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In a game, a dominant strategy is


A) the best strategy for a player to follow only if other players are cooperative.
B) the best strategy for a player to follow, regardless of the strategies followed by other players.
C) a strategy that must appear in every game.
D) a strategy that leads to one player's interests dominating the interests of the other players.

E) B) and C)
F) A) and D)

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Table 17-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Table 17-1 Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: 21. -Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, what price will they charge? A) $25 B) $30 C) $35 D) $40 21. -Refer to Table 17-1. If Rochelle and Alec operate as a profit-maximizing monopoly in the market for water, what price will they charge?


A) $25
B) $30
C) $35
D) $40

E) All of the above
F) None of the above

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Tying can be thought of as a form of price discrimination.

A) True
B) False

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Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. -Refer to Figure 17-5. Suppose we observe that the outcome of the game is one in which each company earns a profit of $10 million. This outcome A) is the result of each company pursuing its dominant strategy. B) is the result of cooperation between the two companies, and we know that a cooperative outcome is easy in a game such as this one. C) is the result of cooperation between the two companies, and we know that a cooperative outcome is difficult in a game such as this one. D) is the most likely outcome of the game, regardless of whether the two companies cooperate. -Refer to Figure 17-5. Suppose we observe that the outcome of the game is one in which each company earns a profit of $10 million. This outcome


A) is the result of each company pursuing its dominant strategy.
B) is the result of cooperation between the two companies, and we know that a cooperative outcome is easy in a game such as this one.
C) is the result of cooperation between the two companies, and we know that a cooperative outcome is difficult in a game such as this one.
D) is the most likely outcome of the game, regardless of whether the two companies cooperate.

E) B) and D)
F) A) and D)

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Which of the following is correct? When oligopolies collude


A) they make higher profits and consumers of the product are better off.
B) they make higher profits but consumers of the product are worse off.
C) they make lower profits and consumers of the product are better off.
D) they make lower profits and consumers of the product are worse off.

E) A) and B)
F) A) and C)

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From society's standpoint, cooperation among oligopolists is


A) desirable, because it leads to less conflict among firms and a wider variety of products for consumers.
B) desirable, because it leads to an outcome closer to the competitive outcome than what would be observed in the absence of cooperation.
C) undesirable, because it leads to output levels that are too low and prices that are too high.
D) undesirable, because it leads to output levels that are too high and prices that are too high.

E) None of the above
F) All of the above

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The Sherman Antitrust Act prohibits price-fixing in the sense that


A) competing executives cannot even talk about fixing prices.
B) competing executives can talk about fixing prices, but they cannot take action to fix prices.
C) a price-fixing agreement can lead to prosecution provided the government can show that the public was not well-served by the agreement.
D) None of the above is correct. The Sherman Act did not address the matter of price-fixing.

E) A) and B)
F) All of the above

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Table 17-22 Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for repair work and a high price. The annual economic profit from each strategy is indicated in the table. The profits are shown as (Matt, Brian) in each cell. Table 17-22 Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for repair work and a high price. The annual economic profit from each strategy is indicated in the table. The profits are shown as (Matt, Brian) in each cell. -Refer to Table 17-22. Which of the following statements is correct? A) Matt's dominant strategy is to charge a low price. B) Brian's dominant strategy is to charge a high price. C) The dominant strategy for both Brian and Matt is to charge a low price. D) Matt's dominant strategy is to charge a high price. -Refer to Table 17-22. Which of the following statements is correct?


A) Matt's dominant strategy is to charge a low price.
B) Brian's dominant strategy is to charge a high price.
C) The dominant strategy for both Brian and Matt is to charge a low price.
D) Matt's dominant strategy is to charge a high price.

E) B) and C)
F) C) and D)

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All examples of the prisoner's dilemma game are characterized by one and only one Nash equilibrium.

A) True
B) False

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Which of the following statements about oligopolies is not correct?


A) An oligopolistic market has only a few sellers.
B) The actions of any one seller can have a large impact on the profits of all other sellers.
C) Oligopolistic firms are interdependent in a way that competitive firms are not.
D) Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenues.

E) All of the above
F) A) and B)

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In markets characterized by oligopoly,


A) the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
B) collusive agreements will always prevail.
C) collective profits are always lower with cartel arrangements than they are without cartel arrangements.
D) pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market.

