ECO 251 Ch. 16 Document

ECO 251 Ch. 16 Document - CHAPTER 16 OLJGOPOLY 253 . When...

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Unformatted text preview: CHAPTER 16 OLJGOPOLY 253 . When firms cooperate with one another, it is generally good for society as a whole. 5. " en firms c00perate with one another, it is generally good for the cooPe . / g ' s. 6. Whe n oligopolists collude and form a cartel, the outcome in the ' et is similar to that enerated by a perfectly competitive market. 7. The pricd quantity generated by a Nash equilibrium ' closer to the competi- tive soluti . than the price and quantity generated b _ .- cartel. 8. The greater '3 - number of firms in the oligopo , the more the outcome of the market looks It at generated by a monop . 9. Cooperation is eas. _ aintained in an o ‘opoly because cooperation maximizes each individual firm “ rofits. 10. The prisoners’ dilemma I» mon ates why it is difficult to maintain cooperation even when cooperation is ‘ . ally beneficial. 1]. There is a constant tens' ' in . olig0poly between cooperation and self~interest because after an ag - ment to re ce production is reached, it is profitable for each individual ’ to cheat and pr - uce more. 12. The domin - strategy for an oligopolis ' to cooperate with the group and main- tain low a oduction regardless of what the ther oligopolists do. 13. An' st laws require manufacturers to eng 5 in resale price maintenance or . r trade. Predatory pricing occurs when a firm cuts prices - 'th the intention of driving competitors out of the market so that the firm can bee e a monopolist and later raise prices. 15. If a prisoners’ dilemma game is repeated, the participants are .- ore likely to inde- pendently maximize their profits and reach a Nash equilibrium. Multiple-Choice Questions 1. The market for hand tools (such as hammers and screwdrivers) is dominanted by Black £2: Decker, Stanley, and Craftsman. This market is best described as a. competitive. log. a monopoly. , an oligopoly. d. monopolistically competitive. 2. A market structure in which many firms sell products that are similar but not identical is known as a. perfect competition. b. monopoly. s: olisopoly- d. " monopolistic competition. 3. If oligopolists engage in collusion and successfully form a cartel, the market out- come is the same as if it were served by a monopoly. b. the same as if it were served by competitive firms. c. efficient because cooperation improves efficiency. d. known as a Nash equilibrium. 254 PART 5 FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY 4. Suppose an oligopolist individually ma>drruzes its profits. When calculating prof- its, if the output effect exceeds the price effect on the marginal unit of production, then the oligopolist a. has maximized profits. ' Should produce more units. c. should produce fewer units. d. should exit the industry. e. is in a Nash equilibrium. 5. As the number of sellers in an oligopoly grow larger, an oligopolistic market looks more like a. amonopoly. b. monopolistic competition. a competitive market. d. a collusion solution. 6. When an oligopolist individually chooses its level of production to maximize its profits, it produces an. output that is more than the level produced by a monopoly and less than the level produced by a competitive market. b. less than the level produced by a moriopoly and more than the level produced by a competitive market. c. more than the level produced by either a monopoly or a competitive market. d. less than the level produced by either a monopoly or a competitive market. 7. When an oligopolist individually chooses its level of production to maximize its profits, it charges a price that is a. more than the price charged by a monopoly and less than the price charged r by a competitive market. less than the price charged by a monopoly and more than the price charged by a competitive market. c. more than the price charged by either a monopoly or a competitive market. d. less than the price charged by either a monopoly or a competitive market. 