Deck 10: Game Theory: Inside Oligopoly

Question 1

The figure below presents information for a one-shot game. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|}\hline & \text { Low Price } & \text { High Price } \\\hline \text { Low Price } & (2,2) & (10,-8) \\\hline \text { HighPrice } & (-8,10) & (6,6) \\\hline\end{array}\end{array}$ What are secure strategies for firm A and firm B respectively?

A) (low price, high price)
B) (high price, low price)
C) (high price, high price)
D) (low price, low price)

Answer 1

(low price, low price)

Question 2

If you advertise and your rival advertises,you each will earn $4 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million.If you and your rival plan to be in business for only one year,the Nash equilibrium is:

A) for each firm to advertise.
B) for neither firm to advertise.
C) for your firm to advertise and the other not to advertise.
D) None of the preceding answers is correct.

Answer 2

B

Question 3

Consider the following entry game: Here,firm B is an existing firm in the market,and firm A is a potential entrant.Firm A must decide whether to enter the market (play "enter")or stay out of the market (play "not enter").If firm A decides to enter the market,firm B must decide whether to engage in a price war (play "hard"),or not (play "soft").By playing "hard," firm B ensures that firm A makes a loss of $1 million,but firm B only makes $1 million in profits.On the other hand,if firm B plays "soft," the new entrant takes half of the market,and each firm earns profits of $5 million.If firm A stays out,it earns zero while firm B earns $10 million.Which of the following are perfect equilibrium strategies?

A) (enter, soft)
B) (not enter, soft)
C) (enter, hard)
D) (not enter, hard)

Answer 3

D

Question 4

Refer to the following game. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|}\hline & \text {Low Price } & \text { High Price } \\\hline \text {Low Price } & (10,9) & (15,8) \\\hline \text { High Price } & (-10,7) & (11,11) \\\hline\end{array}\end{array}$ If this one-shot game is repeated three times,the Nash equilibrium payoffs for firms A and B will be ______ each period.

A) (10, 9)
B) (11, 11)
C) (?10, 7)
D) (15, 8)

Question 5

In the game shown below,firms 1 and 2 must independently decide whether to charge high or low prices. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm Two }\\\text { Firm One }\begin{array}{|l|l|l|}\hline & \text { High Price } & \text { Low Price } \\\hline \text { High Price } & (10,10) & (5,-5) \\\hline \text { Low Price } & (5,-5) & (0,0) \\\hline\end{array}\end{array}$ Which of the following are the Nash equilibrium payoffs (each period)if the game is repeated 10 times?

A) (0, 0)
B) (5, -5)
C) (-5, 5)
D) (10, 10)

Question 6

Which of the following are important determinants of collusion in pricing games?

A) The number of firms
B) Firm size
C) History
D) All of the statements associated with this question are correct.

Question 7

In the game shown below,firms 1 and 2 must independently decide whether to charge high or low prices. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm Two }\\\text { Firm One }\begin{array}{|l|l|l|}\hline & \text { High Price } & \text { Low Price } \\\hline \text { High Price } & (10,10) & (5,-5) \\\hline \text { Low Price } & (5,-5) & (0,0) \\\hline\end{array}\end{array}$ Which of the following are Nash equilibrium payoffs in the one-shot game?

A) (0, 0)
B) (5, -5)
C) (-5, 5)
D) (10, 10)

Question 8

Refer to the following game. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|}\hline & \text {Low Price } & \text { High Price } \\\hline \text {Low Price } & (10,9) & (15,8) \\\hline \text { High Price } & (-10,7) & (11,11) \\\hline\end{array}\end{array}$ What are the secure strategies for firm A and firm B respectively?

A) (low price, high price)
B) (high price, low price)
C) (high price, high price)
D) (low price, low price)

Question 9

In the game shown below,firms 1 and 2 must independently decide whether to charge high or low prices. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm Two }\\\text { Firm One }\begin{array}{|l|l|l|}\hline & \text { High Price } & \text { Low Price } \\\hline \text { High Price } & (10,10) & (5,-5) \\\hline \text { Low Price } & (5,-5) & (0,0) \\\hline\end{array}\end{array}$ Suppose the game is infinitely repeated.Then the "best" the firms could do in a Nash equilibrium is to earn ___ per period.

