Oligopoly

Question 1

Oligopoly

Answer 1

A few sellers in a market

actions of one seller have a large impact on everyone else

Question 2

Game Theory

Answer 2

the study of how people behave in strategic situations

strategic situations=looking at how other people will respond in a situation

Question 3

The strategic solutions in oligopolies

Answer 3

Each firm knows that profit depends on how much they produce and how much the other firms produce

Must consider how a decision will affect the production decisions of other firms in a market

Question 4

When are oligopolies best off?

Answer 4

when they cooperate together and act as a monopoly

producing a small amount of output at a price above the marginal cost

Question 5

Collusion

Answer 5

Agreement among firms in a market about quantities to produce or prices

looking to find the outcome that will maximize total profit

Question 6

Cartel

Answer 6

A group of firms acting in unison

Question 7

What does a cartel agree on?

Answer 7

total level of production, the amount produced by each member

Question 8

What does a cartel agree on?

Answer 8

total level of production, the amount produced by each member

Question 9

Do agreements often be made with cartels?

Answer 9

No

Question 10

What happens when oligopolists decide to pursue their own interests?

Answer 10

they produce more than the monopoly quantity, charge a price lower than the monopoly price, and earn total profits less than the monopoly profits

Question 11

Nash equilibrium

Answer 11

A situation in which economic actors interacting with one another each chose their best strategy given the strategies that all the other actors have chosen

Question 12

What is the oligopoly price?

Answer 12

Less than the monopoly price but greater than the competitive price

Question 13

What happens when the size of a cartel increases?

Answer 13

reaching and enforcing an agreement becomes more difficult

Question 14

The output effect

Answer 14

price is above marginal cost, selling one more of the goods at the going price will raise profit

Question 15

The price effect

Answer 15

Raising production will increase the total amount sold, lowers the price of the good and lowers the profit from all other gallons sold

Question 16

What happens when the output effects is bigger than the price effect?

Answer 16

the production of the good will be increased

Question 17

What happens when the price effect outweighs the output effect

Answer 17

the production of the good will not be raised

Question 18

What happens when the number of sellers in an oligopoly grows?

Answer 18

an oligopolistic market resembles a competitive market

the price approaches marginal cost, the quantity produced approaches the socially efficient level

Question 19

Prisoners’ Dilemma

Answer 19

A particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it’s mutually beneficial

Question 20

Dominant Strategy

Answer 20

A strategy that is best for a player in a game regardless of the strategies chosen by other players

Question 21

When oligopolies collude

Answer 21

they make high profits but consumers of the product are worse off

Question 22

What is equilibrium quantity in markets characterized by oligopoly (where it does lie between monopoly/perfect competitive markets?)

Answer 22

higher than in monopoly markets and lower than in perfectly competitive markets

Question 23

What happens when the number of firms in an oligopoly increases?

Answer 23

the price approaches marginal cost

the quantity approaches the socially efficient level