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Game Theory and Oligopoly Profit quiz

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  • What does it mean for firms in an oligopoly to be interdependent?
    It means each firm's profit depends on the output decisions of its competitors, so they must consider each other's actions when making choices.
  • In the Jack and Jill duopoly example, what is the marginal cost of pumping water?
    The marginal cost is zero, as there are no costs involved in pumping water in this example.
  • How is total revenue calculated in the Jack and Jill example?
    Total revenue is calculated by multiplying the price by the quantity sold.
  • What output and price maximize total profit in the monopoly scenario described?
    A quantity of 60 and a price of 60 maximize total profit, resulting in a total profit of 3,600.
  • How does perfect competition affect price and quantity compared to a monopoly?
    Perfect competition leads to a higher quantity and lower price, driving profit to zero as price equals marginal cost.
  • What is collusion in the context of an oligopoly?
    Collusion is when firms agree to cooperate, often by limiting output, to maximize total profit as if they were a monopoly.
  • What incentive do firms have to cheat on a collusive agreement?
    Each firm can increase its own profit by producing more than agreed, even though this reduces total industry profit.
  • What happens to total profit if one firm cheats while the other cooperates in the Jack and Jill example?
    Total profit decreases from 3,600 to 3,500, with the cheating firm earning more and the cooperating firm earning less.
  • What is the outcome when both firms in the duopoly cheat on the collusive agreement?
    Both firms end up with lower profits (1,600 each), and total profit falls to 3,200.
  • How does the prisoner's dilemma relate to the oligopoly example discussed?
    Both firms have an incentive to cheat, leading to a worse outcome for both than if they had cooperated, mirroring the prisoner's dilemma.
  • What is a payoff matrix in game theory?
    A payoff matrix displays the profits (or payoffs) for each firm based on the combination of strategies chosen by all firms.
  • What is a dominant strategy in the context of the Jack and Jill example?
    A dominant strategy is the best choice for a firm regardless of what the other firm does; in this case, both Jack and Jill have a dominant strategy to produce 40 gallons.
  • What is the Nash equilibrium in the Jack and Jill duopoly scenario?
    The Nash equilibrium occurs when both produce 40 gallons, each earning 1,600, as neither can improve their outcome by changing their own strategy alone.
  • Where does the oligopoly output typically fall compared to monopoly and perfect competition?
    Oligopoly output is between the monopoly and perfect competition levels, reflecting some market power but also competitive pressure.
  • Why does the presence of even one additional competitor in an oligopoly reduce profits compared to a monopoly?
    The added competition creates uncertainty and incentives to increase output, which drives prices and profits down from monopoly levels.