A) (0, 0)
B) (5, -5)
C) (-5, 5)
D) (10, 10)

Question 10

Consider the following information for a simultaneous move game: If you advertise and your rival advertises,you each will earn $5 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million.If you and your rival plan to be in business for 10 years,then the Nash equilibrium is:

A) for each firm to advertise every year.
B) for neither firm to advertise in early years, but to advertise in later years.
C) for each firm to not advertise in any year.
D) for each firm to advertise in early years, but not advertise in later years.

Question 11

Refer to the following game. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|}\hline & \text {Low Price } & \text { High Price } \\\hline \text {Low Price } & (10,9) & (15,8) \\\hline \text { High Price } & (-10,7) & (11,11) \\\hline\end{array}\end{array}$ Which of the following is true?

A) A dominant strategy for firm A is "high price."
B) There does not exist a dominant strategy for firm A.
C) A dominant strategy for firm B is "low price."
D) None of the preceding answers is correct.

Question 12

The figure below presents information for a one-shot game. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|}\hline & \text { Low Price } & \text { High Price } \\\hline \text { Low Price } & (2,2) & (10,-8) \\\hline \text { HighPrice } & (-8,10) & (6,6) \\\hline\end{array}\end{array}$ If this one-shot game is repeated 100 times,the Nash equilibrium payoffs of the players will be ________________ each period.

A) (2, 2)
B) (10, ?8)
C) (?8, 10)
D) (6, 6)

Question 13

If you advertise and your rival advertises,you each will earn $4 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million.If you and your rival plan to be in business for 10 years,then the Nash equilibrium is:

A) for each firm to advertise every year.
B) for neither firm to advertise in early years, but to advertise in later years.
C) for each firm to not advertise in any year.
D) for each firm to advertise in early years, but not advertise in later years.

Question 14

Consider the following information for a simultaneous move game: If you advertise and your rival advertises,you each will earn $5 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million.If you and your rival plan to hand your business down to your children (and this "bequest" goes on forever),then a Nash equilibrium when the interest rate is zero is:

A) for each firm to not advertise until the rival does, and then to advertise forever.
B) for your firm to never advertise.
C) for your firm to always advertise when your rival does.
D) for each firm to advertise until the rival does not advertise, and then not advertise forever.

Question 15

Which of the following is true?

A) In a one-shot game, a collusive strategy always represents a Nash equilibrium.
B) A perfect equilibrium occurs when each player is doing the best he can regardless of what the other player is doing.
C) Each Nash equilibrium is a perfect equilibrium.
D) Every perfect equilibrium is a Nash equilibrium.

Question 16

Refer to the following game. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|}\hline & \text {Low Price } & \text { High Price } \\\hline \text {Low Price } & (10,9) & (15,8) \\\hline \text { High Price } & (-10,7) & (11,11) \\\hline\end{array}\end{array}$ What are the Nash equilibrium strategies for firm A and firm B,respectively,in a one-shot game?

A) (low price, low price)
B) (high price, high price)
C) (low price, high price)
D) (low price, low price) and (high price, high price)

Question 17

Consider the following information for a simultaneous move game: If you advertise and your rival advertises,you each will earn $5 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million.If you and your rival plan to be in business for only one year,the Nash equilibrium is:

A) for each firm to advertise.
B) for neither firm to advertise.
C) for your firm to advertise and the other not to advertise.
D) None of the preceding answers is correct.

Question 18

Consider the following entry game: Here,firm B is an existing firm in the market,and firm A is a potential entrant.Firm A must decide whether to enter the market (play "enter")or stay out of the market (play "not enter").If firm A decides to enter the market,firm B must decide whether to engage in a price war (play "hard"),or not (play "soft").By playing "hard," firm B ensures that firm A makes a loss of $1 million,but firm B only makes $1 million in profits.On the other hand,if firm B plays "soft,",the new entrant takes half of the market,and each firm earns profits of $5 million.If firm A stays out,it earns zero while firm B earns $10 million.Which of the following are Nash equilibrium strategies?

