pounds.
A) 30; 30
B) 40; 40
C) 30; 40
D) 40; 30
Figure: Prisoners' Dilemma for Thelma and Louise
111. (Figure: Prisoners' Dilemma for Thelma and Louise) Look at the Figure Prisoners'
Dilemma for Thelma and Louise. Thelma and Louise are arrested and jailed for murder.
Given the payoff matrix in the figure, the optimal behavior for Thelma and Louise to
minimize their joint sentence is for Thelma _____ and for Louise ____.
A) to confess; not to confess.
B) to confess; to confess.
C) not to confess; to confess
D) not to confess; not to confess
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112. (Figure: Prisoners' Dilemma for Thelma and Louise) Look at the Figure Prisoners'
Dilemma for Thelma and Louise. Thelma and Louise are arrested and jailed for murder.
Given the payoff matrix in the figure, the Nash equilibrium behavior is for Thelma
_____ and Louise _____.
A) to confess; not to confess
B) to confess; to confess
C) not to confess; to confess
D) not to confess; not to confess
Figure: Payoff Matrix for the United States and the European Union
113. (Figure: Payoff Matrix for the United States and the European Union) Look at the figure
Payoff Matrix for the United States and the European Union. Suppose that the United
States and the European Union both produce corn, and each region can make more
profit if output is limited and the price of corn is high. The joint profit-maximizing
combination is for the United States to produce a _____ output and the European Union
to produce a _____ output.
A) high; high
B) high; low
C) low; low
D) low; high
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114. (Figure: Payoff Matrix for the United States and the European Union) Look at the figure
Payoff Matrix for the United States and the European Union. Suppose that the United
States and the European Union both produce corn, and each region can make more
profit if output is limited and the price of corn is high. The Nash equilibrium
combination is for the United States to produce a _____ output and the European Union
to produce a _____ output.
A) high; high
B) high; low
C) low; low
D) low; high
115. The outcome of a strategic choice is called a:

A) payoff.
B) game.
C) product.
D) dilemma.
116. Suppose that each of two prisoners has the independent choice of confessing to a crime
or not confessing to a crime they were both alleged to commit. If neither confesses, both
spend two years in prison; if both confess, both spend three years in prison. If one
confesses and the other does not, the confessor gets off with one year but the other gets
six years. According to game theory, the likely strategy of the prisoners is that:
A) both will confess.
B) neither will confess.
C) one will confess and the other will not.
D) both may or may not confess.
117. Suppose that each of the two firms in a duopoly has the independent choice of
advertising or not advertising. If neither advertises, each gets $10 million in profit; if
both advertise, their profits will be $5 million each; and if one advertises while the other
does not, the advertiser gets profit of $15 million and the other gets profit of $2 million.
According to game theory, the Nash equilibrium is:
A) both may or may not advertise.
B) one will advertise and the other will not.
C) both will advertise.
D) neither will advertise.
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118. Suppose that each of the two firms in a duopoly has the independent choice of
advertising or not advertising. If neither advertises, each gets $10 million in profit; if
both advertise, their profits will be $5 million each; and if one advertises while the other
does not, the advertiser gets profit of $15 million and the other gets profit of $2 million.
According to game theory, if the firms collude to maximize joint profits:
A) both may or may not advertise.
B) one will advertise and the other will not.
C) both will advertise.
D) neither will advertise.
119. A strategy that is the same regardless of the action of the other player in a game is a
_____ strategy.
A) competitive
B) trigger
C) dominant
D) tit-for-tat
120. A dominant strategy equilibrium occurs when:

A) a player has no choice.
B) all players make the same choice regardless of the action of the other players.
C) each player makes the best choice given the choice of the other player.
D) no player is able to dictate the actions of any other player.
121. (Table: Two Rival Gas Stations) Look at the table Two Rival Gas Stations, which shows
a payoff matrix for two gas stations in a small town. Each firm can set either a high
price or a low price, and customers view these two firms as nearly perfect substitutes.
Profits in each cell of the payoff matrix are given as (Swifty, Speedy). If each firm sets
the price independently, the Nash equilibrium outcome will be:
A) $100, $100.
B) $150, $25.
C) $25, $150.
D) $50, $50.
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122. (Table: Two Rival Gas Stations) Look at the table Two Rival Gas Stations, which shows
a payoff matrix for two gas stations in a small town. Each firm can set either a high
price or a low price, and customers view these two firms as nearly perfect substitutes.
Profits in each cell of the payoff matrix are given as (Swifty, Speedy). Which of the
following choices describes a dominant strategy?
A) Swifty will always set a low price, no matter Speedy's choice.
B) Swifty will always set a high price, no matter Speedy's choice.
C) Swifty will set a low price when Speedy sets a high price, but Swifty will set a high
price when Speedy sets a low price.
D) Swifty will set a high price when Speedy sets a high price, but Swifty will set a low
price when Speedy sets a low price.
123. A player's best action regardless of the action taken by the other player in a game is
called a _____ strategy.
A) competitive
B) trigger
C) dominant
D) tit-for-tat
124. A dominant strategy equilibrium exists in a game when:

A) no player has a choice.
B) every player has a clear best action that does not depend on the action of the other
players.
C) each player's choices are dependent on the actions of other players.
D) no player is able to dictate or predict the actions of any other player.
125. Gary's Gas and Frank's Fuel are the only two providers of gasoline in their small town.
Gary summarizes his pricing strategy as, “I'll do to Frank what Frank did to me last
time.” This is an example of:
A) a dominant strategy.
B) a tit-for-tat strategy.
C) an irrational strategy.
D) product differentiation.
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126. If rival solar roof panel manufacturers in Reno limit production and _____ prices in a
way that increases their profits without meeting with one another in a formal way, they
are engaging in _____ collusion.
A) lower; tacit
B) raise; tacit
C) lower; explicit
D) raise; explicit
127. Tacit collusion is difficult to achieve in practice:

A) the larger the number of firms in the industry.
B) the fewer the number of products being sold.
C) the more similar the marginal costs of each firm.
D) if customers have little or no bargaining power.
128. When a firm responds to a rival's cheating by cheating and to a rival's cooperation by
cooperating, that firm is practicing a _____ strategy.
A) dominant
B) trigger
C) conclusive
D) tit-for-tat
129. Unwritten or unspoken understandings through which firms restrict competition are
called:
A) cartel agreements.
B) oligopoly agreements.
C) overt collusion.
D) tacit collusion.
130. Which of the following is TRUE?