8. As the number of sellers in an oligopoly increases, a. collusion is more likely to occur because a larger number of firms can place pressure on any firm that defects. b. output in the market tends to fall because each firm must cut back on production. c; the price in the market moves further from marginal cost. {d3 the price in the market moves closer to marginal cost. 9. A situation in which oligopolists interacting with one another each choose their best strategy given the strategies that all the other oligopolists have chosen is known as a - a. collusion solution. b. cartel. cf} Nash equilibrium. 3. dominant strategy. CHAPTER 16 OLIGOPOLY 255 Use the table below to answer questions 10 through 13. The table shows the demand schedule for tickets to watch amateur baseball games in a medium-sized town. The city provides the ballparks, and the players play for free, so the marginal cost of providing the games is zero. The city has autho- rized two companies to provide baseball games in two stadiums, and the public considers the games in each stadium to be equivalent. Price Quantizx $6 0 5 1,000 4 2,000 3 3,000 2 4,000 1 5,000 0 6,000 10. Under competition, the price and quantity in this market would be a. $4; 2,000. '. b. $3; 3,000. - c. $2; 4,000. d. $1,- 5,000. @ $0,- 6,000. 11. If the duopolists in this baseball market collude and successfully form a cartel, what is the price that each should charge in order to maximize profits? a. $5 b. $4 :32: $3 d. $2 e. $1 12. If the duopolists in this baseball market collude and successfully form a cartel, how much profit will each earn? a. $1,500 b. $3,000 9. $4,000 (a? $4,500 e. $9,000 13. Suppose that the dquolists are unable to collude, and both companies cheat on the production agreement. Ifboth alter production together by SOD-unit increments so that total production changes by LOUD-unit increments, how much profit will each earn when the market reaches a Nash equilibrium? a. $2,500 b. $4,000 256 PART 5 FIRM BEHAVIOR AND THE ORGANlZATlON OF INDUSTRY Use the prisoners’ dilemma game in Exhibit 2 to answer questions 14 and 15. It shows the possible profits for duopolists that are the only two restaurants in town. Each firm can choose how many hours to be open for business. HIBlT Open Many Hours Open Few Hours Sue gets $70,000 Sue gets $60,000 Joe gets $70,000 Joe gets $90,000 Sue gets $90,000 ' Sue gets $80,000 Joe gets $60,000 I Joe gets $80,000 14. The dominant strategy for Sue and Joe is for i . both to be open for many hours. . both to be open for a few hours. <2. Sue to be open for many hours while Joe is open for few hours. cl. Sue to be Open for few hours while Ioe is open for many hours. e. There is no dominant Strategy in this prisoners’ dilemma game. 15. Suppose Sue and Joe agreed to collude and jointly maximize their profits. If Sue and Joe were to be able to repeatedly play the game shown above and they agreed on a penalty for defeating from their agreement, what is the likely outcome of the game? a. Both are open for many hours. Both are open for a few hOurs. c. Sue is open for many hours while Joe is open for few hours. d. Sue is open for few hours while Joe is open for many hours. 16. Many economists argue that resale price maintenance a. is price fixing and, therefore, is prohibited by law. b. enhances the market power of the producer. has a legitimate purpose of stopping discount retailers from free riding on the services provided by full-service retailers. d. is both a and b. 17. Collusion is difficult for an oligopoly to maintain a. because antitrust laws make collusion illegal. b. because, in the case of oligopoly, self-interest is in conflict with cooperation. if additional firms enter of the oiigopoly. -‘ d. for all of the above reasons. CHAPTER 16 OLIGOPOLY 257 Use the following information to answer questions 18 and 19: Suppose that ABC Publishing sells an economics textbook and an accornpanying study guide. Bob is willing to pay $75 for the text and $15 for the study guide. Mary is willing to spend $60 for the text and $25 for the study guide. Suppose both the book and study guide have a zero marginal cost of production. 18. If ABC Publishing charges separate prices for both products, its best strategy is to charge prices that, when combined, total a. $60. GD. $.75. c. $80. d. $85. e. $90. 19. If ABC Publishing engages in tying, its best strategy is to charge a combined price of a. $60. b. $75. c. $80. $85. he: $90. 