Week 8 (GPT)

Question 1

What distinguishes an oligopoly from a monopoly?

Answer 1

A: An oligopoly has a small number of sellers, while a monopoly has only one seller.

Question 2

What is an example of an oligopoly in the Australian market?

Answer 2

The airline industry, with Virgin, Jetstar, and Qantas dominating the market.

Question 3

Why are there high barriers to entry in an oligopoly?

Answer 3

Barriers include
government licensing,
high investment costs,
economies of scale.

Question 4

What does it mean for firms in an oligopoly to be interdependent?

Answer 4

Each firm’s actions affect the others, requiring strategic decision-making.

Question 5

What is strategic interaction in an oligopoly?

Answer 5

Firms anticipate and respond to competitors’ actions in order to maximize profit.

Question 6

What is a payoff matrix used for?

Answer 6

To model strategic interactions between firms in oligopolistic markets.

Question 7

What is a dominant strategy?

Answer 7

A strategy that provides a better outcome for a firm regardless of the rival’s action.

Question 8

What is the Nash Equilibrium?

Answer 8

A situation where no player has an incentive to change their strategy unilaterally.

Question 9

Why might the Nash Equilibrium not be the best mutual outcome?

Answer 9

Because firms may earn less collectively compared to if they cooperated.

Question 10

What is the prisoner’s dilemma in the context of oligopoly?

Answer 10

A situation where firms acting in their own interest leads to a worse collective outcome.

Question 11

Why is collusion difficult in oligopoly markets?

Answer 11

It is illegal and firms have an incentive to cheat for individual gain.

Question 12

What is a cartel?

Answer 12

A formal agreement between firms to coordinate pricing and output, often illegal.

Question 13

What happens in a coordination game?

Answer 13

Firms or individuals benefit most by coordinating their actions rather than acting independently.

Question 14

What is an example of a coordination game outside business?

Answer 14

Deciding which side of the road to drive on – all must choose the same for safety.

Question 15

What does a strategy profile denote in game theory?

Answer 15

The set of strategies chosen by all players in the game.

Question 16

How do firms decide in a simultaneous game?

Answer 16

They make decisions at the same time without knowing the other’s choice.

Question 17

Why does advertising in oligopoly often lead to market failure?

Answer 17

Because mutual advertising increases costs with no added market share, reducing profits.

Question 18

What is a key feature of the Nash equilibrium in the advertising game?

Answer 18

Both firms advertise, leading to reduced collective profit despite the best individual strategy, as both advertising cancels out and they will both have to inatate to advertise inorder to not b under cut by the competitor, as a result they both loss money due to unessaey advertising.

Question 19

What is the invisible hand principle, and how does oligopoly differ?

Answer 19

Normally, pursuit of self-interest leads to optimal outcomes, but in oligopoly, it may not.

Question 20

What are the legal implications of cartel behavior?

Answer 20

Cartels are prohibited under competition law, and members cannot legally enforce agreements.

Question 21

What does a 2x2 payoff matrix in game theory represent?

Answer 21

It shows the outcomes for two players, each choosing between two strategies, with each cell showing their respective payoffs.

Question 22

In a payoff matrix, what do the rows and columns represent?

Answer 22

The rows represent one firm’s possible strategies, while the columns represent the other firm’s possible strategies.

Question 23

What does it mean when a strategy is dominant in a payoff matrix?

Answer 23

It yields a higher payoff for a player no matter what the other player chooses.

Question 24

How can you visually identify a dominant strategy in a matrix?

Answer 24

By comparing payoffs across a row or column and seeing which choice always gives the higher number.

Question 25

Where is the Nash equilibrium found on a payoff matrix?

Answer 25

It is the cell where both players' strategies are the best responses to each other, and neither has an incentive to deviate.

Question 26

Why is the bottom-right cell often the Nash equilibrium in a price war matrix?

Answer 26

Because both firms choose to lower prices due to dominant strategies, even though it leads to reduced profits.

Question 27

In a graph showing profits on a payoff matrix, what do higher payoffs indicate?

Answer 27

More favorable outcomes for the firm—usually shown by larger numbers in the matrix.

Question 28

What is the significance of the top-left cell (both firms charge a high price) in a price war matrix?

Answer 28

It represents the highest collective profit, but it's unstable due to incentives to undercut.

Question 29

How does a payoff matrix model the prisoner’s dilemma in economics?

Answer 29

It shows how rational self-interest leads both firms to worse collective outcomes (e.g., both undercutting prices).

Question 30

How does the difference in utility between players affect the likely outcome in a coordination game?