A) Once an industry has achieved tacit collusion, producers have an incentive to raise
prices.
B) Tacit collusion is legal in the United States.
C) The fact that one firm changes its price shortly after another firm does is proof of
tacit collusion.
D) It is difficult to determine how much tacit collusion exists in a particular industry;
hence tacit collusion remains hard to prosecute in the United States.
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131. An unwritten, unspoken agreement through which firms limit competition among
themselves is called:
A) satisfying.
B) tacit collusion.
C) overt collusion.
D) a cartel.
132. When firms in a particular industry informally agree to charge the same price as the
largest firm in that industry, it is called:
A) satisfying.
B) price extortion.
C) overt collusion.
D) tacit collusion.
133. OPEC is:

A) the Organization of Petroleum Exporting Countries.
B) an international cartel made up of oil-producing countries.
C) the cartel that was responsible for the large increases in crude oil prices in the
1970s.
D) described by all of these answer choices.
134. A well-known example of an international cartel is:

A) Japan.
B) OPEC.
C) Exxon.
D) General Motors.
135. Tacit collusion in an industry is limited by:

A) a large number of firms.
B) simple products and pricing.
C) the bargaining power of buyers.
D) a large number of firms and the bargaining power of buyers.
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136. Which of the following does NOT describe OPEC?
A) OPEC is the Organization of Petroleum Exporting Countries.
B) OPEC is an international cartel made up of 12 oil-producing countries and two
unofficial members.
C) OPEC is the cartel that was responsible for the large increases in crude oil prices in
the 1970s.
D) OPEC is the name of the free-trade zone encompassing the Middle East and other
oil-producing nations.
137. OPEC is a(n) _____ cartel that includes _____ national governments.
A) illegal; 12
B) legal; 13
C) illegal; 11
D) legal; 8
138. _____ is the unwritten or unspoken agreement through which firms limit _____.
A) A satisfying agreement; price increases
B) Tacit collusion; competition among themselves
C) Overt collusion; competition among rivals
D) A cartel; price changes
139. Which of the following is a form of strategic behavior intended to influence the future
actions of other players?
A) dormant strategy
B) trigger strategy
C) conclusive strategy
D) tit-for-tat strategy
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Figure: Payoff Matrix for Jake and Zoe
140. (Figure: Payoff Matrix for Jake and Zoe) Look at the figure Payoff Matrix for Jake and
Zoe, the only producers of slushies in their tourist town. Each week, each decides
whether to price high or price low for the following week. The figure shows the profit
per week earned by their two firms. According to the Nash equilibrium, Jake prices
_____ and Zoe prices _____.
A) high; high
B) high; low
C) low; high
D) low; low
141. (Figure: Payoff Matrix for Jake and Zoe) Look at the figure Payoff Matrix for Jake and
Zoe, the only producers of slushies in their tourist town. Every week, each decides
whether to price high or price low for the following week. The figure shows the profit
per week earned by their two firms. Suppose the firms each decide to price high initially
and adopt a tit-for-tat strategy for the following weeks. After a few weeks, Jakes profit
would be _____ and Zoe's profit would be _____.
A) $800; $800
B) $1,000; $1,000
C) $1,500; $200
D) $200; $1,500
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Figure: Payoff Matrix II for Blue Spring and Purple Rain
142. (Figure: Payoff Matrix II for Blue Spring and Purple Rain) Payoff Matrix II for Blue
Spring and Purple Rain describes two producers of bottled water. The Nash equilibrium
in the figure is reached when Blue Spring charges a _____ price and Purple Rain
charges a _____ price.
A) high; high
B) low; low
C) high; low
D) low; high
Spring and Purple Rain describes two producers of bottled water. Each has two
strategies available to it: a high price and a low price. The dominant strategy for Purple
Rain is to:
A) charge a low price.
B) charge a high price.
C) adopt the same strategy as Blue Spring.
D) Purple Rain does not have a dominant strategy.
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Spring and Purple Rain describes two producers of bottled water. Suppose Blue Spring
charges a high price and Purple Rain does the same. In the next period, Blue Spring
charges a low price and Purple Rain incurs a loss. If Purple Rain responds with a
tit-for-tat strategy, it will:
A) always charge a low price—the same as its dominant strategy.
B) make random changes in its price so that Blue Spring is left with no systematic
strategy.
C) charge a low price in the next period and thereafter charge the same price that Blue
Spring charged in the previous period.
D) always charge a high price.
Spring and Purple Rain describes two producers of bottled water. If both firms follow a
tit-for-tat strategy, equilibrium will be reached when:
A) both firms charge a high price.
B) both firms charge a low price.
C) Blue Spring charges a high price and Purple Rain charges a low price.
D) Purple Rain charges a high price and Blue Spring charges a low price.
Figure: Payoff Matrix for Gehrig and Gabriel
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146. (Figure: Payoff Matrix for Gehrig and Gabriel) The figure Payoff Matrix for Gehrig and
Gabriel describes two people who sell handmade Davy Crockett figurines in San
Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce
5,000 figurines each month or to produce 7,000 figurines each month. The combined
profits of the two are maximized if Gehrig produces _____ figurines and Gabriel
produces _____ figurines.
A) 5,000; 5,000
B) 7,000; 7,000
C) 7,000; 5,000
D) 5,000; 7,000
5,000 figurines each month or to produce 7,000 figurines each month. For Gehrig and
Gabriel, the dominant strategy is to:
A) produce 5,000 figurines.
B) produce 7,000 figurines.
C) produce between 5,000 and 7,000 figurines.
D) collude and increase production to more than 14,000 figurines.
5,000 figurines each month or to produce 7,000 figurines each month. If both follow a
tit-for-tat strategy, equilibrium will be reached when Gehrig produces _____ figurines
and Gabriel produces _____ figurines.
A) 5,000; 5,000
B) 7,000; 7,000
C) 7,000; 5,000
D) 5,000; 7,000
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Figure: Pricing Strategy in Cable TV Market I
149. (Figure: Pricing Strategy in Cable TV Market I) In the figure Pricing Strategy in Cable
TV Market I, the dominant strategy for CableNorth:
A) is to advertise.
B) is not to advertise.
C) is to do whatever CableSouth does.
D) does not exist.
150. (Figure: Pricing Strategy in Cable TV Market I) In the figure Pricing Strategy in Cable
TV Market I, the dominant strategy for CableSouth:
A) is to advertise.
B) is not to advertise.
C) is to do whatever CableNorth does.
D) does not exist.
151. (Figure: Pricing Strategy in Cable TV Market I) Look at the figure Pricing Strategy in
Cable TV Market I. If both CableNorth and CableSouth advertise, then without any
collusion:
A) CableNorth will stop advertising to maximize profits.
B) CableSouth will stop advertising to maximize profits.
C) there will be no tendency for either CableNorth or CableSouth to stop advertising.
D) there is a tendency for both CableNorth and CableSouth to stop advertising.
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Cable TV Market I. If neither CableNorth nor CableSouth advertises, then without any
collusion:
A) CableNorth will begin advertising to maximize profits.
B) CableSouth will begin advertising to maximize profits.
C) there will be no tendency for either CableNorth or CableSouth to begin advertising.
D) there is a tendency for both CableNorth and CableSouth to begin advertising.
Cable TV Market I. If the two firms in the cable TV market collude:
A) both firms advertise, and each earns $100,000 per month.
B) neither firm advertises, and each earns $150,000 per month.
C) CableNorth advertises and earns $130,000 per month, while CableSouth does not
advertise and earns $70,000 per month.
D) both firms advertise and each earns $130,000 per month.
Figure: Pricing Strategy in Cable TV Market II
154. (Figure: Pricing Strategy in Cable TV Market II) Look at the figure Pricing Strategy in
Cable TV Market II. The dominant strategy for CableNorth:
A) is to charge a high price.
B) is to charge a low price.
C) is to charge what CableSouth does.
D) does not exist.
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Cable TV Market II. The dominant strategy for CableSouth:
A) is to charge a high price.
B) is to charge a low price.
C) is to charge what CableNorth does.
D) does not exist.
Cable TV Market II. The Nash equilibrium in the cable TV market occurs when:
A) both firms set a low price and each earns $90,000 per month.
B) both firms set a high price and each earns $100,000 per month.
C) CableNorth sets a high price and earns $80,000 per month, and CableSouth sets a
low price and earns $130,000 per month.
D) CableNorth sets a low price and earns $130,000 per month, and CableSouth sets a
high price and earns $80,000 per month.
Cable TV Market II. The noncooperative equilibrium in the cable TV market occurs
when:
A) CableNorth sets a high price and earns $80,000 per month and CableSouth sets a
B) CableNorth sets a low price and earns $130,000 per month and CableSouth sets a
C) both firms set a low price and each earns $90,000 per month.
D) both firms set a high price and each earns $100,000 per month.
Cable TV Market II. If the two firms in the cable TV market collude:
A) CableNorth will set a high price and earn $80,000 per month, and CableSouth will
set a low price and earn $130,000 per month.
B) CableNorth will set a low price and earn $130,000 per month, and CableSouth will
set a high price and earn $80,000 per month.
C) both firms will set a low price and each will earn $90,000 per month.
D) both firms will set a high price and each will earn $100,000 per month.
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Cable TV Market II. If CableNorth followed a high-price strategy one month just to find
it only earned $80,000 because CableSouth followed a low-price strategy, and
CableNorth decided to lower prices for the next month, we would say that CableNorth is
following:
A) a kinked demand model.
B) a dominant strategy.
C) a tit-for-tat strategy.
D) a collusive strategy.
Cable TV Market II. Suppose that after one month, the cable providers follow a
tit-for-tat strategy. Eventually they will achieve a tacit collusive equilibrium at which:
A) both firms set a low price and each earns $90,000 per month.
B) both firms set a high price and each earns $100,000 per month.
C) CableNorth sets a high price and earns $80,000 per month and CableSouth sets a
D) CableNorth sets a low price and earns $130,000 per month and CableSouth sets a
161. (Table: Coke and Pepsi Advertising Game) Look at the table Coke and Pepsi
Advertising Game. The soft-drink industry is dominated by Coke and Pepsi, and each
firm spends a lot of money on advertising. Suppose each firm is considering a costly
television commercial during halftime of the Super Bowl. The table shows the payoff
matrix of profits that each firm would receive from its advertising decision, given the
advertising decision of their rival. Profits in each cell of the payoff matrix are given as
(Coke, Pepsi). If each firm makes the decision whether to advertise on the Super Bowl
independently, the Nash equilibrium is for Coke _____ and Pepsi _____ during the
Super Bowl.
A) to advertise; to advertise
B) not to advertise; not to advertise
C) not to advertise; to advertise
D) to advertise; not to advertise
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162. (Table: Coke and Pepsi Advertising Game) Look at the table Coke and Pepsi
Advertising Game. The soft-drink industry is dominated by Coca-Cola and Pepsi, and
each firm spends a lot of money on advertising. Suppose each firm is considering a
costly television commercial during halftime of the Super Bowl. The table shows the
payoff matrix of profits that each firm would receive from their advertising decision,
given the advertising decision of their rival. Profits in each cell of the payoff matrix are
given as (Coke, Pepsi). If both firms expect to play this game every year for the
foreseeable future, in the outcome Coke _____ and Pepsi _____.
A) advertises; does not advertise
B) does not advertise; advertises
C) does not advertise; does not advertise
D) advertises; advertises
163. (Table: Demand for Solar Water Heaters) Look at the table Demand for Solar Water
Heaters. The marginal cost of producing solar water heaters is zero, and only two firms,
Rheem and Calefi, produce them. Suppose they agree to produce only 25 water heaters
each. By how much does Rheem's profit rise if it cheats on the agreement and produces
30 water heaters?
A) $3,000
B) $2,700
C) $2,000
D) $5,000
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each. If Rheem cheats on the agreement and produces 30 water heaters, what is the
price effect for Rheem?
A) –$1,000
B) –$2,500
C) $2,000
D) $1,000
each. . If Rheem cheats on the agreement and produces 30 water heaters, what is the
quantity effect for Rheem?
A) $1,000
B) $4,500
C) $2,000
D) $9,000
Rheem and Calefi, produce them. If Rheem and Calefi get into a price war, the
equilibrium price in the market will be:
A) $0.
B) $700.
C) $800.
D) $1,000.
Rheem and Calefi, produce them. If they agree to collude, what price will the cartel
charge and how many water heaters will the cartel sell?
A) $1,000; 50
B) $1,100; 45
C) $900; 55
D) $800; 60
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168. (Table: Demand for Crude Oil) Look at the table Demand for Crude Oil. For simplicity,
assume that the marginal cost of producing crude oil is zero. There are only two
producers of crude oil, and they cannot cooperate. But they play this game every week,
each player has a tit-for-tat strategy, and the other player knows this. When both firms
use a tit-for-tat strategy, firm 1 will produce _____ barrels, and firm 2 will produce
_____ barrels.
A) 40; 40
B) 40; 50
C) 50; 50
D) 30; 30
169. Which of the following industries is MOST likely to be monopolistically competitive?

