ECN 502 Module 12 Practice Questions

Managerial Economics

12.1. Which of the following factors can delay the entry of new competitive firms into the oligopoly market characterized by a dominant firm and some fringe firms? a. b. c. d. Mergers and acquisitions Price threat Brand name and reputation of the dominant firm Quality controls set by the government

ANS: C

The following matrix represents the payoffs to two producers, each making a strategic choice either to keep the output at 5 units or at 10 units.

12.2. Assume that the law allows players (firms of equal sizes) to make enforceable agreements. Which of the following agreements are they likely to form? a. b. c. d. Player A and Player B would produce 5 units each Player A and Player B would produce 10 units each Player A would produce 10 units and Player B would produce 5 units Player B would produce 10 units and Player A would produce 5 units

ANS: A Note: The best outcome here is for A and B to produce 5 units each and earn a profit of $50 each. Assuming an enforceable agreement is possible, this is the outcome they would agree upon. 12.3. Which of the following payoffs would be received by the two players if both decide to break the agreement? a. b. c. d. Each player would enjoy profits worth $50 Each player would incur a loss worth $10 Each player would enjoy profits worth $20 Each player would enjoy profits worth $100

ANS: C

Tim James

1

ECN 502

Managerial Economics

Note: Let’s look at this first from A’s perspective. If B chooses 5, A’s best response is to choose 10. If B chooses 10, A’s best response is to choose 10. Thus A will choose 10. If A chooses 10, B’s best response is to choose 5. Thus the Nash equilibrium would be for them both to earn $20 in the (10, 10) cell.

12.4. a. b. c. d.

The principle of backward induction proves that in price-fixing oligopoly