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Exam 17: Oligopoly

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Question 61

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In imperfectly competitive markets, increasing production will decrease the price of all units sold. This concept is known as the

A) income effect.
B) output effect.
C) price effect.
D) cartel effect.

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

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Question 62

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Which potentially anti-competitive business practice is often justified on the grounds that it corrects for the free rider problem?

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resale pri...

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Question 63

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Table 17-5 The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. ​ ​ $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { (Gallons) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per gallon) }\end{array} & \begin{array} { c } \text { Total Revenue } \\\text { (Dollars) }\end{array} \\\hline 0 & 8 & 0 \\\hline 50 & 7 & 350 \\\hline 100 & 6 & 600 \\\hline 150 & 5 & 750 \\\hline 200 & 4 & 800 \\\hline 250 & 3 & 750 \\\hline 300 & 2 & 600 \\\hline 350 & 1 & 350 \\\hline 400 & 0 & 0 \\\hline\end{array}$ -Refer to Table 17-5. If there are exactly five sellers of gasoline in Driveaway and if they collude, then which of the following outcomes is most likely?

Scenario 17-1 ​ Assume that a local restaurant sells two items, salads and steaks. The restaurant's only two customers on a particular day are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms. Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can provide each of these items at zero marginal cost. -Refer to Scenario 17-1. If the restaurant is able to use tying to price salads and steaks, what is the profit-maximizing price to charge for the "tied" good?

Table 17-5 The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. ​ ​ $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { (Gallons) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per gallon) }\end{array} & \begin{array} { c } \text { Total Revenue } \\\text { (Dollars) }\end{array} \\\hline 0 & 8 & 0 \\\hline 50 & 7 & 350 \\\hline 100 & 6 & 600 \\\hline 150 & 5 & 750 \\\hline 200 & 4 & 800 \\\hline 250 & 3 & 750 \\\hline 300 & 2 & 600 \\\hline 350 & 1 & 350 \\\hline 400 & 0 & 0 \\\hline\end{array}$ -Refer to Table 17-5. Suppose we observe that the price of a gallon of gasoline in Driveaway is $5; we observe as well that a particular seller's profit is $150. Given this observation, which of the following scenarios is most likely?

Table 17-4 Only two firms, JKL and XYZ, sell a particular product. The following table shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. ​ ​ $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Price } \\\text { (Dollars per unit) }\end{array} & \begin{array} { c } \text { Quantity Demanded } \\\text { (Units) }\end{array} & \begin{array} { c } \text { Total Revenue } \\\text { (Dollars) }\end{array} \\\hline 28 & 0 & 0 \\\hline 26 & 5 & 130 \\\hline 24 & 10 & 240 \\\hline 22 & 15 & 330 \\\hline 20 & 20 & 400 \\\hline 18 & 25 & 450 \\\hline 16 & 30 & 480 \\\hline 14 & 35 & 490 \\\hline 12 & 40 & 480 \\\hline 10 & 45 & 450 \\\hline 8 & 50 & 400 \\\hline 6 & 55 & 330 \\\hline 4 & 60 & 240 \\\hline 2 & 65 & 130 \\\hline 0 & 70 & 0 \\\hline\end{array}$ ​ -Refer to Table 17-4. If this market were perfectly competitive instead of oligopolistic, what quantity would be produced?

For a firm, strategic interactions with other firms in the market become more important as the number of firms in the market becomes larger.

​Cartels are difficult to maintain because

Briefly describe the two arguments that economists make to defend the practice of resale price maintenance.

Table 17-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure. ​ -Refer to Table 17-6. Increasing the size of its store and parking lot is a dominant strategy for

As the number of firms in an oligopoly becomes very large, the price effect disappears.

Scenario 17-2 ​ 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 17-2. How much additional profit can the telecommunications company earn by switching to the use of a tying strategy to price high speed internet access and cable television rather than pricing these goods separately?

As the number of sellers in an oligopoly becomes very large,

Briefly describe the practice of predatory pricing.

Table 17-5 The table shows the town of Driveaway's demand schedule for gasoline. Assume the town's gasoline seller(s) incurs a cost of $2 for each gallon sold, with no fixed cost. ​ ​ $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { (Gallons) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per gallon) }\end{array} & \begin{array} { c } \text { Total Revenue } \\\text { (Dollars) }\end{array} \\\hline 0 & 8 & 0 \\\hline 50 & 7 & 350 \\\hline 100 & 6 & 600 \\\hline 150 & 5 & 750 \\\hline 200 & 4 & 800 \\\hline 250 & 3 & 750 \\\hline 300 & 2 & 600 \\\hline 350 & 1 & 350 \\\hline 400 & 0 & 0 \\\hline\end{array}$ -Refer to Table 17-5. If there are exactly five sellers of gasoline in Driveaway and if they collude, then which of the following outcomes is most likely?

Cartels with a small number of firms have a greater probability of reaching the monopoly outcome than do cartels with a larger number of firms.

OPEC (Organization of Petroleum Exporting Countries) is an example of a cartel in the output market for petroleum. Major League Baseball could be considered a cartel in the __________ market for baseball players.

In a prisoner's dilemma, the Nash Equilibrium might not have a dominant strategy for either player. ​

Scenario 17-1 ​ Assume that a local restaurant sells two items, salads and steaks. The restaurant's only two customers on a particular day are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms. Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can provide each of these items at zero marginal cost. -Refer to Scenario 17-1. How much additional profit can the restaurant earn by switching to the use of a tying strategy to price salads and steaks rather than pricing these goods separately?

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.