### Which type of market do individual firms have no incentive

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Consider a remote town in which two restaurants, All-You-Can-Eat Café and GoodGrub Diner, operate in a duopoly. Both restaurants ignore the health code, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they have to pay workers to do the cleaning.

If both restaurants do not clean, each will earn \$8,000; alternatively, if they both hire workers to clean, each will earn only \$5,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make \$12,000, and the other restaurant will make only \$3,000.

5.3. When the oligopolists (duopolists) expect to compete with each other over an extended period of time, each restaurant chooses to be "nice" and follow a strategy that raises the profits of the other restaurant, expecting the other restaurant to return the favor.

This is an example of:

A. Tacit collusion

B. Perfect competition

C. A non-cooperative Nash equilibrium

D. A prisoners' dilemma

In which type of market do individual firms have no incentive to advertise?

A. Perfect competition

B. Monopolistic competition

C. Oligopoly

D. Monopoly

Consider a remote town in which two restaurants, All-You-Can-Eat Café and GoodGrub Diner, operate in a duopoly. Both restaurants ignore the health code, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they have to pay workers to do the cleaning.

If both restaurants do not clean, each will earn \$8,000; alternatively, if they both hire workers to clean, each will earn only \$5,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make \$12,000, and the other restaurant will make only \$3,000.

5.3. When the oligopolists (duopolists) expect to compete with each other over an extended period of time, each restaurant chooses to be "nice" and follow a strategy that raises the profits of the other restaurant, expecting the other restaurant to return the favor.

This is an example of:

A. Tacit collusion

B. Perfect competition

C. A non-cooperative Nash equilibrium

D. A prisoners' dilemma

Consider a remote town in which two restaurants, All-You-Can-Eat Café and GoodGrub Diner, operate in a duopoly. Both restaurants ignore the health code, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they have to pay workers to do the cleaning.

If both restaurants do not clean, each will earn \$8,000; alternatively, if they both hire workers to clean, each will earn only \$5,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make \$12,000, and the other restaurant will make only \$3,000.

5.2. If the two restaurants do not collude, what is the Nash equilibrium of this game?

A. All-You-Can-Eat Café cleans, but GoodGrub Diner does not clean.

B. All-You-Can-Eat Café does not clean, but GoodGrub Diner cleans.

C. All-You-Can-Eat Café does not clean, and GoodGrub Diner does not clean.

D. All-You-Can-Eat Café cleans, and GoodGrub Diner cleans.

Consider an economy in which there is initially one firm, HealthyBreakfast, in the market for breakfast cereal. A new firm, TastyCereal, is deciding whether to enter the market, which would change the market to a duopoly.

Assume that HealthyBreakfast can choose to sell its cereal to grocery stores at a high price or a low price. As a monopolist, it can earn \$8 million by selling at a high price, or \$5 million by selling at a low price. If TastyCereal enters the market and HealthyBreakfast sells at a high price, each firm makes \$3 million; however, if TastyCereal enters the market and HealthyBreakfast sells at a low price, each firm loses \$1 million.

4.2. Now suppose HealthyBreakfast can sign long-term contracts with grocery stores at a set price before TastyCereal decides whether or not to enter. This game is shown in the following diagram:

In this case, HealthyBreakfast will sign a contract at a ____ price, and TastyCereal _____ enter the market.

A. High; will

B. High; will not

C. Low; will not

D. Low; will

Consider an economy in which there is initially one firm, HealthyBreakfast, in the market for breakfast cereal. A new firm, TastyCereal, is deciding whether to enter the market, which would change the market to a duopoly.

Assume that HealthyBreakfast can choose to sell its cereal to grocery stores at a high price or a low price. As a monopolist, it can earn \$8 million by selling at a high price, or \$5 million by selling at a low price. If TastyCereal enters the market and HealthyBreakfast sells at a high price, each firm makes \$3 million; however, if TastyCereal enters the market and HealthyBreakfast sells at a low price, each firm loses \$1 million.

4.1. The following diagram shows this game: TastyCereal first decides whether to enter or not, and then HealthyBreakfast decides whether to sell at a high or low price.

Suppose that HealthyBreakfast can't set long-term contracts with the grocery stores that sell its cereal. HealthyBreakfast issues a press release saying that if TastyCereal enters the market, it will sell at a low price. This _____ a credible threat, and TastyCereal _____ enter the market.

A. Is; will not

B. Is; will

C. Is not; will

D. Is not; will not

The payoff matrix below shows the payoffs for two coffee manufacturers, Cambridge and Greystone, which are deciding whether to advertise. The blue payoffs show Cambridge's profit for different strategies selected by each firm. The orange payoffs show Greystone's profit. For example, if Cambridge advertises and Greystone does not advertise, Cambridge's payoff is \$10,000 and Greystone's payoff is \$3,000. Consider this a one-shot game; that is, they interact only once and never again.

Greystone

Cambridge Advertise \$5,000 , \$5,000 \$10,000 , \$3,000

Not advertise \$3,000 , \$10,000 \$7,000 , \$7,000

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