ECON 705 Module 6.2 Quiz and Solutions

ECON 705 Module 6.2 Quiz and Solutions 1. Oligopolies are characterized by Select one: a. a small number of large firms, each making independent decisions about own price and output. c. a large number of firms with no individual control over the market price. d. a large number of small firms, each acting independently in setting price and quantity. 2. Game theory is the branch of economics that studies Select one: b. how large firms grow and merge to become monopolies. c. how small, competitive firms determine their cost curves. d. the behavior of perfectly competitive firms that produce video games. 3. In game theory, a simultaneous decision is one where Select one: a. an oligopoly firm decides on its own price and output b. one firm in an oligopoly makes a price or output decision, and the remaining firms then observe and react to that. decision. 4. A firm's dominant strategy is one where Select one: b. a rival firm receives a better payoff than an alternative strategy. c. the firm receives a good payoff but is not likely to choose the option. 5. The prisoners' dilemma is a game where Select one: a. one prisoner has two choices possible while the other has only one. b. prisoners face the same prison sentence regardless of the choice they make. c. the prisoners can confer with each other before making their decision. 6. A dominated strategy is one Select one: a. which offers the lowest total payout to both rivals. b. which will be chosen in certain situations, but will not be chosen in at least one situation. 7. A Nash equilibrium occurs when Select one: a. rival firms decide to cooperate and set prices. c. the highest-payoff outcome is realized by both firms. d. firms seek their highest payoff but the result is not stable. 8. When firms' decisions are made sequentially, a best solution can be found by b. looking at current payoffs to guide later decisions. 9. Firms may decide to cooperate if Select one: b. the Nash equilibrium outcome represents the highest individual payoffs. c. the punishment for cheating is low or unenforceable. 10. The original prisoners' dilemma game showed no cooperation because Select one: a. there is no honor among thieves. b. the prisoners were not smart enough to consider its high payoff. individual interest. d. the no cooperative strategy (confess) yielded the highest combined outcome. 11. Cooperation among firms (or collusion) is rare because Select one: a. the combined profit of the colluding firms is so high. c. there are too many firms in an industry to all cooperate effectively. 12. It is impossible for firms to legally collude, i.e., to keep their prices at an agreed-upon high level while not violating antitrust laws. True 13. Firms may offer price matching to Select one: a. discourages other firms in the market from cutting price to gain customers. c. attracts customers by being willing to accept rivals' low prices. 14. How might publicly posting prices promote collusion among firms? Select one: a. It raises the benefit and lowers the cost of cheating on a collusive agreement. b. If prices are widely known, then it is easier for a rogue firm to cheat the agreement. 15. One of the biggest obstacles to cooperative behavior among U.S. firms is that Select one: a. all firms will eagerly adopt the pricing strategy and will not experiment with alternatives. b. regulations make it difficult to observe pricing behavior of firms in U.S. industries. d. almost all U.S. industries have a small number of firms, so collusion is difficult. 16. Wal-Mart is often accused of keeping prices so low that mom-and-pop businesses are unable to compete. Wal-Mart is thus being accused of Select one: b. setting price equal to marginal revenue. c. price matching. d. tacit collusion.