A) automobile production
B) fresh bagel shops
C) corn farming
D) electric utility production
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170. A monopolistically competitive industry, such as corn snack chips, and a perfectly
competitive industry, like wheat farming, are alike in that:
A) firms in both types of industries produce identical products.
B) firms in both types of industries produce similar but not identical products.
C) barriers to entry in both industries are large.
D) there are many firms in each industry.
171. Monopolistic competition is characterized by:

A) free entry and exit in the long run.
B) each firm producing a standardized product.
C) few producers.
D) barriers to entry.
172. In monopolistic competition, each firm:

A) is a price taker.
B) has some ability to set the price of its differentiated good.
C) will set price equal to marginal cost.
D) has marginal revenue that is greater than price.
173. The wedding dress industry is monopolistically competitive. As a result:

A) thousands of dress suppliers all sell identical products.
B) dresses tend to be differentiated among the many sellers serving this market.
C) it has freedom of entry but not exit.
D) prices tend to be lower than if the dress industry approximated perfect competition.
174. Monopolistic competition is similar to perfect competition because firms in both market
structures:
A) are price takers.
B) produce goods that are perfect substitutes.
C) find it beneficial to advertise.
D) do not face any barriers to entry to the industry in the long run.
175. In monopolistic competition:

A) firms earn zero economic profits in the long run.
B) each firm produces a product identical to that of every other firm in the industry.
C) firms are aware of their strategic interdependence.
D) firms earn large economic profits in the long run.
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176. For the monopolistically competitive wild-caught seafood market, the demand curve for
any individual firm is _____, and there are _____ producers of seafood.
A) downward-sloping; few
B) upward-sloping; many
C) vertical; few
D) downward-sloping; many
177. The downward-sloping demand curve for a monopolistically competitive firm:

A) reflects product differentiation.
B) eventually will become perfectly elastic as more firms enter.
C) indicates collusion among firms in the industry.
D) ensures that the firm will produce at minimum average cost in the long run.
178. An industry characterized by many firms producing similar but differentiated products
in a market with easy entry and exit is called:
B) monopolistic.
C) monopolistically competitive.
D) oligopolistic.
179. An example of monopolistic competition is the _____ industry.

