Microeconomics: Market Structures Quiz
16 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is a characteristic of a monopolistic competitive market?

  • Single seller
  • High barriers to entry
  • Perfect substitutes
  • Many sellers and many buyers (correct)

Which method helps a monopolistic competitive firm maintain market power?

  • Increasing entry barriers
  • Costly signaling through advertisement (correct)
  • Offering identical products
  • Lowering prices to match competitors

What distinguishes an oligopoly from a monopolistic competitive market?

  • Perfectly elastic demand
  • High barriers to entry (correct)
  • Absence of market power
  • A large number of small firms

In an oligopoly, why must a firm consider its rival's reactions?

<p>Because firms are interdependent (C)</p> Signup and view all the answers

What is a dominant strategy in game theory?

<p>A strategy that yields a higher payoff than other strategies regardless of rivals' actions (B)</p> Signup and view all the answers

What does overt collusion in an oligopoly result in?

<p>Joint behavior similar to a monopolist (A)</p> Signup and view all the answers

What does a payoff matrix represent in game theory?

<p>Possible outcomes based on players' actions (B)</p> Signup and view all the answers

Which of the following is NOT a characteristic of an oligopoly?

<p>Firms act independently without considering rivals (C)</p> Signup and view all the answers

What indicates that a strategy is strictly dominant for player A?

<p>Player A's outcomes are better when B chooses 'Confess'. (B)</p> Signup and view all the answers

Which scenario represents a Nash Equilibrium?

<p>Both players choose 'Confess'. (D)</p> Signup and view all the answers

What is the payoff when both players achieve the Nash Equilibrium of (Confess, Confess)?

<p>-2,-2 (C)</p> Signup and view all the answers

In the example provided, what happens to the sum of payoffs if both players choose 'Not Confess'?

<p>-2 (B)</p> Signup and view all the answers

What is necessary to find the equilibrium outcome between two players?

<p>Each player's strategy must be fixed and maximized based on the other's action. (D)</p> Signup and view all the answers

How can repeated plays restore the first-best solution in a game?

<p>By removing incentives for players to deviate from the optimal strategy. (C)</p> Signup and view all the answers

What is an intertemporal trade-off in game theory?

<p>Choosing a strategy that leads to a lower payoff now for a higher payoff later. (D)</p> Signup and view all the answers

When is a player's strategy considered best-responding?

<p>When they maximize their payoff given the other player's action. (B)</p> Signup and view all the answers

Flashcards

Monopolistic Competition

A market structure characterized by many sellers offering differentiated products with low barriers to entry. This means that many businesses sell similar but slightly unique products with no major obstacles for new competitors to join the market.

Monopolist within Product Market

A firm operating in a monopolistic competitive market can influence the price of its own product (not a price taker) due to product differentiation, but it faces competition and cannot set prices freely.

Perfectly Competitive Firm in the General Market

A firm operating in a perfectly competitive market is a price taker, meaning it cannot influence the price of the product it sells. There are many sellers offering identical products, so no individual firm can impact market prices.

Maintain Product Differentiation

Monopolistic competitive firms must constantly differentiate their products and find ways to attract customers to maintain their market power and earn profit.

Signup and view all the flashcards

Oligopoly

A market structure dominated by a small number of large firms that have significant control over the market. These firms are interdependent, meaning their actions affect each other's profits.

Signup and view all the flashcards

Firms are Interdependent

In an oligopoly, firms must consider how their rivals will react to their decisions. This means that their pricing strategies and other actions need to take into account the potential responses from competitors.

Signup and view all the flashcards

Overt Collusion

When firms in an oligopoly collude to jointly act like a monopolist, setting prices and output levels to maximize their collective profit.

Signup and view all the flashcards

The Payoff Matrix

A tool used to analyze strategic interactions between players (firms) in an oligopoly. It shows all possible actions of each player and the resulting payoffs (profits) for each combination of choices.

Signup and view all the flashcards

Strictly Dominant Strategy

A strategy where a player chooses the same action regardless of what the other player does, and this action always yields a higher payoff compared to other options.

