Econ 101 Section 3– Principles of Microeconomics
Instructor: C. Burkart
Questions 1 to 8 are worth 2 points each. Clearly circle the one best answer to each question. You will not receive credit if your answer choice is unclear or ambiguous.
1. Which of the following statements about oligopolies is NOT correct?
a. There are only a few firms in the industry.
b. Oligopolistic firms are always large.
c. An important reason for the existence of oligopolies is the presence of economies of scale.
d. Each firm possesses some market power.
2. When firms engage in tacit collusion, they
a. limit production in a way that enhances industry profits.
b. meet periodically to establish production quotas.
c. meet periodically to establish a monopoly price.
d. compete on price by undercutting each other.
3. Game theory is
a. the branch of economics that looks at psychological motives.
b. the science of designing effective product differentiation.
c. the branch of economics that looks at political motives.
d. the study of behavior in situations of interdependence.
4. For competing firms, a(n) _________ strategy is when it is in each firm's best interest to pursue an action _________ the action taken by the other firm.
a. dominant, only after considering
b. tit-for-tat, regardless of
c. dominant, regardless of
d. equilibrium, only after considering
5. A firm engaged in strategic behavior
a. is not seeking to maximize long-term profit.
b. takes the market price as given, as does a perfectly competitive firm.
c. fits the definition of a natural monopoly.
d. attempts to influence the behavior of other firms.
6. For the members of OPEC, it is in their combined interests to
a. reach a non-cooperative equilibrium.
b. engage in product differentiation.
c. maximize yearly petroleum output.
d. restrict yearly output and keep prices high.
7. The reason why game theory is not applied to perfect competition is that
a. we cannot define a dominant strategy for perfect competition.
b. it is difficult to define the pay-offs that motivate perfectly competitive firms.
c. the behavior of one perfectly competitive firm does not affect the behavior of its rivals.
d. the price leadership model works better in describing perfect competition.
8. Why is collusion more likely in cases of oligopoly than in perfect competition?
a. Oligopoly moves towards an equilibrium outcome; perfect competition does not.
b. There are too many firms in perfect competition to allow for collusion.
c. In oligopoly, all firms sell an identical product; but in perfect competition, the product varies between producers.
d. Perfect competition moves towards an equilibrium outcome; oligopoly does not.
Question 10 [16 pts.] To preserve the North Atlantic fish stocks, it is decided that only two fishing fleets,
|
Price of fish |
Quantity of fish |
|
|
(per pound) |
demanded (pounds) |
Total Revenue |
|
$17 |
1800 |
30600 |
|
$16 |
2000 |
32000 |
|
$15 |
2100 |
31500 |
|
$14 |
2200 |
30800 |
|
$12 |
2300 |
27600 |
one from the US and the other from the EU can fish in those waters (sounds like Canada gets screwed, eh?) The accompanying table shows the per week market demand schedule for fish from these waters. The only costs are fixed costs, so fishing fleets maximize profit by maximizing revenue. In other words, assume that marginal cost is zero and that fixed costs are sunk.
a. If both fishing fleets collude,
What is the revenue-maximizing output for the North Atlantic fishery? _2000 lbs_
What price will a pound of fish sell for? __$16__
b. If both fishing fleets collude and share the output equally,
What is the revenue to the EU fleet? _$16,000_
To the US fleet? _$16,000_
c. Suppose the EU fleet cheats by expanding its own catch by 100 pounds per week. The US fleet doesn’t change its catch.
What is the revenue to the US fleet? _$15,000_
To the EU fleet? _$16,500_
d. In retaliation for the cheating by the EU fleet, the US fleet also expands its catch by 100 pounds per week.
What is the revenue to the US fleet? __$15,400_
To the EU fleet? __$15,400__
Question 11 [8 pts.] Suppose that we have a fishery similar to that of Question 10 with the two sides behaving non-cooperatively at first. Assume the US and the EU each can send out either one or two
|
|
|
|
|
EU |
|
|
|
|
|
1 fleet |
|
2 fleets |
|
|
1 fleet |
|
10000 |
|
12000 |
|
US |
|
10000 |
|
4000 |
|
|
|
2 fleets |
|
4000 |
|
7500 |
|
|
|
12000 |
|
7500 |
|
fishing fleets. Also assume that the more fleets in the area, the more fish they catch in total but the lower the catch of each fleet. The accompanying payoff matrix shows the profit (in dollars) per week earned by the two sides.
a. What is the non-cooperative equilibrium: will each side choose to send out one fleet, or two fleets?
US: _two fleets_ EU: _two fleets_
b. Suppose that each side recognizes that they will be playing this game well into the future, and they both decide to adopt a “tit-for-tat” strategy whereby each side will send only one fleet out as long as the other does the same. If either of them breaks the agreement and sends out a second fleet, the other will also send out two and will continue to do so until its competitor send out only one fleet.
If both play this strategy, how much profit will the EU side make every week? __$10,000__
How much profit will the US side make every week? __$10,000__