A) restaurant
B) soft-drink
C) automobile
D) airline
180. A(n) _____ is a single firm with _____, whereas a(n) _____ implies an industry with
_____ firm(s) and _____.
A) oligopoly; no barriers to entry; monopoly; many; easy entry and exit
B) monopoly; barriers to entry; monopolistic competition; many; easy entry and exit
C) monopoly; barriers to entry; oligopoly; few; no barriers to entry
D) monopolistic competitor; barriers to entry; monopoly; one; barriers to entry
181. In large shopping malls, the retail clothing market is most illustrative of:
A) monopolistic competition.
B) monopoly.
D) perfect oligopoly.
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182. An industry with a large number of relatively small firms producing differentiated
products in a market with easy entry and exit of firms is:
A) a monopoly.
B) a duopoly.
C) an oligopoly.
D) monopolistically competitive.
183. A monopolistically competitive industry is characterized by a _____ number of firms

producing _____ products; it has _____ entry.
A) small; identical; barriers to
B) small; similar; relatively easy
C) large; similar; relatively easy
D) large; identical; relatively easy
184. Monopolistic competition is an industry structure characterized by:

A) a product with no close substitutes.
C) a large number of firms.
D) barriers to entry and exit.
185. Because most communities have a large number of similar but not identical substitutes,
the market for chiropractors is best considered to be:
A) an oligopoly.
D) a monopoly.
the market for financial planners is best considered to be:
A) a monopoly.
B) an oligopoly.
187. A feature of monopolistic competition that makes it different from monopoly is the:
A) fact that firms in monopolistically competitive industries follow the marginal
decision rule, while monopolies do not.
B) downward-sloping demand curve.
C) downward-sloping marginal revenue curve.
D) number of firms in the industry.
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188. An industry characterized by many competitors, each producing identical products, with
free entry and exit, is described as:
A) monopolistically competitive.
B) oligopolistic.
C) perfectly competitive.
D) monopolistic.
189. Which of the following is NOT a characteristic of monopolistic competition?

A) product differentiation
B) lack of barriers to entry and exit in the long run
C) many competing producers
D) tacit collusion
190. Which of the following describes a feature shared by monopolistic competition and
perfect competition?
A) few firms in the industry
B) no barriers to entry or exit in the long run
C) absolute market power
D) standardized products
191. A common example of monopolistic competition is the market for:

A) oranges.
B) 1-inch nails.
C) automobiles.
D) gas stations.
192. An industry with a large number of relatively small firms producing _____ in a market
with easy entry and exit is a(n) _____.
A) similar products; monopoly
B) identical products; monopolistic competition
C) differentiated products; oligopoly
D) differentiated products; monopolistic competition
193. Monopolistic competition describes an industry characterized by a _____ number of

firms producing _____ products with _____ entry.
A) small; identical; barriers to
B) small; similar; relatively easy
C) large; similar; relatively easy
D) large; identical; relatively easy
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194. The market for dentists in most communities can be considered _____ because the
market has a large number of similar but not identical dental services.
A) monopolistic competition
B) a monopoly
C) perfect competition
D) an oligopoly
195. Monopolistic competition describes an industry characterized by:

A) a product with many close substitutes.
C) a small number of firms.
196. Monopolistic competition is different from monopoly because firms:

A) have some power to set prices.
B) have a downward-sloping demand curve.
C) face some competition.
D) have a downward-sloping marginal revenue curve.
the market for florists is best considered:
A) a monopoly.
B) an oligopoly.
D) perfectly competitive.
198. Monopolistic competition describes an industry characterized by:

A) a product with no close substitutes.
B) many firms, each with some market power.
C) a small number of firms.
199. An industry with easy entry and exit of a large number of small firms producing a
standardized product is:
C) an oligopoly.
D) a monopoly.
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200. Because of the lack of substitutes, the market for newly developed brand-name
prescription drugs is best considered to be:
C) oligopoly.
D) monopoly.
201. An industry with a few interdependent firms is best described as an example of:
C) oligopoly.
D) monopoly.
202. The market for grade A large eggs in California is best considered to be an example of:
C) oligopoly.
D) monopoly.
203. An industry with a single firm producing a product for which there are no close
substitutes and which is protected by barriers to entry is an example of:
C) oligopoly.
D) monopoly.
204. The market for soft drinks, which is dominated by Coca Cola and Pepsi, is best
considered to be an example of:
C) oligopoly.
D) monopoly.
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205. If the toothpaste market is monopolistically competitive, product differentiation may
take the form of:
A) production of many varieties of toothpaste, including those with whitening agents.
B) differentiation in the locations where certain toothpastes are available.
C) quality differences among the various brands.
D) production of many varieties of toothpaste, including those with whitening agents;
differentiation in the locations where certain toothpastes are available; and quality
differences among the various brands.
206. In many cities you can stay at a Holiday Inn in the downtown area, in a suburban
community, or near the airport. These Holiday Inn establishments are examples of
product differentiation by:
A) type.
B) location.
C) quality.
D) style.
207. Many customers will walk right past a diner that serves coffee and go to Starbucks,
where they pay more for a cup of java. For these customers, coffee is differentiated by:
A) style.
B) location.
C) quality.
D) type.
208. The sources of product differentiation do NOT include:

A) differences in location.
B) differences in quality.
C) the perception by consumers that products are different, even if they are physically
identical.
D) consumers' value in uniformity.
209. Which of the following is NOT a source of product differentiation?

A) price
B) location
C) style
D) quality
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210. Firms in monopolistic competition can acquire some market power by:
A) using price competition.
B) engaging in tacit collusion.
C) differentiating the product.
D) increasing their output to the perfectly competitive level.
211. When initially a monopolistically competitive industry earns economic profit, , the
result of competition among sellers is usually that:
A) the price of the product increases to monopoly level.
B) the price of the product quickly reaches the perfectly competitive level.
C) firms in the industry gain market share.
D) firms in the industry lose market share.
212. The term imperfect competition is used to refer to both oligopoly and monopolistic
competition.
A) True
B) False
213. If the Baltimore furniture market had only a few sellers, it would be considered an
oligopoly.
A) True
B) False
214. In the U.S. economy, oligopoly is rare.

A) True
B) False
215. Cartels are illegal in the United States.

A) True
B) False
216. One of the most inefficient ways for duopolists to earn a profit is to engage in collusion
or form a cartel.
A) True
B) False
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217. The fact that the price effect for an oligopolist is less than the price effect for a
monopolist helps explain why firms are likely to cheat on a cartel agreement.
A) True
B) False
218. Suppose all of the firms in an industry form a cartel and succeed in raising the price to
the monopoly level by reducing output. Any single firm will find that it can increase its
profits by cheating on the cartel agreement.
A) True
B) False
219. Oligopolists will earn zero profits unless they can collude.
A) True
B) False
220. Each firm in a cartel has an incentive to break its word and produce more than the
agreed quantity.
A) True
B) False
221. A Nash equilibrium results when each player chooses the action that maximizes his or
her payoff given the actions of other players.
A) True
B) False
222. A strategy of tit-for-tat involves playing cooperatively at first, then doing whatever the
other player did the previous period.
A) True
B) False
223. The noncooperative equilibrium of a prisoners' dilemma game can be avoided if the
game is played repeatedly and firms engage in strategic behavior.
A) True
B) False
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224. A situation in which each firm acts to raise the profits of its rivals (and of itself) without
any formal agreement between firms is known as tacit collusion.
A) True
B) False
225. Until 1890, trusts in which firms in an industry agreed to limit production and raise
prices were legal in the United States.
A) True
B) False
226. Antitrust legislation was first passed in the United States in 1776.
A) True
B) False
227. Oligopoly first became an issue in the United States in the second half of the nineteenth
century, when the growth of railroads allowed for a national market for goods.
A) True
B) False
228. Cartels were legal in the United States until 1890.

A) True
B) False
229. The purpose of the nineteenth-century cartels was to increase production and encourage
price competition.
A) True
B) False
230. A trust is a government agency that enforces laws limiting the power of oligopolies.
A) True
B) False
231. A trust is the organization that is formed when two large companies merge.
A) True
B) False
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232. A trust is formed when shareholders of the major companies in an industry place their
shares in the hands of a board of trustees who control the companies and act as a single
firm that can engage in monopoly pricing.
A) True
B) False
233. The first trust in the United States was established in 1881 by lawyers at John D.
Rockefeller's Standard Oil Company.
A) True
B) False
234. The purpose of the trusts established in the United States in the late 1800s was to
decrease government spending and the size of the federal budget deficit.
A) True
B) False
235. The purpose of antitrust policy is to prevent the exercise of monopoly power.
A) True
B) False
236. The law enacted in 1890 to break up existing monopolies and prevent the formation of
new ones was the Glass-Steagall Act.
A) True
B) False
237. The law enacted in 1890 to break up existing monopolies and prevent the formation of
new ones was the Sherman Antitrust Act.
A) True
B) False
the same industry and prohibits mergers that it believes will reduce competition is the
Office of Management and Budget.
A) True
B) False
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the same industry and prohibits mergers that it believes will reduce competition is the
Justice Department.
A) True
B) False
240. Until recently most advanced countries except the United States did NOT have policies
against price fixing.
A) True
B) False
241. The European Union enforces antitrust policies similar to those in the United States for
its member countries.
A) True
B) False
242. The purpose of the Sherman Antitrust Act was to encourage the establishment of
monopolies to replace trusts.
A) True
B) False
243. Suppose that Walmart buys fresh roses from several hundred small backyard gardeners
in California. These gardeners are very likely to be able to engage successfully in tacit
collusion.
A) True
B) False
244. Tacit collusion is most likely to occur if there are only a few firms in the industry.
A) True
B) False
245. Tacit collusion is relatively unlikely to occur in an industry with 3 firms than in an
industry with 10 firms.
A) True
B) False
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246. If there are many firms in an industry, there is little incentive for firms to engage in tacit
collusion because a smaller proportion of the units of the product sold are affected by
the price effect if a firm increases output.
A) True
B) False
247. Oligopoly firms that produce only cement are less likely to collude than firms in a cell
phone oligopoly.
A) True
B) False
248. Tacit collusion is likely to occur when firms have different market shares.
A) True
B) False
249. Suppose an oligopoly is composed of four firms. One firm has a 50% market share;
another firm, 35%; another, 10%; and the fourth, 5%. It will be easier for this industry to
engage in tacit collusion than for an oligopoly each of whose four firms has 25% of the
market.
A) True
B) False
250. Until recently most other advanced countries did not have policies that prohibited price
fixing.
A) True
B) False
251. A price war occurs when tacit collusion breaks down and aggressive price competition
causes prices to collapse.
A) True
B) False
252. In a price war, firms in an oligopoly often push prices up to the monopoly level.
A) True
B) False
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253. Across most industries, oligopoly is far more common than either perfect competition or
monopoly.
A) True
B) False
254. Shops that sell live bait to people in Alabama may be monopolistically competitive if
there is product differentiation and differentiation by location.
A) True
B) False
255. The hamburger industry has some differentiation and many firms. This suggests that the
hamburger industry is more oligopolistic than monopolistically competitive.
A) True
B) False
256. Gas stations are not monopolistically competitive, because everyone knows the gasoline
is the same regardless of where it is purchased.
A) True
B) False
257. Tacit collusion is NOT feasible in monopolistic competition because of the large
number of competing firms.
A) True
B) False
258. As product differentiation increases, the price elasticity of demand falls and the firm
increases its market power.
A) True
B) False
259. Monopolistic competition is unique among the four market structures in that it is the
only one that is always characterized by product differentiation.
A) True
B) False
260. Monopolistic competition is often found in service industries.

A) True
B) False
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261. Competition limits the price a monopolistically competitive firm can set.
A) True
B) False
262. If the Boston doughnut market is monopolistically competitive and the firms are earning
short-run profits, consumers in Boston will see less diversity in the doughnuts offered
over time.
A) True
B) False
263. In monopolistic competition, the primary source of product differentiation is price

