Question : Table 14-6 There two mobile home manufacturers in Nevada, Sturdy Homes : 1387876

 

 

Table 14-6

 

 

There are two mobile home manufacturers in Nevada, Sturdy Homes (S) and My Haven (M). Sturdy Homes has been in the market for a long time and must now compete with newcomer, My Haven. Suppose that Sturdy Homes believes that My Haven will match any price it sets. Use Table 14-6 to answer the following question and assume throughout that Sturdy Homes believes that My Haven will match any price it sets.

 

78) Refer to Table 14-6.  What price will Sturdy Homes charge and what profit does Sturdy Homes expect to make?

A) Price = $8,000; expected profit = $7 million

B) Price = $8,000; expected profit = $4 million

C) Price = $10,000; expected profit = $5 million

D) Price = $12,000; expected profit = $3 million

 

Table 14-7

 

 

 

Perfect Plants

Perfect Plants

 

 

Don’t offer same-day delivery

Offer same-day delivery

Florabunda Florist

Don’t offer same-day delivery

Florabunda earns $1,500 million profit/Perfect earns $1,500 million profit

Florabunda earns $800 million profit/Perfect earns $1,800 million profit

Florabunda Florist

Offer same-day delivery

Florabunda earns $1,800 profit/Perfect earns $800 million profit

Florabunda earns $1,000 million profit/Perfect earns $1,000 million profit

 

The payoff matrix shown above assumes that Perfect Plants and Florabunda Florist must decide whether to offer same-day delivery for their products. The matrix shows how much profit each firm will earn if it does or does not offer same-day delivery. The amount of profit for one firm depends on whether the other firm offers same-day delivery.

 

79) Refer to Table 14-7.  Which of the following statements is true?

A) Neither Perfect nor Florabunda has a dominant strategy.

B) Perfect’s dominant strategy is to offer same-day delivery; Florabunda’s dominant strategy is to not offer same-day delivery.

C) Florabunda’s dominant strategy is to offer same-day delivery; Perfect’s dominant strategy is to not offer same-day delivery.

D) The dominant strategy for both firms is to offer same-day delivery.

 

 

80) Refer to Table 14-7.  Which of the following statements is true?

A) Given that Florabunda offers same-day delivery, Perfect’s best strategy is to not offer same-day delivery.

B) Given that Perfect offers same-day delivery, Florabunda’s best strategy is to offer same-day delivery.

C) Perfect and Florabunda will agree to collude in order to maximize their profits.

D) Neither Perfect nor Florabunda will offer same-day delivery; this decision will decrease their costs and allow each firm to earn more than $1,800 million in profits.

 

81) Which of the following explains why two firms, Apex and Bongo, would engage in implicit collusion, rather than explicit collusion?

A) Implicit collusion allows Apex to increase its profits at the expense of Bongo without Bongo knowing that collusion has occurred; if Apex engages in explicit collusion, Bongo will realize collusion has taken place and retaliate against Apex.

B) Implicit collusion is less costly to both firms than explicit collusion; therefore, profits will be greater for both firms if they engage in implicit collusion.

C) Explicit collusion is illegal; if the managers of Apex and Bongo engage in implicit collusion they may be within the law.

D) Implicit collusion always has an enforcement mechanism that forces both firms to collude; explicit collusion does not have an enforcement mechanism.

 

 

82) Which of the following is an example of implicit collusion?

A) product differentiation

B) a retaliation strategy

C) a second-price auction

D) price leadership

 

 

83) A form of implicit collusion where one firm in an oligopoly announces a price change which is matched by other firms in the same industry is

A) “follow the leader” pricing.

B) price leadership.

C) retaliation pricing.

D) “tit-for-tat” pricing.

 

84) Which of the following best explains why airlines often cut their ticket prices at the last-minute in order to fill the remaining empty seats on their flights?

A) Fixed costs in the airline industry are very large, but the marginal cost of flying one more passenger is very low.

B) Airlines receive a subsidy from the government for each flight that is fully booked and departs on time.

C) The Federal Aviation Administration ranks each airline based on the percentage of flights that are fully booked. These rankings affect the decisions of firms to use a particular airline to fly their employees to business meetings.

D) Cutting prices makes the airlines more popular with their customers, who may fly with the same airline in the future as the result of buying low-price tickets.

 

 

85) A study conducted by economists at the University of Chicago found that when Southwest Airlines begins flying a new route, ticket prices on other airlines for that route ________, indicating that airlines ________.

A) stay relatively unchanged; may begin practicing implicit price collusion when Southwest enters a market

B) drop by an average of 29 percent; may have been practicing implicit price collusion before Southwest’s entry into the market

C) rise by an average of 65 percent; know they can practice implicit price collusion once Southwest announces it is entering a market

D) first drop and then rise back to their original levels; temporarily stop practicing implicit price collusion until Southwest becomes established, then return to their collusive pricing strategies

 

86) The Organization of Petroleum Exporting Countries (OPEC) controls about 75 percent of the world’s proven oil reserves. Economists refer to OPEC as a cartel because

A) OPEC is a monopoly, but it is located outside of the boundaries of any one country. This is the definition of a cartel.

B) this is the term used for an oligopoly that is controlled by national governments rather than private firms.

C) it is a group of firms that collude to restrict output to increase prices and profits.

D) this is the term economists use to describe an oligopoly that sells a standardized product, such as oil, rather than a differentiated product, such as automobiles.

 

 

87) Since 1972, the world price of oil has been largely determined by OPEC, which controls about 75 percent of the world’s proven oil reserves. Since 1972 the price of oil has

A) fluctuated. OPEC’s situation is an example of a prisoner’s dilemma.

B) risen slowly, but steadily. Members of OPEC fear that if they raise the price of oil too quickly this will lead oil-buying nations to accuse OPEC of price gouging, which is illegal under international law.

C) steadily fallen through the 1970s, then risen continually in the years since then. OPEC’s actions are an example of implicit collusion.

D) been tied by OPEC to the rate of inflation in the United States. If, for example, the rate of inflation is 5 percent in one year, OPEC will raise the price of oil by 5 percent the next year.

 

 

88) Collusion makes firms better off because if they act as a single entity (a cartel) they can reduce output and increase their prices and profits. But some cartels have failed and others are unstable. Which of the following is a reason why cartels often break down?

A) Most cartels do not have a dominant strategy.

B) When a cartel is profitable, the amount of competition it faces increases.

C) Members of a cartel may resent having to share their profits equally.

D) Each member of a cartel has an incentive to “cheat” on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement.