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Table 17-26 Two prescription drug manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare related expenses associated with side-effects from its drugs. Each drug manufacturer has evidence that indicates that taking its prescription drug causes liver failure. State prosecutors do not have access to the same data used by drug manufacturers and thus will have difficulty recovering full costs without the help of at least one of the drug manufacturer's studies. Each firm has been presented with an opportunity to lower its liability in the suit if it cooperates with attorneys representing the states. Table 17-26 Two prescription drug manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare related expenses associated with side-effects from its drugs. Each drug manufacturer has evidence that indicates that taking its prescription drug causes liver failure. State prosecutors do not have access to the same data used by drug manufacturers and thus will have difficulty recovering full costs without the help of at least one of the drug manufacturer's studies. Each firm has been presented with an opportunity to lower its liability in the suit if it cooperates with attorneys representing the states. Refer to Table 17-26. Pursuing its own best interests, Firm A will concede that taking their prescription drug causes liver failure e. only if Firm B concedes that taking its drug causes liver failure. f. only if Firm B does not concede that taking its drug causes liver failure. g. regardless of whether Firm B concedes that taking its drug causes liver failure. h. None of the above. In pursuing its own best interests, Firm A will in no case concede that taking its prescription drug causes liver failure. ANSWER: d POINTS: 1 DIFFICULTY: Difficulty: Moderate LEARNING OBJECTIVES: ECON.MANK.15.84 - LO: 17-2 NATIONAL STANDARDS: United States - BUSPROG: Analytic TOPICS: DISC: Game Theory KEYWORDS: BLOOM'S: Application NOTES: r -Refer to Table 17-26. Pursuing its own best interests, Firm B will concede that taking its drug causes liver failure A) only if Firm A concedes that taking its drug causes liver failure. B) only if Firm A does not concede that taking its drug causes liver failure. C) regardless of whether Firm A concedes that taking its drug causes liver failure. D) None of the above; in pursuing its own best interests, Firm B will in no case concede that taking its drug causes liver failure. Refer to Table 17-26. Pursuing its own best interests, Firm A will concede that taking their prescription drug causes liver failure e. only if Firm B concedes that taking its drug causes liver failure. f. only if Firm B does not concede that taking its drug causes liver failure. g. regardless of whether Firm B concedes that taking its drug causes liver failure. h. None of the above. In pursuing its own best interests, Firm A will in no case concede that taking its prescription drug causes liver failure. ANSWER: d POINTS: 1 DIFFICULTY: Difficulty: Moderate LEARNING OBJECTIVES: ECON.MANK.15.84 - LO: 17-2 NATIONAL STANDARDS: United States - BUSPROG: Analytic TOPICS: DISC: Game Theory KEYWORDS: BLOOM'S: Application NOTES: r -Refer to Table 17-26. Pursuing its own best interests, Firm B will concede that taking its drug causes liver failure


A) only if Firm A concedes that taking its drug causes liver failure.
B) only if Firm A does not concede that taking its drug causes liver failure.
C) regardless of whether Firm A concedes that taking its drug causes liver failure.
D) None of the above; in pursuing its own best interests, Firm B will in no case concede that taking its drug causes liver failure.

E) B) and D)
F) A) and B)

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Table 17-13 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits of the two home-improvement stores are shown in the table below. Table 17-13 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits of the two home-improvement stores are shown in the table below. 14. -Refer to Table 17-13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. If they both agree to cooperate on a strategy that maximizes their joint profits, annual profit will grow by A) $1.0 million for Lopes and by $1.5 million for HomeMax. B) $0.4 million for Lopes and by $3.4 million for HomeMax. C) $3.2 million for Lopes and by $0.6 million for HomeMax. D) $2.0 million for Lopes and by $2.5 million for HomeMax. 14. -Refer to Table 17-13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. If they both agree to cooperate on a strategy that maximizes their joint profits, annual profit will grow by


A) $1.0 million for Lopes and by $1.5 million for HomeMax.
B) $0.4 million for Lopes and by $3.4 million for HomeMax.
C) $3.2 million for Lopes and by $0.6 million for HomeMax.
D) $2.0 million for Lopes and by $2.5 million for HomeMax.

E) None of the above
F) A) and C)

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Before the , agreements between oligopolists were unenforceable contracts; afterwards, such agreements were criminal conspiracies.

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Sherman An...

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Suppose that Bieber and Rihanna are duopolists in the music industry. In May, they agree to work together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By June, each singer is considering breaking the agreement. What would you expect to happen next?


A) Bieber and Rihanna will determine that it is in each singer's self interest to maintain the agreement.
B) Bieber and Rihanna will each break the agreement. Both singers' profits will decrease.
C) Bieber and Rihanna will each break the agreement. Both singers' profits will increase.
D) Bieber and Rihanna will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price also will increase.

E) C) and D)
F) B) and D)

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Table 17-4 The table shows the town of Mauston's demand schedule for gasoline. For simplicity, assume the town's gasoline seller(s) incur no costs in selling gasoline. Table 17-4 The table shows the town of Mauston's demand schedule for gasoline. For simplicity, assume the town's gasoline seller(s) incur no costs in selling gasoline. -Refer to Table 17-4. If the market for gasoline in Mauston is a monopoly, then the profit-maximizing monopolist will charge a price of A) $7 and sell 150 gallons. B) $5 and sell 250 gallons. C) $3 and sell 350 gallons. D) $0 and sell 500 gallons. -Refer to Table 17-4. If the market for gasoline in Mauston is a monopoly, then the profit-maximizing monopolist will charge a price of


A) $7 and sell 150 gallons.
B) $5 and sell 250 gallons.
C) $3 and sell 350 gallons.
D) $0 and sell 500 gallons.

E) None of the above
F) A) and C)

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Table 17-4 The table shows the town of Mauston's demand schedule for gasoline. For simplicity, assume the town's gasoline seller(s) incur no costs in selling gasoline. Table 17-4 The table shows the town of Mauston's demand schedule for gasoline. For simplicity, assume the town's gasoline seller(s) incur no costs in selling gasoline. -Refer to Table 17-4. Suppose there are exactly two sellers of gasoline in Mauston: Shellon and Standstop. If Shellon sells 150 gallons and Standstop sells 200 gallons, then A) Shellon's profit is $450 and Standstop's profit is $600. B) Shellon's profit is $1,050 and Standstop's profit is $1,200. C) the two firms are colluding and earn monopoly profits. D) consumers in Mauston are worse off than they would be if the two firms colluded. -Refer to Table 17-4. Suppose there are exactly two sellers of gasoline in Mauston: Shellon and Standstop. If Shellon sells 150 gallons and Standstop sells 200 gallons, then


A) Shellon's profit is $450 and Standstop's profit is $600.
B) Shellon's profit is $1,050 and Standstop's profit is $1,200.
C) the two firms are colluding and earn monopoly profits.
D) consumers in Mauston are worse off than they would be if the two firms colluded.

E) B) and C)
F) A) and D)

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Suppose the market for home-grown peppers in the town of Smallville is comprised of two farmers. Explain why they might try to collude.

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The two farmers might try to collude abo...

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Oligopolies can end up looking like competitive markets if the number of firms is


A) large and they all cooperate.
B) large and they do not cooperate.
C) small and they all cooperate.
D) small and they do not cooperate.

E) A) and C)
F) B) and C)

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Table 17-5 The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero. Table 17-5 The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero. -Refer to Table 17-5. Assume there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell. How many premium digital channel cable TV subscriptions will be sold altogether when this market reaches a Nash equilibrium? A) 6,000 B) 9,000 C) 12,000 D) 15,000 -Refer to Table 17-5. Assume there are two profit-maximizing digital cable TV companies operating in this market. Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell. How many premium digital channel cable TV subscriptions will be sold altogether when this market reaches a Nash equilibrium?


A) 6,000
B) 9,000
C) 12,000
D) 15,000

E) All of the above
F) C) and D)

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The prisoners' dilemma game


A) provides insight into why cooperation is individually rational.
B) provides insight into why cooperation is difficult.
C) is a game in which neither player has a dominant strategy.
D) is a game in which exactly one of the two players has a dominant strategy.

E) A) and B)
F) All of the above

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Table 17-34 Suppose that two oil companies - BP and Exxon - own adjacent natural gas fields. The profits that each firm earns depends on both the number of wells it drills and the number of wells drilled by the other firm. The table below lists each firm's individual profits: Exxon Drill one well Drill two wells Table 17-34 Suppose that two oil companies - BP and Exxon - own adjacent natural gas fields. The profits that each firm earns depends on both the number of wells it drills and the number of wells drilled by the other firm. The table below lists each firm's individual profits: Exxon Drill one well Drill two wells -Refer to Table 17-34. Is there a Nash equilibrium? If so, describe it. -Refer to Table 17-34. Is there a Nash equilibrium? If so, describe it.

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Yes. Exxon has a dominant strategy to dr...

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Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies. -Refer to Figure 17-5. Suppose we observe that the outcome of the game is one in which each company earns a profit of $10 million. This outcome A) is the result of each company pursuing its dominant strategy. B) is the result of cooperation between the two companies, and we know that a cooperative outcome is easy in a game such as this one. C) is the result of cooperation between the two companies, and we know that a cooperative outcome is difficult in a game such as this one. D) is the most likely outcome of the game, regardless of whether the two companies cooperate. -Refer to Figure 17-5. Suppose we observe that the outcome of the game is one in which each company earns a profit of $10 million. This outcome


A) is the result of each company pursuing its dominant strategy.
B) is the result of cooperation between the two companies, and we know that a cooperative outcome is easy in a game such as this one.
C) is the result of cooperation between the two companies, and we know that a cooperative outcome is difficult in a game such as this one.
D) is the most likely outcome of the game, regardless of whether the two companies cooperate.