Signup and view all the flashcards

Nash Equilibrium

A situation where no player can improve their payoff by unilaterally changing their strategy, assuming the other player's strategy remains unchanged.

Signup and view all the flashcards

Finding Equilibrium

The process of identifying the Nash Equilibrium by analyzing each player's best response to the other player's actions.

Signup and view all the flashcards

Second-Best Solution

A situation where the sum of payoffs in the Nash Equilibrium is lower than the sum of payoffs if players chose a different, non-equilibrium strategy.

Signup and view all the flashcards

Restoring First-Best through Repeated Plays

The idea that in repeated interactions, players can use past outcomes to encourage cooperation and achieve a better outcome than the Nash Equilibrium.

Signup and view all the flashcards

Intertemporal Trade-off

The trade-off between maximizing short-term profits and potentially sacrificing long-term gains, often relevant in strategic interactions.

Signup and view all the flashcards

Dominant Strategy Equilibrium

The outcome when all players choose their dominant strategies.

Signup and view all the flashcards

Equilibrium Payoff

The sum of payoffs achieved in the Nash Equilibrium outcome, representing the collective benefit to all players.

Signup and view all the flashcards

Study Notes

Monopolistic Competition

  • A monopolistic competitive market, like soft drinks, has many sellers and buyers.
  • Products are differentiated—not perfect substitutes, like Coke vs. Pepsi
  • Barriers to entry are low.

Monopolist within Product Market

  • A monopolist in a product market can earn a profit.
  • The profit area is represented on a diagram, as is deadweight loss.
  • Diagrams show the relationship of Price (P) to quantity (Q) and other cost curves.

Perfectly Competitive Firm

  • Low barriers to entry lead to zero profit in the long run.
  • Firms will enter if profit exists
  • Demand shifts to the left.

Maintaining Product Differentiation

  • To maintain long-run profit, a monopolistic firm must maintain market power.
  • Innovation is one key method
  • Advertising is another method (costly signal)

Oligopoly Characteristics

  • An oligopoly has a small number of large firms.
  • Firms are interdependent.
  • Firms are strategic price makers.
  • High barriers to entry.

Firms are Interdependent

  • Oligopolists consider how rivals will react to their decisions.
  • Perfectly competitive firms are price takers
  • Monopolists have no rivals.
  • Monopolistic competitive firms have no direct rivals within their product market.

Overt Collusion

  • Oligopolists act together like a monopolist
  • There is a deadweight loss, which is visually depicted
  • OPEC countries are an example.

The Payoff Matrix

  • To understand a game, define players, their actions and payoffs.
  • An example presented is Prisoner's Dilemma.

Strategy

  • A plan of action in response to rival actions
  • Always confess and match rival's action are examples

Dominant Strategy

  • A strategy that’s best for a player, regardless of the other players’ choices
  • An example in a payoff matrix is always confess in Prisoner's Dilemma.

Nash Equilibrium

  • No player can unilaterally improve by changing strategy .
  • An example is given in a payoff matrix, where always confess is the equilibrium strategy
  • (-2,-2) is the equilibrium outcome in the example

How to Find Equilibrium

  • Determine the best action for each player, given the actions of others.

Second-Best Solution

  • The sum of payoffs in the equilibrium is -4
  • The sum of payoffs if players choose not to confess is -2,
  • The not confess option is often the first-best solution

Restoring First-Best through Repeated Plays

  • Repeated plays allow players to base strategies on action history.
  • Players can penalize each other for deviating from the first-best solution
  • Intertemporal trade-offs are a key consideration (current vs. future benefits)
  • Sufficiently patient players can sustain a monopoly outcome.
  • Game theory examines this relationship in detail.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

Related Documents

Principles of Microeconomics L22 Lecture Notes PDF

Description

Test your understanding of different market structures including monopolistic competition, monopolies, and oligopolies. Explore concepts like product differentiation, barriers to entry, and pricing strategies in various market scenarios.

More Like This

Use Quizgecko on...
Browser
Open
Browser
Browser