Answer 30

The player with the stronger preference is more likely to influence the joint decision.

Question 31

What does a coordination game payoff matrix visually highlight about cooperation?

Answer 31

That mutual cooperation yields better outcomes than miscoordination, even if preferences differ.

Question 32

In game theory, how is graphical representation useful for firms?

Answer 32

It helps visualize strategic decisions and anticipate competitor responses.

Question 33

What does a Nash equilibrium graphically show about market behavior?

Answer 33

It predicts where firms will settle given rational, self-interested strategies without communication.

Question 34

What does equilibrium in a market mean?

Answer 34

It's the point where marginal benefit (demand) equals marginal cost (supply), maximizing total surplus.

Question 35

What assumption is required for market equilibrium to maximize utility?

Answer 35

That demand reflects true marginal benefit and supply reflects true marginal cost.

Question 36

What is an externality?

Answer 36

A cost or benefit incurred by a third party who is not directly involved in the transaction.

Question 37

What is a positive externality?

Answer 37

A benefit enjoyed by someone who is not the consumer or producer of the good.

Question 38

What is a negative externality?

Answer 38

A cost suffered by someone who is not the consumer or producer of the good.

Question 39

Give an example of a positive consumption externality.

Answer 39

Vaccination, which benefits others by reducing disease spread.

Question 40

Give an example of a negative consumption externality.

Answer 40

Smoking, which harms others through second-hand smoke.

Question 41

Give an example of a positive production externality.

Answer 41

Beehives near orchards providing pollination services to neighboring farms.

Question 42

Give an example of a negative production externality.

Answer 42

A factory polluting a river, harming people not involved in its production.

Question 43

What is the Coase Theorem?

Answer 43

If transaction costs are low, private bargaining will lead to an efficient outcome regardless of who has property rights.

Question 44

What causes a product to be under-supplied in the presence of a positive externality?

Answer 44

The market only considers private benefit, not social benefit.

Question 45

What causes a product to be over-supplied in the presence of a negative externality?

Answer 45

The market only considers private cost, not social cost.

Question 46

How can governments correct positive externalities?

Answer 46

By subsidizing consumers or producers to increase production or consumption.

Question 47

How can governments correct negative externalities?

Answer 47

By taxing goods to internalize the external cost.

Question 48

What is deadweight loss in the context of externalities?

Answer 48

The loss of social surplus when market output is not socially optimal due to unaccounted external costs or benefits.

Question 49

In a graph with a positive consumption externality, what happens to the demand curve?

Answer 49

It shifts outward (right/up) to reflect the social benefit.

Question 50

What does the area between the private and social demand curves represent in a positive externality graph?

Answer 50

The external benefit not captured by the market.

Question 51

Where is the efficient output in a positive consumption externality graph?

Answer 51

Where the social demand curve intersects the supply curve.

Question 52

In a negative production externality graph, what happens to the supply curve?

Answer 52

It shifts upward (left) to reflect the true social cost.

Question 53

What does the vertical distance between the private and social supply curves represent in a negative externality graph?

Answer 53

The external cost per unit.

Question 54

What is the result of ignoring a negative externality in the supply curve?

Answer 54

The good is overproduced, leading to deadweight loss.

Question 55

In a graph with deadweight loss due to a negative externality, where is the deadweight loss located?

Answer 55

Between the social marginal cost and the demand curve, beyond the socially optimal quantity.

Question 56

How does a subsidy for a good with a positive externality affect the graph?

Answer 56

It shifts the demand or supply curve to increase output toward the socially optimal level.

Question 57

How does a tax for a good with a negative externality affect the supply curve?

Answer 57

It shifts the supply curve upward, decreasing output toward the socially optimal level.

Question 58

What do parallel supply curves in an externality graph signify?

Answer 58

The difference between private and social costs or benefits remains constant per unit.

Question 59

Where is the deadweight loss in a graph with under-consumption due to positive externalities?

Answer 59

Between the demand curve and the social demand curve, up to the efficient quantity.

Question 60

What is the market equilibrium point in a graph with no externalities?

Answer 60

The intersection of the private demand and private supply curves.

Question 61

What is the socially optimal equilibrium in the presence of an externality?

Answer 61

The intersection of the social cost or social benefit curve with the opposing market curve.

Question 62

How does government subsidy move equilibrium in a positive externality scenario?

Answer 62

It increases quantity and lowers or maintains price depending on whether it's given to the buyer or seller.

Question 63

How does government tax shift equilibrium in a negative externality scenario?

Answer 63

It raises the price and reduces quantity, moving the market toward the social optimum.