Question

The prisoners’ dilemma shows us that firms have an incentive to collusion, or fix prices, but then they also have an incentive to cheat, or renege on their price fixing. The prisoners’ dilemma shows us that firms can sometimes be made better off if they ___________ instead of acting in their own ____________.

There are three models of the oligopoly:

1. The kinked-demand theory, in which competitors will match any price decrease and ignore any price increase.
   1. Because of this, the elasticity of demand for higher prices is ________ elastic than the elasticity of demand for price decreases.
   2. In this model, there is no incentive for any firm to change price. Why? _____________________________________________________________

2. The collusive pricing model is one in which all firms agree to fix prices.
3. 1. Each firm finds it most profitable to charge _________ price, but only if the rivals do.
   2. A _______ is a formal association in which the members display overt collusion.

Oligopolies are inefficient because:

1. P is (greater than, less than, or equal to) min ATC meaning that it is NOT ___________ efficient (i.e. the firm is producing where ATC is not at its minimum).
2. P is (greater than, less than, or equal to) MC meaning that is it NOT __________ efficient (i.e. the firm is under allocating resources).

Answer 1

1.

The prisoners dilemma shows us that firms can sometimes be made better off if they cooperate instead of acting in their own seld interest

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