1. If the four-firm concentration ratio of an industry is 75%, what does it mean?

2. Explain how payoff matrices used in Game Theory illustrate mutual interdependence among firms in oligopolies. How can they be used to predict likely outcomes?

3. Explain, using the prisoners’ dilemma analysis, why cooperation can be mutually beneficial, but if conditions prevent cooperation or collusion from happening, the outcome is worse for both parties.

4. What is the basis of the kinked-demand model? Explain the reason for the gap in the oligopolist’s marginal-revenue curve. How does this model explain price rigidity in oligopoly?

5. Why is advertising prevalent in many oligopolies, especially when industry demand is inelastic? Illustrate your answer by assuming that with advertising, a firm’s demand curve has price elasticity of -1.5 and without advertising, it is -2. If MC is $10, what is the difference in the profit-maximizing price?

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1 This means that the 4 firms with the highest output in the industry have a combined 75 of the outp... View the full answer