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Which of the following statements is (are) true of the prisoners' dilemma?


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

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

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Table 17-2 Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Table 17-2 Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: -Refer to Table 17-2. Suppose the town enacts new antitrust laws that prohibit Abby and Brad from operating as a monopoly. What will be the price of water once Abby and Brad reach a Nash equilibrium? A) $12 B) $8 C) $6 D) $4 -Refer to Table 17-2. Suppose the town enacts new antitrust laws that prohibit Abby and Brad from operating as a monopoly. What will be the price of water once Abby and Brad reach a Nash equilibrium?


A) $12
B) $8
C) $6
D) $4

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

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Figure 17-2. Two companies, Acme and Pinnacle, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. Figure 17-2. Two companies, Acme and Pinnacle, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. -Refer to Figure 17-2. The more frequently this game is played, the more likely it is that A) both firms will produce a good quality product. B) both firms will produce a poor quality product. C) both firms experience a reduction in profits compared to the Nash equilibrium outcome. D) one firm will experience an increase in profits and the other will experience a decrease in profits. -Refer to Figure 17-2. The more frequently this game is played, the more likely it is that


A) both firms will produce a good quality product.
B) both firms will produce a poor quality product.
C) both firms experience a reduction in profits compared to the Nash equilibrium outcome.
D) one firm will experience an increase in profits and the other will experience a decrease in profits.

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

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Table 17-23 Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs, and thus increase their profits, if they reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the costs savings will outweigh the lost sales. Listed in the table below are the individual profits for each firm. Table 17-23 Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs, and thus increase their profits, if they reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the costs savings will outweigh the lost sales. Listed in the table below are the individual profits for each firm. -Refer to Table 17-23. At the Nash equilibrium, how much profit will Firm B earn? A) $3,500 because firm B will maintain the agreement not to advertise, but firm A will break the agreement and choose to advertise. B) $4,000 because each firm will break the agreement and choose to advertise. C) $5,000 because each firm will maintain the agreement and choose not to advertise. D) $6,000 because firm A will maintain the agreement not to advertise, but firm B will break the agreement and choose to advertise. -Refer to Table 17-23. At the Nash equilibrium, how much profit will Firm B earn?


A) $3,500 because firm B will maintain the agreement not to advertise, but firm A will break the agreement and choose to advertise.
B) $4,000 because each firm will break the agreement and choose to advertise.
C) $5,000 because each firm will maintain the agreement and choose not to advertise.
D) $6,000 because firm A will maintain the agreement not to advertise, but firm B will break the agreement and choose to advertise.

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

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Table 17-29 Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H) , comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's energy drinks, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits: Firm W Breaks agreement Maintains agreement and advertises and does not advertise Table 17-29 Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H) , comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's energy drinks, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits: Firm W Breaks agreement Maintains agreement and advertises and does not advertise -Refer to Table 17-29. What is the outcome of this game? A) Neither Firm W nor Firm H will advertise. B) Both Firm W and Firm H will advertise. C) Firm W will advertise but Firm H will not. D) Firm W will not advertise but Firm H will. -Refer to Table 17-29. What is the outcome of this game?


A) Neither Firm W nor Firm H will advertise.
B) Both Firm W and Firm H will advertise.
C) Firm W will advertise but Firm H will not.
D) Firm W will not advertise but Firm H will.

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

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An agreement between two duopolists to function as a monopolist usually breaks down because


A) they cannot agree on the price that a monopolist would charge.
B) they cannot agree on the output that a monopolist would produce.
C) each duopolist wants a larger share of the market to capture more profit.
D) each duopolist wants to charge a higher price than the monopoly price.

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

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Table 17-7 The information in the table below shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. Table 17-7 The information in the table below shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. -Refer to Table 17-7. Suppose there is only one internet radio provider in this market and it seeks to maximize its profit. The company will A) sell 2,000 subscriptions and charge a price of $48 for each subscription. B) sell 3,000 subscriptions and charge a price of $40 for each subscription. C) sell 4,000 subscriptions and charge a price of $32 for each subscription. D) sell 5,000 subscriptions and charge a price of $24 for each subscription. -Refer to Table 17-7. Suppose there is only one internet radio provider in this market and it seeks to maximize its profit. The company will


A) sell 2,000 subscriptions and charge a price of $48 for each subscription.
B) sell 3,000 subscriptions and charge a price of $40 for each subscription.
C) sell 4,000 subscriptions and charge a price of $32 for each subscription.
D) sell 5,000 subscriptions and charge a price of $24 for each subscription.

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

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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. In what sense is the game involving ABC and QRS similar to the prisoners' dilemma game involving Bonnie and Clyde? A) In both games, if the players pursue their own interests, then the outcome is the best possible outcome for each player. B) In both games, a dominant strategy can be identified for each player. C) In both games, cooperation between the players is easy to maintain. D) All of the above are correct. -Refer to Figure 17-5. In what sense is the game involving ABC and QRS similar to the prisoners' dilemma game involving Bonnie and Clyde?