20. Laws that make it illegal for firms to compire to raise prices or reduce production are known as a. pro-competition laws. antitrust laws. c. antimonopoly laws. cl. anticollusion laws. e. all of the above. '— ADVANCED CRITICAL THINKING You are watching television. An advertisement begins, "Come on down to Warehouse Electronics. We’ve got deals so great you won’t believe it! National brand 13-inch color television sets for $99. The ' price is so 10 r t we can’t tell you the name of the manufacturer!” 1. Wh . ould Warehouse Electronics be unable to reveal the name of the v . uiac- turer W " c it advertises its television sets for an unusually low pric-.- '\ _ 2. Although this activity ap - ars like price fixing, ' the objective of this practice to reduce competition? Why? 3. Why would the - .- ufacturer place this typ of restriction on the retailers that sell its prod 258 PART 5 FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY SOLUTIONS 2- 31- Terms and De itions j, imperfect competi ‘on _7_ Oligopoly _2_ Monopolistic competiti _6m Duopoly _E’;_ Collusion 1} Cartel i Nash equilibrium ;_ Game theory 1 Prisoners’ dilemma _x_4_ Dominant strategy Practice Problems 1. a. Monopoly, only one firm from w ‘ch to purchase. b. Monopolistic competition, many firms ch selling differentiated products. c. Monopoly, only one firm can produce it du to copyright laws. C. d. Oiigopoly, few firms (Fuji, Kodak) selling similar products. e. Perfect competition, many firms selling identical products. f. Monopolistic competition, many firms ec h selling differentiated products. d. g. Oligopoly, few firms (Goodyear, Firetone, Michelin) selling very similar produ s. . h. Monopoly, only one firm from hich to purchase. i. Monopolistic competition, firms each selling differentiated produc . j. Oligopoly, few firms (Ke ogg Company, Post, General Mills, Qu . er Oats) selling similar products. k. Perfect competition, any firms selling -' 3' identical products. 1. Oligopoiy, few airl' es from which to choose at any one airpo , similar product. h Note: While mo - poly and competition are more easily di guished, the line between oligopoly and ' onopolistic competition is not as sharp. Fo example, (b) might be considered to be an v igopoly since there are relatively it few pub shers and economic textbooks may be co ‘dered to be very similar, and (1) might be co sidered to be monOpolistic competitiOn if t - products are considered to be differenti- k. a d, and so on. ./' Price per Quantity Total Revenue Bushel (in bushels) (profit) $12 0 $0 ‘11 5 55 10 1 t 100 9 ' 5 135 8 20 160 7 25 175 6 30 180 5 35 175 4 40 160 3 45 135 - 50 100 “i 55 55 0 60 0 b. In a competitive market, competition re— duces the price until it equals marginal cost (which is zero in this case), therefore P : $0 and Q = 60. These duopolists would behave as a mo- nopolist, produce at the level that maximiz- es profit, and agree to divide the production levels and profit. Therefore, P = $6, Q = 30 for the market. Profit 2 $6 x 30 2 $180. Each firm produces 15 units at $6 and receives profit of $90 (half of the $180). Cheating firm: 20 x $5 2 $100, other firm: 15 x $5 = $75. Each firm: 20 X $4 = $80. . No, because the profit would fall for the cheater to 25 x $3 : $75, which is below $80 rofit from part 8 above. Therefore, the Nash euilibrium is each firm producing 20 units (4 for the market) at a price of $4, creating $1 of profit for the market, and each du~ opo st receives $80 profit. The - sh equilibrium has a higher price ($154 comp u to $0) and a smaller quantity (40 units co a pared to 60 unitS). Society is better off with mpetitive equilibrium. The new ash equilibrium would have a lower price nd a larger quantity. It would move towar the competitive solution. See Exhibit 3. The dominant ategy for each is to cheat and sell 20 units ecause each firm’s profit is greater when it .- lls 20 units regardless of whether the other ti sells 15 or 20 units. They might be able 1 maintain the coop— erative (monopoly) pr duction level of 30 units and each produce 5 units because if ...
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This note was uploaded on 10/22/2011 for the course ACCT 3551 taught by Professor Brown during the Spring '11 term at UNC.

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ECO 251 Ch. 16 Document - CHAPTER 16 OLJGOPOLY 253 . When...

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