Ch 17 Review

In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is one

• in which neither Bonnie nor Clyde confesses.

• in which both Bonnie and Clyde confess.

• that involves neither Bonnie nor Clyde pursuing a dominant strategy.

• that is ideal in terms of Bonnie’s self-interest and in terms of Clyde’s self-interest.

Game theory is necessary for understanding

• all market structures.

• competition and oligopoly, but it is not necessary for understanding monopoly.

• monopoly and oligopoly, but it is not necessary for understanding competition.

• oligopoly, but it is not necessary for understanding monopoly or competition.

Dave and Andy are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $4,000. If they both advertise on radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $6,000 and the other will earn $5,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $11,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant strategy, then Dave will

• advertise on TV and earn $4,000.

• advertise on radio and earn $7,000.

• advertise on TV and earn $11,000.

• not advertise and earn $10,000.

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?

• Jay-Z and Beyonce will determine that it is in each singer’s best self interest to maintain the agreement.

• Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price will decrease.

• Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will decrease, and the new equilibrium price will increase.

• Jay-Z and Beyonce will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase.

If an oligopolist is part of a cartel that is collectively producing the monopoly level of output, then that oligopolist has the incentive to lower production with the aim of

• lowering prices.

• increasing profits for the group of firms as a whole.

• increasing profits for itself, regardless of the impact on profits for the group of firms as a whole.

• None of the above is correct.

As the number of firms in an oligopoly increases,

• each seller becomes more concerned about its impact on the market price.

• the output effect decreases.

• the total quantity of output produced by firms in the market gets closer to the socially efficient quantity.

• the oligopoly has more market power and firms earn a greater profit.

Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.

Refer to Figure 17-1. The dominant strategy for ABC is to

• produce high output, and the dominant strategy for XYZ is to produce high output.

• produce high output, and the dominant strategy for XYZ is to produce low output.

• produce low output, and the dominant strategy for XYZ is to produce high output.

• produce low output, and the dominant strategy for XYZ is to produce low output.

Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.

Refer to Figure 17-1. Which of the following statements is correct?

• ABC can potentially earn its highest possible profit if it produces a high level of output, and for that reason it is a dominant strategy for ABC to produce a high level of output.

• The highest possible combined profit for the two firms occurs when both produce a low level of output, and for that reason producing a low level of output is a dominant strategy for both firms.

• Regardless of the strategy pursued by ABC, XYZ’s best strategy is to produce a high level of output, and for that reason producing a high level of output is a dominant strategy for XYZ.

• Our knowledge of game theory suggests that the most likely outcome of the game, if it is played only once, is for one firm to produce a low level of output and for the other firm to produce a high level of output.

Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.

Refer to Figure 17-1. If this game is played only once, then the most likely outcome is that

• both firms produce a low level of output.

• ABC produces a low level of output and XYZ produces a high level of output.

• ABC produces a high level of output and XYZ produces a low level of output.

• both firms produce a high level of output.