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ECON 213 quiz 12 complete solutions
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Question 1 The accompanying payoff matrix depicts the possible outcomes for two players involved in a game of Rock, Paper, Scissors. If a player receives a payoff of 1, the player wins; if the player receives a payoff of –1, the player loses; if both players receive 0 (zero), the players tie. If Madonna chooses rock and Kid Cudi chooses paper, Madonna’s payoff is __________ and Kid Cudi’s payoff is __________.

Question 2 Oligopolistic markets are __________ because price is __________ marginal cost.

Question 3 Wal­Mart and Target are the only stores in a remote town that currently stock and sell the PlayStation 5 video game console. Managers at both stores are simultaneously deciding whether to charge a price of \$1,000 or \$1,500 for each console. If both stores charge \$1,000, they earn a profit of \$100,000 each. If both stores charge \$1,500, they earn a profit of \$200,000 each. If one store charges \$1,000 and the other store charges \$1,500, the store that charges \$1,000 earns a profit of \$250,000 and the firm that charges \$1,500 earns a profit of \$50,000. If Wal­Mart and Target __________, they can both charge \$1,500 and earn the highest combined profit available.

Question 4 The accompanying table shows a small community’s demand for monthly subscriptions to a streaming movie service. Assume that only two firms (Nextflix and Flixbuster) sell in this market, that each firm offers the same quality of service and movie selection, and that each firm’s marginal cost is constant and equal to 0 (zero) due to excess capacity. Use this information to answer the questions that follow. If the two firms operating in this market agreed to each supply one­half of the quantity a monopolist would supply, the contract would specify that:

Question 5 The accompanying payoff matrix depicts the possible outcomes for two players involved in a game of Rock, Paper, Scissors. If a player receives a payoff of 1, the player wins; if the player receives a payoff of ­1, the player loses; if both players receive 0 (zero), the players tie. Brian’s optimal strategy is to:

Question 6 Airline A and Airline B are the two largest airlines in the country. The chief executive officer of Airline A calls the chief executive officer of Airline B and says, “Why don’t we both raise prices 25% across the board next week?” This is an example of:

Question 7 In 2011, three firms (Firm A, Firm B, and Firm C) were selling cellular phone service for a price of \$40 per month in Playa del Carmen, Mexico. Each firm serviced 100 cellphone customers; thus, all firms together serviced a total of 300 customers. Assume marginal cost is 0 (zero) for all firms and thus total revenue is equal to total profit. In 2012, Firms A and B each continued to service 100 customers, but Firm C now serviced 150 customers; thus, all firms together serviced a total of 350 customers. All firms now charge \$30 per month. Firm C’s monthly profit increased by __________ due only to the output effect and decreased by __________ due only to the price effect, for a net increase of \$500.

Question 8 The accompanying table shows a small community’s demand for monthly subscriptions to a streaming movie service. Assume that only two firms (Nextflix and Flixbuster) sell in this market, that each firm offers the same quality of service and movie selection, and that each firm’s marginal cost is constant and equal to 0 (zero) due to excess capacity. Use this information to answer the questions that follow. Listed below are four different collusive agreements that Nextflix and Flixbuster are considering. Assuming both firms will abide by the terms, which collusive agreement(s) would maximize total profit in the market? I. Nextflix supplies 400 subscriptions and Flixbuster supplies 500 subscriptions. II. Nextflix supplies 500 subscriptions and Flixbuster supplies 300 subscriptions. III. Nextflix supplies 250 subscriptions and Flixbuster supplies 250 subscriptions. IV. Nextflix supplies 100 subscriptions and Flixbuster supplies 400 subscriptions.

Question 9 Because Wal­Mart has never systematically raised prices, there is no evidence that WalMart is engaged in:

Question 10 Why does the Department of Justice not investigate and block the many mergers of large firms that have occurred recently in oligopolistic industries such as the cellular phone industry and the airline industry that obviously lessen competition?

Question 11 The accompanying payoff matrix depicts the possible outcomes for two players involved in a game of volleyball. At this point in the game, the ball has just been hit to Deidra, and she chooses whether to hit right or hit left. At the same time, Ashley chooses whether to jump right (Deidra’s right) or jump left (Deidra’s left). If a player receives a payoff of 1, the player wins the point; if the player receives a payoff of–1, the player loses the point. Use this information to answer the questions that follow. How many Nash equilibrium(ia) exist in this game?

Question 12 In 2011, three firms (Firm A, Firm B, and Firm C) were selling cellular phone service for a price of \$40 per month in Hershey, Pennsylvania. Each firm serviced 100 cellphone customers; thus, all firms together serviced a total of 300 customers. Assume marginal cost is 0 (zero) for all firms and thus total revenue is equal to total profit. In 2012, Firms A and B continued to service 100 customers, but Firm C now serviced 150 customers; thus, all firms together serviced a total of 350 customers. All firms now charge \$30 per month. Due only to the price effect, profits for each firm decline by \$1,000. Due only to the output effect, profits for both Firm A and Firm B did not change, and profits for Firm C increased by \$1,500. It was in Firm C’s interest to increase output because:

Question 13 In January, Wal­Mart offered a 10% off coupon and Target did not. In February, Target offered a 10% off coupon and Wal­Mart did not. In March, Wal­ Mart offered a 10% off coupon and Target did not. It is likely that Wal­Mart and Target are both playing the __________ strategy.