A) In both games, if the players pursue their own interests, then the outcome is the best possible outcome for each player.
B) In both games, a dominant strategy can be identified for each player.
C) In both games, cooperation between the players is easy to maintain.
D) All of the above are correct.

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

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Table 17-15 This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B) . Table 17-15 This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B) . -Refer to Table 17-15. Which of the following statements regarding this game is true? A) Both players have a dominant strategy. B) Player A has a dominant strategy, but player B does not have a dominant strategy. C) Player A does not have a dominant strategy, but player B does have a dominant strategy. D) Neither player has a dominant strategy. -Refer to Table 17-15. Which of the following statements regarding this game is true?


A) Both players have a dominant strategy.
B) Player A has a dominant strategy, but player B does not have a dominant strategy.
C) Player A does not have a dominant strategy, but player B does have a dominant strategy.
D) Neither player has a dominant strategy.

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

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Table 17-13 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 of the two home-improvement stores are shown in the table below. Table 17-13 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 of the two home-improvement stores are shown in the table below. 14. -Refer to Table 17-13. When this game reaches a Nash equilibrium, annual profit will grow by A) $1.5 million for HomeMax and by $1.0 million for Lopes. B) $3.4 million for HomeMax and by $0.4 million for Lopes. C) $0.6 million for HomeMax and by $3.2 million for Lopes. D) $2.5 million for HomeMax and by $2.0 million for Lopes. 14. -Refer to Table 17-13. When this game reaches a Nash equilibrium, annual profit will grow by


A) $1.5 million for HomeMax and by $1.0 million for Lopes.
B) $3.4 million for HomeMax and by $0.4 million for Lopes.
C) $0.6 million for HomeMax and by $3.2 million for Lopes.
D) $2.5 million for HomeMax and by $2.0 million for Lopes.

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

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To increase their individual profits, members of a cartel have an incentive to


A) charge a higher price than the other members of the cartel.
B) increase production above the level agreed upon.
C) ignore the choices made by the other firms and act as a monopolist.
D) charge the same price a monopolist would charge.

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

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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.

A) True
B) False

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A cooperative agreement among oligopolists is more likely to be maintained,


A) the greater the number of oligopolists.
B) the larger the number of buyers of the oligopolists' product.
C) the smaller the number of buyers of the oligopolists' product.
D) the more likely it is that the game among the oligopolists will be played over and over again.

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

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What are the three examples of controversial business practices that antitrust laws often prohibit?

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resale price mainten...

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Briefly describe the business practice of tying.

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Tying is the practice of bundl...

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Economists claim that a resale price maintenance agreement is not anti-competitive because


A) suppliers are never able to exercise noncompetitive market power.
B) if a supplier has market power, it will be likely to exert that power through wholesale price rather than retail price.
C) retail markets are inherently noncompetitive.
D) retail cartel agreements cannot increase retail profits.

E) All of the above
F) C) and D)

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Why do economists use game theory to study the actions of firms in oligopoly markets but not in other markets?

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In oligopoly markets, there are a few fi...

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Which strategy was the most successful in the prisoners' dilemma tournament?

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Cartels in the United States are


A) legal if price is competitively determined.
B) legal if all firms in the industry agree to the terms of the cartel.
C) legal if all conditions of the cartel are made public.
D) illegal.

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

Correct Answer

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Scenario 17-3. Consider two countries, Kinglandia and Rovinastan, that are engaged in an arms race. Each country must decide whether to build new weapons or to disarm existing weapons. Each country prefers to have more arms than the other because a large arsenal gives it more influence in world affairs. But each country also prefers to live in a world safe from the other country's weapons. The following table shows the possible outcomes for each decision combination. The numbers in each cell represent the country's ranking of the outcome (10 = best outcome, 1 = worst outcome) . Scenario 17-3. Consider two countries, Kinglandia and Rovinastan, that are engaged in an arms race. Each country must decide whether to build new weapons or to disarm existing weapons. Each country prefers to have more arms than the other because a large arsenal gives it more influence in world affairs. But each country also prefers to live in a world safe from the other country's weapons. The following table shows the possible outcomes for each decision combination. The numbers in each cell represent the country's ranking of the outcome (10 = best outcome, 1 = worst outcome) . -Refer to Scenario 17-3. Which of these statements is correct? (i) Kinglandia is better off building new weapons if Rovinastan builds new weapons. (ii) Kinglandia is better off building new weapons if Rovinastan disarms existing weapons. (iii) Rovinastan is only better off building new weapons if Kinglandia builds new weapons. A) (i) and (ii) B) (ii) and (iii) C) (i) and (iii) D) (i) , (ii) , and (iii) -Refer to Scenario 17-3. Which of these statements is correct? (i) Kinglandia is better off building new weapons if Rovinastan builds new weapons. (ii) Kinglandia is better off building new weapons if Rovinastan disarms existing weapons. (iii) Rovinastan is only better off building new weapons if Kinglandia builds new weapons.


A) (i) and (ii)
B) (ii) and (iii)
C) (i) and (iii)
D) (i) , (ii) , and (iii)

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

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