oligopolies and game theory

Question 1

A local electricity-generating company has a monopoly that is protected by an entry barrier that takes the form of:

Answer 1

A local electricity-generating company has a monopoly that is protected by an entry barrier that takes the form of:

Question 2

One reason patent protection is vitally important to pharmaceutical firms is that:

Answer 2

he approval process for new drugs through the Therapeutic Goods Administration can take more than 10 years and is very costly. Patents enable firms to recover costs incurred during this process.

Question 3

One reason why the coffeehouse market is competitive is that:

Answer 3

One reason why the coffeehouse market is competitive is that:

Question 4

list the characteristics of a monopolistically competitive market

Answer 4

selling price equals average total cost
marginal revenue equals marginal cost
selling price is greater than marginal cost

Question 5

Consumers benefit from monopolistic competition by:

Answer 5

being able to choose from products more closely suited to their tastes.

Question 6

list 3 parts of an oligopolists business strategy

Answer 6

Deciding the level of total output of a new product.

Determining the amount of advertising that a new product needs.

Setting the product’s price after considering what rivals will do.

Question 7

how is an oligopolistic industry categorised?

Answer 7

there are barriers to entry
the possibility of long-run economic profits
production of standardised products

Question 8

An oligopoly firm is similar to a monopolistically competitive firm in that:

Answer 8

both firms have market power

Question 9

An oligopolist differs from a perfect competitor in that:

Answer 9

there are no barriers to entry in perfect competition, but there are in oligopolies

Question 10

A characteristic found only in oligopolies is

Answer 10

the interdependence of firms.

Question 11

Producing a differentiated product occurs in which industries?

Answer 11

Monopolistic competition and oligopoly.

Question 12

An oligopolist’s demand curve is:

Answer 12

unknown because a response of firms to price changes by rivals is uncertain

Question 13

The prisoner’s dilemma illustrates:

Answer 13

why firms will not cooperate if they behave strategically.

Question 14

The study of how people make decisions in situations in which attaining their
goals depends on their interaction with others is called:

Answer 14

game theory

Question 15

what is an oligopoly?

Answer 15

An oligopoly is a market structure in which a small number of interdependent firms compete. Barriers to entry keep new firms from entering an industry.

Question 16

4 barriers to entry are:

Answer 16

economies of scale, ownership of a key input or raw material, network externalities, and government barriers.

Question 17

what is game theory

Answer 17

it is the study of the decisions of firms in industries where the profits of each firm depends on its interactions with other firms

Question 18

what is a cartel?

Answer 18

A cartel is a group of firms that collude by agreeing to restrict output to increase prices and profits.

Question 19

what is cooperative equilibrium

Answer 19

In a cooperative equilibrium, firms cooperate to increase their mutual payoff

Question 20

what is a non cooperative equilibrium?

Answer 20

In a non-cooperative equilibrium, firms do not cooperate but pursue their own self-interest

Question 21

A ______ is a strategy that is the best for a firm no matter what strategies other firms use

Answer 21

dominant strategy

Question 22

A situation where pursuing dominant strategies results in non-cooperation that leaves everyone worse off is called a :

Answer 22

prisoners dilemma

Question 23

With______________, one firm takes the lead in announcing a price change, which is then matched by the other firms in the industry.

Answer 23

price leadership

Question 24

Explain why a market economy with competition is generally efficient

Answer 24

a competitive market, the price adjusts to ensure that the quantity demanded equals the quantity supplied. Stated another way, in equilibrium every consumer willing to pay the market price is able to buy as much of the product as they want, and every firm willing to accept the market price can sell as much as it wants

Question 25

discuss the economic bases for government intervention.

Answer 25

Government intervention is usually required: to maintain a legal system and enforce the rule of law; to maintain or enforce competition in the market; when positive or negative externalities occur; to regulate the use of common resources; in the provision of public goods and merit goods; to regulate to protect firms and households from the effects of asymmetric information; to improve equity; and in macroeconomic policy management, to stabilise the economy.

Question 26

Distinguish between market failure and government failure.

Answer 26

Market failure occurs when the market does not result in an economically efficient outcome.
Government failure occurs when the government fails to correct adequately for market failure or takes actions that lead to a more inefficient outcome than produced by the market.

Question 27

what is an externality

Answer 27

An externality is a benefit or cost to parties who are not involved in a transaction

Question 28

A _____ occurs when a production or consumption activity benefits others who are not directly involved with that activity and who do not pay for it.

Answer 28

positive

Question 29

a negative externality is

Answer 29

when a production or consumption activity imposes costs on others who are not directly involved with that activity and no compensation is paid