competition.
A) True
B) False
264. The best way for firms in monopolistic competition to gain market power is to engage in
tacit collusion.
A) True
B) False
265. Firms in monopolistic competition can gain some market power by engaging in product
differentiation.
A) True
B) False
266. Economics textbooks are an example of product differentiation by type and style.
A) True
B) False
267. Competition among sellers in monopolistic competition means that all of the firms in
the industry will produce the same product.
A) True
B) False
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268. The fact that firms in a monopolistically competitive industry are competing for a
limited market is called competition among sellers.
A) True
B) False
269. Value in diversity means that by providing a variety of differentiated choices, firms in
monopolistic competition provide a gain to consumers.
A) True
B) False
270. (Table: Demand for Breakfast Cereal) Look at the table Demand for Breakfast Cereal.
Suppose that the marginal cost of producing cereal is zero.
A) If General Mills is the sole producer of breakfast cereal, how many boxes will the
firm produce, what price will be charged, and how much revenue will be earned?
B) Now assume that Kellogg enters the market, and the industry is now a duopoly with
two equal-sized firms. If these firms agree to split the monopoly output equally, how
much revenue will each firm earn under the agreement?
C) If General Mills can cheat on this agreement by producing 50 million more boxes
of cereal without punishment, will it? Analyze the price effect and quantity effect for
General Mills of producing 1 million more boxes.
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271. (Table: Demand Schedule for Gadgets) Look at the table The Market for Gadgets. Two
producers, Margaret and Ray, dominate the market. Each firm can produce gadgets at
marginal costs of approximately zero and has no fixed cost.
A) If these firms form a cartel to maximize joint profits, what output level will be
produced and at what price? If the output is shared evenly, how much profit will each
firm earn?
B) Suppose that Margaret decides to increase production by 100 gadgets and Ray
leaves output constant. What will be the new market price and output? How much profit
will each firm earn?
272. There are only two gas stations, Swifty Gas and Speedy Gas, in a small town. Each firm
can set either a high price or a low price; customers view these two firms as nearly
perfect substitutes. The table shows the payoff matrix. Profits in each cell of the payoff
matrix are given as (Swifty, Speedy). If this game is played only once and each firm sets
the price of gas independently, what is the Nash equilibrium? Is this game an example
of a prisoners' dilemma? Explain your conclusions.
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273. Two large electronic retailers, Biggest Buy and Connection City, are considering
entering a small town. Each firm can either enter the market or not. The table shows the
payoff matrix. Profits in each cell of the payoff matrix are given as (Biggest Buy,
Connection City). Are there any dominant strategies in the game? If this game is played
only once and each firm makes the entry decision independently, what is the Nash
equilibrium of this game? Explain your conclusions.
274. Two electronic retailers, Biggest Buy and Connection City, are considering entering a
small town. Biggest Buy is the larger and more profitable of the two rivals. Each firm
can either enter the market or not. The table shows the payoff matrix. Profits in each cell
of the payoff matrix are given as (Biggest Buy, Connection City). Are there any
dominant strategies in the game? If this game is played only once and each firm makes
the entry decision independently, what is the Nash equilibrium of this game? Explain
your conclusions.
275. Dell and Gateway are close competitors in the personal computer market. Suppose that
each year Dell and Gateway have to decide whether to spend money on costly research
and development (R&D). If both spend money on R&D, each firm will earn $30
million. If neither spends money on R&D, each firm will earn $40 million. If one firm
spends money on R&D and the other does not, the firm that engaged in R&D would
earn $45 million and the firm that did not would earn $25 million.
A) Use a payoff matrix to depict this problem.
B) What is the noncooperative solution to this game?
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276. Two large universities, Humongous State (HSU) and Behemoth State (BSU), dominate
college basketball. Each basketball program aggressively recruits the best athletes to
attend the university, but the best athletes can skip college and jump immediately to
professional basketball. Each school can illegally pay top players to enroll and thus
increase the winning percentage of the team, or each program can follow the rules and
lose the top players to the professional ranks. The table shows the payoff matrix of
winning percentages that each school would receive from its recruiting decision, given
the recruiting decision of its rival. Winning percentages in each cell of the payoff matrix
are given as (HSU, BSU).
A) What is the noncooperative Nash equilibrium?
B) Suppose each school considers the future and devises a tit-for-tat strategy. Neither
school will pay players to play basketball so long as the other does not. If one school
breaks the agreement and pays players, the other school will do the same until the first
school stops paying players. If both schools adopt the tit-for-tat strategy, what are the
winning percentages every year? Will this be effective at eliminating the illegal practice
of paying college athletes to play basketball?
277. Why do the United States and many other countries have antitrust laws? What's so
harmful about oligopoly that it warrants an entire body of law?
278. Monopolistic competition shares some characteristics with perfect competition and
monopoly. Explain where these market structures are similar and where they differ.
279. A university town has many clothing retailers. Some of the stores sell sweatshirts and
T-shirts to college students, and other stores sell suits, sport coats, and business casual
wear to college professors. How are these retail stores differentiating the products that
they sell?
280. Oligopolies are industries:

A) dominated by one seller who shares market power equally with all other sellers.
B) made up of few firms, each with some market power and therefore aware of their
interdependence with the other firms.
C) composed of many buyer and sellers, all of whom are price takers.
D) that are the same as monopolistically competitive industries except that they sell a
standardized product.
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281. An oligopoly may result from:
A) increasing returns to scale.
B) standardization of a product.
C) low or no barriers to entry.
D) price-taking conditions for both buyers and sellers.
282. Maximization of joint profits is most likely when firms are:

A) perfect competitors.
B) monopolistic competitors.
C) duopolists who collude.
D) natural monopolists.
283. Cartels made up of a large number of firms are unstable because each firm in the cartel:
A) has an incentive to cheat.
B) is producing a relatively homogeneous product in which entry barriers are low.
C) does not have to worry about losses.
D) recognizes that the market size is relatively stable.
284. Both monopolists and cartel members will find that a drop in price leads to:
A) a quantity effect that reduces total revenue.
B) a price effect that reduces total revenue.
C) a quantity effect that has no effect on total revenue.
D) neither a price nor a quantity effect.
285. Given the large amount of interdependence among them, cooperation with one's
competitors is the most profitable strategy for:
A) perfect competitors.
B) monopolistic competitors.
C) oligopolists.
D) monopolists.
Scenario: Two Identical Firms
Two identical firms make up an industry in which the market demand curve is represented by Q
= 5,000 – 4P, where Q is the quantity demanded and P is price per unit. The marginal cost of
producing the good in this industry is constant and equal to $650. Fixed cost is zero.
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286. (Scenario: Two Identical Firms) Suppose the two firms in the scenario Two Identical
Firms decide to cooperate and collude, resulting in the same amount of production for
each firm. What is the profit-maximizing price and output for the industry?
A) P = $400; Q = 5,000
B) P = $950; Q = 1,200
C) P = $600; Q = 1,500
D) P = $300; Q = 2,000
287. (Scenario: Two Identical Firms) When the firms in the scenario Two Identical Firms
collude and produce the profit-maximizing output, what is the profit earned by each
firm?
A) $360,000
B) $180,000
C) $15,000
D) $25,000
288. (Scenario: Two Identical Firms) If one firm in the scenario Two Identical Firms decides
to cheat, the cheating firm will:
A) be able to increase its profits initially.
B) find that cheating leads to a decrease in its profits alone.
C) find that cheating initially leads to an increase in both firms' profits.
D) find that the other firm has an increase in its profits alone.
289. The Sherman Antitrust Act:

A) was aimed at preventing the establishment of more monopolies and was the
beginning of antitrust policy.
B) introduced the HHI measure to industries.
C) initially allowed firms to collude legally.
D) allowed the establishment of trusts.
290. A customer with significant buying power in an industry would:

