Chapter 17 Answers

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In the prisoners’ dilemma game, confessing is a dominant strategy for each of the two prisoners.
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True
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One way that public policy encourages cooperation among oligopolists is through antitrust law.
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False
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If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the same level of output as they would produce in a Nash equilibrium.
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False
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The Sherman Antitrust Act states that if a person can prove that he was damaged by an illegal arrangement to restrain trade, he could sue and recover three times the damages he sustained.
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False
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In the case of oligopolistic markets, self-interest makes cooperation difficult and it often leads to an undesirable outcome for the firms that are involved.
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True
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Tying involves a firm
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selling two individual products together for a single price rather than selling each product individually at separate prices.
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Suppose that Jay-Z and Beyonce are duopolists in the music industry. In January, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By February, each singer is considering breaking the agreement. What would you expect to happen next?
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Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price will decrease.
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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. The likely outcome of this game is that PM Inc. earns
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$40 million and Brown Inc. earns $40 million.
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In the prisoners’ dilemma game, one prisoner is always better off confessing, no matter what the other prisoner does.
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True
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A tit-for-tat strategy, in a repeated game, is one in which a player starts by cooperating and then does whatever the other player did last time.
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True
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Tying can be thought of as a form of price discrimination.
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True
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Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same.
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False
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A dominant strategy is a strategy that is best for a player in a game regardless of the strategies chosen by the other players.
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True
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Scenario 17-2. Imagine that two oil companies, Mobile and Cargo, own adjacent oil fields. Under the fields is a common pool of oil worth $96 million. Drilling a well to recover oil costs $3 million per well. If each company drills one well, each will get half of the oil and earn a $45 million profit ($48 million in revenue – $3 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 Mobile and Cargo are able to successfully collude to maximize their joint profits, Mobile will earn
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$45 million and Cargo will earn $45 million.
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Suppose that two poker players believe that they are superior players to the rest of the people at their table. Further suppose that the two players make an agreement to concede hands to each other in order to drive the other players from the game first. Economists would model such behavior as
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game theory.
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For cartels, as the number of firms (members of the cartel) increases,
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the magnitude of the price effect decreases.
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In an oligopoly, the total output produced in the market is
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higher than the total output that would be produced if the market were a monopoly but lower than the total output that would be produced if the market were perfectly competitive.
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Oligopolists may well be able to reach their preferred, cooperative outcome if
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the game they play is repeated a sufficient number of times.
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Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash equilibrium, it
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is always in their best interest to leave their quantities supplied unchanged.
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The story of the prisoners’ dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members.
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True
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Tying is always profitable for a monopoly.
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False
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In some games, the noncooperative equilibrium is bad for the players and bad for society.
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True
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The notion of a tit-for-tat strategy applies to a prisoners’ dilemma game that is played repeatedly, but it does not apply if the game is played only once.
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True
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The Sherman Antitrust Act
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elevated agreements among conspiring oligopolists from an unenforceable contract to a criminal conspiracy.
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Economists claim that a resale price maintenance agreement is not anti-competitive because
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if a supplier has market power, it will be likely to exert that power through wholesale price rather than retail price.
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Predatory pricing involves a firm
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temporarily cutting the price of its product to drive a competitor out of the market.
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Assume that a local bank sells two services, checking accounts and ATM card services. The bank’s only two customers are Mr. Donethat and Ms. Beenthere. Mr. Donethat is willing to pay $8 a month for the bank to service his checking account and $2 a month for unlimited use of his ATM card. Ms. Beenthere is willing to pay only $5 for a checking account, but is willing to pay $9 for unlimited use of her ATM card. Assume that the bank can provide each of these services at zero marginal cost. If the bank is able to use tying to price checking account and ATM services, what is the profit-maximizing price to charge for the “tied” good?
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$10
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Two CEOs from different firms in the same market collude to fix the price in the market. This action violates the
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Sherman Antitrust Act of 1890.
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Which of the following statements is false?
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Most economists agree that predatory pricing is a profitable business strategy that usually preserves market power.
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The essence of an oligopolistic market is that there are only a few sellers.
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True
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The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that the two prisoners play in the prisoners’ dilemma.
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True
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For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.
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False
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Regardless of the firm’s behavior, Google should face antitrust legislation because it generates a dominant share of the revenue in its market.
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False
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A manufacturer of light bulbs sells its products to retail stores and requires the stores to sell the bulbs to customers for $2 per bulb. This practice is known as tying.
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False
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The more firms an oligopoly has,
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the more likely the firms will charge a price closer to the perfectly competitive price.
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What happens when the prisoners’ dilemma game is repeated numerous times in an oligopoly market? (i) The firms may well reach the monopoly outcome. (ii) The firms may well reach the competitive outcome. (iii) Buyers of the oligopolists’ product will likely be worse off as a result.
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(i) and (iii)
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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. PM Inc.’s dominant strategy is to
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advertise regardless of whether Brown Inc. advertises.
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To move the allocation of resources closer to the social optimum, policymakers should typically try to induce firms in an oligopoly to
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compete rather than cooperate with each other.
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An agreement among firms in a market about quantities to produce or prices to charge is called
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collusion.
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In which of the following markets are strategic interactions among firms most likely to occur?
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the market for tennis balls
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Oligopolies produce more when they collude then when they do not.
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False
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All examples of the prisoner’s dilemma game are characterized by one and only one Nash equilibrium.
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False
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Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding oligopolistic markets.
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False
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If two players engaged in a prisoner’s dilemma game are likely to repeat the game, they are more likely to cooperate than if they play the game only once.
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True
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Some business practices that appear to reduce competition, such as resale price maintenance, may have legitimate economic purposes.
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True
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In the U.S. government’s 1998 suit against the Microsoft Corporation, a central issue was whether Microsoft should be allowed to integrate its Internet browser into its Windows operating system. Microsoft responded that
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putting new features into old products is a natural part of technological practice.
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If nations such as Germany, Japan, and the United States prohibited international trade in automobiles, a likely effect would be that
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the price effect would become a more significant consideration for each firm that makes automobiles.
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Very often, the reason that players can solve the prisoners’ dilemma and reach the most profitable outcome is that
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the players play the game not once but many times.
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Predatory pricing refers to
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a monopoly firm reducing its price in an attempt to maintain its monopoly.
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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. In 1971, Congress passed a law that banned cigarette advertising on television. If cigarette companies are profit maximizers, it is likely that
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neither company opposed the ban on advertising.

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