E) B) and D)
F) A) and C)

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Figure 17-3. Hector and Bart are roommates. On a particular day, their apartment needs to be cleaned. Each person has to decide whether to take part in cleaning. At the end of the day, either the apartment will be completely clean (if one or both roommates take part in cleaning) , or it will remain dirty (if neither roommate cleans) . With happiness measured on a scale of 1 (very unhappy) to 10 (very happy) , the possible outcomes are as follows: Figure 17-3. Hector and Bart are roommates. On a particular day, their apartment needs to be cleaned. Each person has to decide whether to take part in cleaning. At the end of the day, either the apartment will be completely clean (if one or both roommates take part in cleaning) , or it will remain dirty (if neither roommate cleans) . With happiness measured on a scale of 1 (very unhappy) to 10 (very happy) , the possible outcomes are as follows: -Refer to Figure 17-3. If this game is played only once, then the most likely outcome is that A) Hector and Bart both clean. B) Hector cleans and Bart does not clean. C) Bart cleans and Hector does not clean. D) neither Hector nor Bart cleans. -Refer to Figure 17-3. If this game is played only once, then the most likely outcome is that


A) Hector and Bart both clean.
B) Hector cleans and Bart does not clean.
C) Bart cleans and Hector does not clean.
D) neither Hector nor Bart cleans.

E) A) and D)
F) None of the above

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Reaching and enforcing an agreement between members of a cartel becomes more difficult as the size of the group __________.

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Scenario 17-4. 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. -Refer to Scenario 17-4. 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.

E) A) and B)
F) B) and D)

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The prisoners' dilemma game


A) is a situation in which two players both have dominant strategies which lead to the highest total payoff for the two players.
B) has no Nash equilibrium since players, after agreeing to play their dominant strategy, will have an incentive to switch to another strategy.
C) has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would agree to if they could cooperate with each other.
D) Both a and c are correct.

E) B) and C)
F) A) and D)

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In which of the following games is it clearly the case that the cooperative outcome of the game is good for the two players and bad for society?


A) Two oil companies own adjacent oil fields over a common pool of oil, and each company decides whether to drill one well or two wells.
B) Two airlines dominate air travel between City A and City B, and each airline decides whether to charge "high" airfare or a "low" airfare on flights between those two cities.
C) Two superpowers decide whether to build new weapons or to disarm.
D) In all of the above cases, the cooperative outcome of the game is good for the two players and bad for society

E) A) and B)
F) All of the above

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Game theory is necessary to understand which kinds of markets? (i) perfectly competitive (ii) monopolistically competitive (iii) oligopoly (iv) duopoly (v) monopoly


A) (i) and (ii) only
B) (iii) , (iv) , and (v) only
C) (iii) and (iv) only
D) (i) , (ii) , (iii) , (iv) , and (v)

E) None of the above
F) B) and C)

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Table 17-17 This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B) . Table 17-17 This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B) . -Refer to Table 17-17. Which of the following outcomes represent the Nash equilibrium in this game? A) Q=2 for Firm A and Q=3 for Firm B. B) Q=3 for Firm A and Q=2 for Firm B. C) There is no Nash equilibrium in this game since neither player has a dominant strategy. D) Both a and b are correct. -Refer to Table 17-17. Which of the following outcomes represent the Nash equilibrium in this game?


A) Q=2 for Firm A and Q=3 for Firm B.
B) Q=3 for Firm A and Q=2 for Firm B.
C) There is no Nash equilibrium in this game since neither player has a dominant strategy.
D) Both a and b are correct.

E) B) and D)
F) A) and D)

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Scenario 17-4. 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. -Refer to Scenario 17-4. In 1971, Congress passed a law that banned cigarette advertising on television. If cigarette companies are profit maximizers, it is likely that


A) neither company opposed the ban on advertising.
B) Brown Inc. sued the federal government on grounds that the ban constitutes a civil rights violation.
C) both companies sued the federal government on grounds that the ban constitutes a civil rights violation.
D) both companies retaliated with black-market operations.

E) None of the above
F) C) and D)

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Scenario 17-6 Assume that a local telecommunications company sells high speed internet access and cable television. The company's only two customers are Taylor and Tim. Taylor is willing to pay $50 per month for high speed internet access and $50 per month for cable television. Tim is willing to pay only $20 per month for high speed internet access, but is willing to pay $70 per month for cable television. Assume that the telecommunications company can provide each of these products at zero marginal cost. -Refer to Scenario 17-6. If the telecommunications company is unable to use tying, what is the profit-maximizing price to charge for cable television?

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