A) make a tacit price agreement more difficult to achieve.
B) make a tacit price agreement easier to achieve.
C) have no effect on tacit pricing agreement negotiations.
D) result in a kinked demand curve.
Page 66
Scenario: Payoff Matrix for Two Firms
The following table provides the payoff matrix for two firms, firm A and firm B. They are the
only two firms in the industry and can either compete or cooperate with each other, with the
following profit results reflecting their actions.
291. (Scenario: Payoff Matrix for Two Firms) In the scenario Payoff Matrix for Two Firms,
firm A:
A) has a dominant strategy to compete.
B) has a dominant strategy to cooperate.
C) has two dominant strategies.
D) has no dominant strategy.
firm B:
A) has a dominant strategy to compete.
B) has a dominant strategy to cooperate.
C) has two dominant strategies.
D) has no dominant strategy.
if both firms pursue their dominant strategies:
A) their joint profits are maximized.
B) their joint profits are not maximized.
C) their joint profits reflect an equal sharing of the total profits.
D) neither can attain its largest possible profits, since there are two dominant strategies
for each firm.
Page 67
294. If a player has an incentive to cheat no matter what the other player does and if both
players act in this manner, both players will be worse off. This is a:
A) prisoners' dilemma.
B) tit-for-tat strategy.
C) price leadership model.
D) kinked demand curve model.
295. A strategy in which players cooperate initially but then mimic what the other players do
is referred to as a:
A) prisoners' dilemma.
B) tit-for-tat strategy.
C) price leadership model.
D) kinked demand curve model.
296. Firms will choose a tit-for-tat strategy if they:

A) expect that price wars will ultimately provide benefits for the dominant firm.
B) believe that the firms in the industry will be competing with each other for a long
time.
C) do not believe interdependence is a prominent characteristic of the industry.
D) are sure that cheating behavior will go unnoticed.
297. When countries spend increasingly large amounts of funds on military production as a
means of impressing an equally powerful antagonistic neighbor with possible military
superiority, a prisoners' dilemma evolves, since both countries would be better off if
they did not pursue such a strategy. This is an example of:
A) a tacit agreement.
B) an arms race.
C) a price leadership model.
D) exclusive dealing.
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Scenario: Payoff Matrix for Firms X and Y
The following payoff matrix depicts the profits for the only two firms in this oligopolistic
industry.
298. (Scenario: Payoff Matrix for Firms X and Y) In the scenario Payoff Matrix for Firms X
and Y, if firm Y were to choose its dominant strategy, it would:
A) choose a low price.
B) choose a high price.
C) encounter a dilemma, since there are two dominant strategies.
D) allow firm X to dominate the industry.
and Y, if firm X were to choose its dominant strategy, it would:
A) choose a low price.
B) choose a high price.
C) encounter a dilemma, since there are two dominant strategies.
D) allow firm Y to dominate the industry.
and Y, if firm X and firm Y wish to maximize joint profits:
A) each firm should choose its dominant strategy.
B) Firm Y should choose a dominant strategy and Firm X, a nondominant strategy.
C) each should consider its specific situation before choosing a strategy, since
strategies also entail costs.
D) each should choose a nondominant strategy.
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301. Industries that are made up of many competing producers, each selling a differentiated
product, and whose firms earn zero economic profits in the long run are:
B) monopolies.
C) oligopolies.
302. When Henry Ford produced his cars, he _____, while GM produced its cars _____.
A) maximized economies of scale; by also maximizing economies of scale
B) maximized economies of scale; with an emphasis on product differentiation
C) produced with excess capacity; maximized economies of scale
D) produced with excess capacity; also with excess capacity
Page 70
Answer Key
1. C
2. A
3. B
4. A
5. C
6. B
7. C
8. C
9. A
10. A
11. C
12. B
13. D
14. D
15. A
16. C
17. B
18. A
19. A
20. B
21. D
22. A
23. C
24. D
25. C
26. B
27. D
28. C
29. B
30. C
31. A
32. C
33. C
34. D
35. C
36. A
37. A
38. D
39. D
40. D
41. C
42. D
43. B
44. C
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45. B
46. B
47. C
48. D
49. C
50. B
51. A
52. D
53. D
54. C
55. B
56. C
57. D
58. A
59. A
60. C
61. D
62. B
63. D
64. A
65. A
66. B
67. A
68. C
69. B
70. C
71. D
72. A
73. D
74. D
75. C
76. D
77. A
78. B
79. A
80. A
81. A
82. C
83. A
84. B
85. C
86. D
87. A
88. C
89. B
90. D
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91. B
92. D
93. C
94. A
95. A
96. B
97. C
98. A
99. C
100. C
101. B
102. B
103. C
104. B
105. B
106. A
107. A
108. D
109. A
110. B
111. D
112. B
113. C
114. A
115. A
116. A
117. C
118. D
119. C
120. B
121. D
122. A
123. C
124. B
125. B
126. B
127. A
128. D
129. D
130. D
131. B
132. D
133. D
134. B
135. D
136. D
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137. B
138. B
139. D
140. D
141. B
142. B
143. A
144. C
145. A
146. A
147. B
148. A
149. D
150. D
151. C
152. C
153. B
154. B
155. B
156. A
157. C
158. D
159. C
160. B
161. A
162. C
163. C
164. B
165. B
166. A
167. A
168. A
169. B
170. D
171. A
172. B
173. B
174. D
175. A
176. D
177. A
178. C
179. A
180. B
181. A
182. D
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183. C
184. C
185. C
186. D
187. D
188. C
189. D
190. B
191. D
192. D
193. C
194. A
195. A
196. C
197. C
198. B
199. A
200. D
201. C
202. A
203. D
204. C
205. D
206. B
207. C
208. D
209. A
210. A
211. D
212. A
213. A
214. B
215. A
216. B
217. A
218. A
219. B
220. A
221. A
222. A
223. A
224. A
225. A
226. B
227. A
228. A
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229. B
230. B
231. B
232. A
233. A
234. B
235. A
236. B
237. A
238. B
239. A
240. A
241. A
242. B
243. B
244. A
245. B
246. A
247. B
248. B
249. B
250. A
251. A
252. B
253. A
254. A
255. B
256. B
257. A
258. A
259. B
260. A
261. A
262. B
263. B
264. B
265. A
266. A
267. B
268. A
269. A
270. A) General Mills will maximize total revenue at 250 million boxes at $2.50 per box.
Total revenue is equal to $625 million.
B) If the firms split the market with a cartel agreement, total output and market price
will be the same, but total revenue for each firm will be $312.5 million.
C) If General Mills produces 50 million more boxes, the firm produces a total of 175
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million boxes and the market price falls to $2. On the original 125 million boxes, the
price effect is –$0.50 × 125 million = –$62.5 million. On the additional 50 million
boxes sold at $2 each, the quantity effect is $2 × 50 million = $100 million. The net
change in total revenue is $37.5 million. Yes, General Mills has an incentive to cheat on
the agreement.
271. A) Joint profits are maximal when total industry production is 500 gadgets (250 from
each firm) at $5 each. The two firms split this revenue, and each earns 0.5 × ($500 × 5)
= $1,250 in profit.
B) If Margaret increases production by 100 gadgets, total industry output will be 600
gadgets, each sold at $4. Margaret is now selling 350 gadgets at $4, so she is earning
$1,400 in profit. Ray is now selling 250 gadgets at a price of $4, so he is earning $1,000
in profit.
272. Each gas station will set a low price. Setting a low price is a dominant strategy for each
firm. If Swifty sets a high price, Speedy earns more money by setting a low price,
because earning $150 is preferred to earning $100. If Swifty sets a low price, Speedy
earns more money by setting a low price, because earning $50 is preferred to earning
$25. Yes, it is an example of a prisoners' dilemma, because in hindsight each firm can
see that there is an outcome (both setting a high price) that is mutually beneficial. Had
they been able to cooperate, they might have escaped the dilemma.
273. There are no dominant strategies. If Biggest Buy enters the market, Connection City
will not enter, because earning $0 is preferred to losing $10. If Biggest Buy does not
enter the market, Connection City will enter, because earning $25 is preferred to earning
$0. The same situation exists with Biggest Buy. There are two Nash equilibria in this
game: entry, no entry and no entry, entry. In both situations, neither firm has the
incentive to deviate unilaterally from this outcome; so by definition, these can each be
defined as a Nash equilibrium.
274. Biggest Buy has a dominant strategy of entering the market. No matter what Connection
City chooses to do, Biggest Buy will always prefer to enter. Connection City does not
have a dominant strategy. If Biggest Buy enters the market, Connection City will not
enter because earning $0 is preferred to losing $10. If Biggest Buy does not enter the
market, Connection City will enter because earning $15 is preferred to earning $0. The
Nash equilibrium exists where Biggest Buy enters (the dominant strategy) and
Connection City does not enter. Thus, the payoffs are $25, $0.
275. A) This payoff matrix illustrates the game. The payoffs are (Dell, Gateway).
B) Both firms have a dominant strategy to spend money on R&D, so the

