Microeconomics Ch. 17 – Flashcards

In which of the following markets is economic profit driven to zero in the long run? a. Oligopoly b. Monopoly c. Perfect competition d. Cartels

When an oligopoly market reaches a Nash equilibrium, a. the market price will be different for each firm. b. the firms will not have behaved as profit maximizers. c. a firm will have chosen its best strategy, given the strategies chosen by other firms in the market. d. a firm will not take into account the strategies of competing firms.

In order to be successful, a cartel must a. find a way to encourage members to produce more than they would otherwise produce. b. agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. c. agree on the total level of production and on the amount produced by each member. d. agree on the prices charged by each member, but they need not agree on amounts produced.

The equilibrium price in a market characterized by oligopoly is a. higher than in monopoly markets and higher than in perfectly competitive markets. b. higher than in monopoly markets and lower than in perfectly competitive markets. c. lower than in monopoly markets and higher than in perfectly competitive markets. d. lower than in monopoly markets and lower than in perfectly competitive markets.

Cartels are difficult to maintain because a. antitrust laws are difficult to enforce. b. higher than in monopoly markets and lower than in perfectly competitive markets. c. there is always tension between cooperation and self-interest in a cartel. d. firms pay little attention to the decision made by other firms.

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

The prisoners' dilemma provides insights into the a. difficulty of maintaining cooperation. b. benefits of avoiding cooperation. c. benefits of government ownership of monopoly. d. ease with which oligopoly firms maintain high prices.

Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume that both countries have entered into an agreement to maintain certain production levels in order to maximize profits. In the world market for oil, the demand curve is downward sloping. The agreed-upon production level between the two countries will invariable be a. lower than the Nash equilibrium level. b. equal to the Nash equilibrium level. c. equal to the duopoly market equilibrium level. d. higher than the duopoly market equilibrium level.

Imagine that two oil companies, Big Petro Inc. and Gargantuan Gas, own adjacent oil fields. Under the fields is a common pool of oil worth $48 million. Drilling a well to recover oil costs $2 million per well. If each company drills one well, each will get half of the oil and earn a $22 million profit ($24 million in revenue - $2 million in costs). Assume that having X percent of the total wells means that a company will collect X percent of the total revenue. If Big Petro Inc. were to drill a second well, what would its profit be if Gargantuan Gas did not drill a second well? a. $22 million b. $24 million c. $26 million d. $28 million

Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million. What will these two companies do if they behave as individual profit maximizers? a. Neither company will advertise. b. Both companies will advertise. c. One company will advertise, the other will not. d. there is no way of knowing without knowing how many customers are stolen through advertising.

All cartels are inherently reliant on a. a horizontal demand curve. b. an inelastic demand for their product. c. the cooperation of their members. d. enforcement of antitrust laws.