E) A) and D)
F) None of the above

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Scenario 17-1. Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume that both countries have entered into an agreement to maintain certain production levels in order to maximize profits. In the world market for oil, the demand curve is downward sloping. -Refer to Scenario 17-1. The fact that both countries have colluded to earn higher profit shows their desire to keep their combined level of output


A) above the monopoly level.
B) below the Nash equilibrium level.
C) equal to the Nash equilibrium level.
D) above the Nash equilibrium level.

E) C) and D)
F) A) and C)

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Predatory pricing involves a firm


A) colluding with another firm to restrict output and raise prices.
B) selling two individual products together for a single price rather than selling each product individually at separate prices.
C) temporarily cutting the price of its product to drive a competitor out of the market.
D) requiring that the firm reselling its product do so at a specified price.

E) All of the above
F) B) and D)

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Table 17-3 Imagine a small town in a remote area where only two residents, Maria and Miguel, own dairies that produce milk that is safe to drink. Each week Maria and Miguel work together to decide how many gallons of milk to produce. They bring milk to town and sell it at whatever price the market will bear. To keep things simple, suppose that Maria and Miguel can produce as much milk as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for milk is shown in the table below: Table 17-3 Imagine a small town in a remote area where only two residents, Maria and Miguel, own dairies that produce milk that is safe to drink. Each week Maria and Miguel work together to decide how many gallons of milk to produce. They bring milk to town and sell it at whatever price the market will bear. To keep things simple, suppose that Maria and Miguel can produce as much milk as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for milk is shown in the table below: -Refer to Table 17-3. Suppose that Maria and Miguel work together in order to operate as a profit-maximizing monopolist. What price will they charge for milk? A) $14 B) $12 C) $10 D) $8 -Refer to Table 17-3. Suppose that Maria and Miguel work together in order to operate as a profit-maximizing monopolist. What price will they charge for milk?


A) $14
B) $12
C) $10
D) $8

E) B) and C)
F) A) and C)

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Which of the following questions about predatory pricing remains unresolved?


A) Are the courts capable of determining which price cuts are competitive and which are predatory?
B) Are the courts capable of determining which price cuts are good for consumers?
C) Is predatory pricing ever a profitable business strategy?
D) All of the above questions about predatory pricing are unresolved.

E) B) and D)
F) B) and C)

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Table 17-11 Only two firms, ABC and XYZ, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. Table 17-11 Only two firms, ABC and XYZ, sell a particular product. The table below shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. -Refer to Table 17-11. If ABC and XYZ operate to jointly maximize profits, then what is the price? A) $14 B) $16 C) $18 D) $20 -Refer to Table 17-11. If ABC and XYZ operate to jointly maximize profits, then what is the price?


A) $14
B) $16
C) $18
D) $20

E) A) and B)
F) B) and C)

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Table 17-7 The information in the table below shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. Table 17-7 The information in the table below shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. -Refer to Table 17-7. Assume there are two profit-maximizing internet radio providers operating in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions. If the firms divide the market evenly, how much profit will each company earn? A) $12,000 B) $16,000 C) $44,000 D) $60,000 -Refer to Table 17-7. Assume there are two profit-maximizing internet radio providers operating in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions. If the firms divide the market evenly, how much profit will each company earn?


A) $12,000
B) $16,000
C) $44,000
D) $60,000

E) B) and C)
F) A) and D)

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Table 17-16 This table shows a game played between two players, A and B. The payoffs are given in the table as (Payoff to A, Payoff to B) . Table 17-16 This table shows a game played between two players, A and B. The payoffs are given in the table as (Payoff to A, Payoff to B) . -Refer to Table 17-16. Which of the following statements is true regarding this game? A) Both players have a dominant strategy. B) Neither player has a dominant strategy. C) A has a dominant strategy, but B does not have a dominant strategy. D) B has a dominant strategy, but A does not have a dominant strategy. -Refer to Table 17-16. Which of the following statements is true regarding this game?


A) Both players have a dominant strategy.
B) Neither player has a dominant strategy.
C) A has a dominant strategy, but B does not have a dominant strategy.
D) B has a dominant strategy, but A does not have a dominant strategy.

E) C) and D)
F) B) and D)

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Table 17-18 This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 10 units or 12 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B) . Table 17-18 This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 10 units or 12 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B) . -Refer to Table 17-18. The Nash equilibrium for this game is A) 10 units of output for Firm A and 10 units of output for Firm B. B) 10 units of output for Firm A and 12 units of output for Firm B. C) 12 units of output for Firm A and 10 units of output for Firm B. D) 12 units of output for Firm A and 12 units of output for Firm B. -Refer to Table 17-18. The Nash equilibrium for this game is


A) 10 units of output for Firm A and 10 units of output for Firm B.
B) 10 units of output for Firm A and 12 units of output for Firm B.
C) 12 units of output for Firm A and 10 units of output for Firm B.
D) 12 units of output for Firm A and 12 units of output for Firm B.

E) All of the above
F) A) and B)

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