noncooperative outcome is $30, $30.
276. A) The noncooperative Nash equilibrium is for both schools to pay players. Paying
players, although illegal, is a dominant strategy.
B) As this hypothetical game is designed, a tit-for-tat strategy will not be effective at
eliminating the illegal practice of paying players to attend a school. The outcome of
neither school paying players is unstable because both schools can tacitly agree to pay
Page 77
players and both schools will win more games, so the winning percentages will end up
at 0.7, 0.7, and the practice of paying college basketball players will continue.
277. Oligopolies are industries characterized by a small number of firms. History and
economic theory tell us that when an industry is controlled by a small number of firms,
collusion becomes likely. This collusion, whether explicit or implicit, brings the
industry closer and closer to the monopoly outcome of less output, higher prices, and
increasing deadweight loss. There is also an equity issue. Some people feel that the loss
of consumer surplus, with consequent gain in oligopoly producer profits, unfairly
changes the competitive landscape. So in an effort to discourage monopoly behavior and
to promote a more equitable distribution of total welfare, many nations have an antitrust
policy.
278. Monopolistic competition is similar to perfect competition in two ways. First, both have
many firms competing in the industry. Second, there are no barriers to entry or exit in
the long run, so firms can enter if profits are possible or exit if losses are prevalent. This
flexibility moves firms in both markets to zero economic profit in the long run. Because
monopoly has barriers to entry, positive economic profits are possible in the long run.
Monopolistic competition differs from perfect competition in that firms offer
differentiated products rather than standardized products. Because firms in monopolistic
competition have differentiated products, these firms have some market power to set the
price above marginal revenue. This characteristic is similar to monopoly because
monopolists have absolute market power.
279. These two groups of retailers are differentiating their apparel by style or type. Both sell
clothing, but they sell different types of clothing and target those products to different
shoppers.
280. B
281. A
282. C
283. A
284. B
285. C
286. B
287. B
288. A
289. A
290. A
291. B
292. B
293. A
294. A
295. B
296. B
297. B
298. B
299. B
300. B
301. D
Page 78
302. B
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1.

2. The most important source of oligopoly in an industry is:

4. Oligopoly is a market structure that is characterized by a _____ number of _____ firms

5. To be called an oligopoly, an industry must have:

6. Oligopoly is a market structure characterized by:

8. In oligopoly, a firm must realize that:

11. Which of the following scenarios best describes an oligopolistic industry?

14. An industry characterized by a few interdependent firms and by barriers to entry is

16. An industry with only two firms is generally called:

17. A duopoly is an industry that consists of:

18. An industry that consists of two firms is:

Figure: Monopoly Profits in Duopoly

Use the following to answer questions 66-77:

79. Antitrust policy refers to government:

82. Oligopoly first became an issue in the United States when:

88. The purpose of antitrust policy is to:

94. Airlines are prone to price wars because:

95. Tacit collusion is difficult if:

97. As the number of firms in an oligopoly decreases:

101. One framework used to analyze strategic choices is:

103. The study of behavior in situations of interdependence is called:

107. An action is a dominant strategy when it is a player's best action:

Figure: Payoff Matrix I for Blue Spring and Purple Rain

Use the following to answer questions 109-110:

Figure: Payoff Matrix for Ajinomoto and ADM

Use the following to answer questions 111-112:

Figure: Prisoners' Dilemma for Thelma and Louise

Use the following to answer questions 113-114:

115. The outcome of a strategic choice is called a:

120. A dominant strategy equilibrium occurs when:

Use the following to answer questions 121-122:

124. A dominant strategy equilibrium exists in a game when:

127. Tacit collusion is difficult to achieve in practice:

130. Which of the following is TRUE?

133. OPEC is:

134. A well-known example of an international cartel is:

135. Tacit collusion in an industry is limited by:

Figure: Payoff Matrix for Jake and Zoe

Figure: Payoff Matrix II for Blue Spring and Purple Rain

Use the following to answer questions 146-148:

Figure: Payoff Matrix for Gehrig and Gabriel

Figure: Pricing Strategy in Cable TV Market I

Use the following to answer questions 154-160:

Figure: Pricing Strategy in Cable TV Market II

Use the following to answer questions 161-162:

Use the following to answer questions 163-167:

169. Which of the following industries is MOST likely to be monopolistically competitive?

171. Monopolistic competition is characterized by:

172. In monopolistic competition, each firm:

173. The wedding dress industry is monopolistically competitive. As a result:

175. In monopolistic competition:

177. The downward-sloping demand curve for a monopolistically competitive firm:

179. An example of monopolistic competition is the _____ industry.

183. A monopolistically competitive industry is characterized by a _____ number of firms

184. Monopolistic competition is an industry structure characterized by:

189. Which of the following is NOT a characteristic of monopolistic competition?

191. A common example of monopolistic competition is the market for:

193. Monopolistic competition describes an industry characterized by a _____ number of

195. Monopolistic competition describes an industry characterized by:

196. Monopolistic competition is different from monopoly because firms:

198. Monopolistic competition describes an industry characterized by:

208. The sources of product differentiation do NOT include:

209. Which of the following is NOT a source of product differentiation?

214. In the U.S. economy, oligopoly is rare.

4. Oligopoly is a market structure that is characterized by a _ number of _ firms