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The scenario where the gains from cooperating exceed the rewards from pursuing self-interest is the:
AParadox of thrift
BPrisoner's dilemma
CKinked demand curve
DLaw of demand
Answer & Solution
Correct answer: B. Prisoner's dilemma
1. Game theory supplies the standard model of oligopoly behaviour.
2. The prisoner's dilemma is a scenario in which the gains from cooperation are larger than the rewards from pursuing self-interest.
3. Each firm is nonetheless tempted to defect from the agreement.
4. That tension is why cartels are unstable even when collusion would pay.
_Source: OpenStax Principles of Microeconomics for AP(R) Courses 2e (CC BY 4.0), Ch 10 'Monopolistic Competition and Oligopoly', sections 10.1-10.2_
Related questions
Compared with a cartel, the Boeing and Airbus duopoly is held together by:The prisoner's dilemma applies to oligopoly because firms face a choice between:Monopolistic competition and oligopoly are grouped together because both are:The kinked demand curve makes an oligopolist reluctant to raise price because rivals will:A cartel is unstable because each member firm has an incentive to:Products can be differentiated by physical features, location, intangible qualities and:A cartel agreement aims to produce which level of output?The barrier to entry behind the Boeing and Airbus oligopoly comes from economies of scale