Question 14 Assume that two firms (Firm A and Firm B) operate in the U.S. steel industry. The owner of Firm A writes the following letter to the owner of Firm B: Dear Owner of Firm B, I have concluded that if we both restrict output such that we each produce only 3 million tons of steel per year, we can both charge a price that will allow us to effectively monopolize the steel market and to maximize our joint profits. If you would like to enter into this agreement with me, please draft a contract that specifies this agreement and I will be more than willing to meet with you and sign it. Sincerely, Owner of Firm A If this letter were sent in the year 1944, the:

Question 15 The accompanying payoff matrix depicts the possible outcomes for two players involved in a game of Rock, Paper, Scissors. If a player receives a payoff of 1, the player wins; if the player receives a payoff of –1, the player loses; if both players receive 0 (zero), the players tie. Which of the following statements is true?

Question 16 The __________ Act was the first antitrust bill created in response to the increase in concentration ratios in many leading U.S. industries, including steel, railroads, mining, textiles, and oil.

Question 17 When a third firm enters a market that was previously categorized as a duopoly, the equilibrium price:

Question 18 __________ have a greater incentive to collude and to form cartels in an effort to achieve monopoly­like profits.

Question 19 Assume that there is an oligopoly consisting of firms of different sizes. If a small firm increases output by 25%, the price effect realized by the small firm will be only __________. If a large firm increases output by 25%, the price effect realized by the large firm will be __________.

Question 20 An example of a tying arrangement is:

Version B

Question 1 In 1974, the U.S. Attorney General filed suit against which telecom company for violating antitrust laws?

Question 2 Three firms are currently producing and selling in a market. When one of the three firms exits the market, economists expect that the equilibrium price:

Question 3 According to the kinked demand curve theory, the behavior of firms in an oligopoly creates a demand curve that is __________ at prices above the cartel price and __________ at prices below the cartel price.

Question 4 The accompanying table shows the dollar amount of sales in 2012 for the four largest firms in the above­ground pool industry. Total industry sales in 2012 were \$467,000. Use this table to answer the questions that follow. If Blue Water Island, Inc. acquired Backyard Paradise, Inc., the concentration ratio would __________ and the market price of pools would likely __________.

Question 5 The accompanying table shows a small community’s demand for monthly subscriptions to a streaming movie service. Assume that only two firms (Nextflix and Flixbuster) sell in this market, that each firm offers the same quality of service and movie selection, and that each firm’s marginal cost is constant and equal to 0 (zero) due to excess capacity. Use this information to answer the questions that follow. If this market were a monopoly instead of a duopoly, the market price would be __________ and the quantity of streaming movie subscriptions purchased each month would be __________.

Question 6 The accompanying table shows two firms in a duopoly. Each firm makes its decision without knowledge of the other firm’s decision. The payoffs for each firm represent economic profits, and each firm strictly prefers more economic profit than less. If both firms were able to collude and make their supply decisions collectively, Flixbuster would sell __________ subscriptions per month and Nextflix would sell __________ subscriptions per month.

Question 7 It might be rational for a firm to price its products below __________ costs in order to drive potential entrants from entering a market.

Question 8 The accompanying payoff matrix depicts the possible outcomes for two players involved in a game of Rock, Paper, Scissors. If a player receives a payoff of 1, the player wins; if the player receives a payoff of –1, the player loses; if both players receive 0 (zero), the players tie. If Stan chooses paper and Eric chooses paper, Stan’s payoff is __________ and Eric’s payoff is __________.

Question 9 Five firms are currently producing and selling in a market. When two more firms enter the market, economists expect that the equilibrium price:

Question 10 The accompanying table shows the four­firm concentration ratios for five separate industries. Use this table to answer the questions that follow. In which industry do the four largest firms collectively have the least market power?

Question 11 The __________ Act was the first antitrust bill created in response to the increase in concentration ratios in many leading U.S. industries, including steel, railroads, mining, textiles, and oil.

Question 12 The __________ effect occurs when a buyer’s preference for a product increases as the number of people buying it increases.

Question 13 When two or more firms set prices or quantities in unison, economists refer to them as a:

Question 14 Together, Coca­Cola and Pepsi account for approximately __________% of the soft­drink market.

Question 15 The two major pieces of antitrust legislation in the United States are the:

Question 16 Assume that two firms (Firm A and Firm B) operate in the U.S. steel industry. The owner of Firm A writes the following letter to the owner of Firm B: Dear Owner of Firm B, I have concluded that if we both restrict output such that we each produce only 3 million tons of steel per year, we can both charge a price that will allow us to effectively monopolize the steel market and to maximize our joint profits. If you would like to enter into this agreement with me, please draft a contract that specifies this agreement and I will be more than willing to meet with you and sign it. Sincerely, Owner of Firm A If this letter were sent in the year 1944, the:

Question 17 Assume that there is an oligopoly consisting of firms of different sizes. If a small firm increases output by 25%, the price effect realized by the small firm will be only __________. If a large firm increases output by 25%, the price effect realized by the large firm will be __________.

Question 18 When more firms enter into a market that was previously characterized as a duopoly, it will:

Question 19 Airline A and Airline B are the two largest airlines in the country. The chief executive officer of Airline A calls the chief executive officer of Airline B and says, “Why don’t we both raise prices 25% across the board next week?” This is an example of:

Question 20 When decision­makers face incentives that make it difficult to achieve mutually beneficial outcomes, we say they are in a(n):

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