A) (enter, hard) and (not enter, hard)
B) (enter, soft) and (not enter, soft)
C) (not enter, hard) and (enter, soft)
D) (enter, hard) and (not enter, soft)

Question 19

If you advertise and your rival advertises,you each will earn $4 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million.If you and your rival plan to hand your business down to your children (and this "bequest" goes on forever),then a Nash equilibrium is for each firm to:

A) not advertise until the rival does, and then to advertise forever.
B) never advertise.
C) always advertise.
D) advertise until the rival does not advertise, and then not advertise forever.

Question 20

The figure below presents information for a one-shot game. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|}\hline & \text { Low Price } & \text { High Price } \\\hline \text { Low Price } & (2,2) & (10,-8) \\\hline \text { HighPrice } & (-8,10) & (6,6) \\\hline\end{array}\end{array}$ What are the Nash equilibrium strategies for firm A and B respectively?

A) (low price, high price)
B) (high price, low price)
C) (high price, high price)
D) (low price, low price)

Question 21

Which of the following is true?

A) In an infinitely repeated game, collusion is always a Nash equilibrium.
B) In a finitely repeated game with a certain end period, collusion is unlikely because effective punishments cannot be used during any time period.
C) All of the statements associated with this question are correct.
D) None of the preceding answers is correct.

Question 22

Refer to the game. $\begin{array}{c}\text { Player 2 }\\\text { Player 1}\begin{array}{|l|l|l|l|}\hline & \mathrm{t} 1 & \mathrm{t} 2 & \mathrm{t} 3 \\\hline & & & \\ \mathrm{S} 1 & 10,0 & 5,1 & 4,-200 \\\hline & & & \\\mathrm{S} 2 & 10,100 & 5,0 & 0,-100 \\\hline\end{array}\end{array}$ Which of the following pairs of strategies constitute a Nash equilibrium of the game?

A) S1, t1
B) S1, t2
C) S2, t1
D) S1, t2 and S2, t1

Question 23

Which of the following is true?

A) For a finitely repeated game, the game is played enough times to effectively punish cheaters, and therefore collusion is likely.
B) In an infinitely repeated game with a low interest rate, collusion is unlikely because the game unravels so that effective punishment cannot be used during any time period.
C) A secure strategy is the optimal strategy for a player no matter what the opponent does.
D) None of the preceding answers is correct.

Question 24

Refer to the following game. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|}\hline & \text {Low Price } & \text { High Price } \\\hline \text { Low Price } & (9,10) & (8,15) \\\hline \text { High Price } & (7,-10) & (11,11) \\\hline\end{array}\end{array}$ What are the Nash equilibrium strategies for firm A and firm B respectively?

A) (low price, low price)
B) (high price, high price)
C) (low price, high price)
D) (low price, low price) and (high price, high price)

Question 25

Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the normal-form game shown below. $\begin{array}{c}\text { Worker }\\\text { Manager}\begin{array}{|l|l|l|} \hline & \text { Work } & \text { Shirk } \\\hline & & \\\text { Monitor } & -1,1 & 1,-1 \\\hline \text { Don't } \\\text { Monitor }& 1,-1 & -1,1\\\hline\end{array}\end{array}$ Management and a labor union are bargaining over how much of a $50 surplus to give to the union.The $50 is divisible up to one cent.The players have one shot to reach an agreement.Management has the ability to announce what it wants first,and then the labor union can accept or reject the offer.Both players get zero if the total amounts asked for exceed $50.Which of the following is NOT a Nash equilibrium?

A) Management requests $50 and the labor union accepts $0.
B) Management requests $30 and the labor union accepts $10.
C) Management requests $25 and the labor union accepts $25.
D) Neither management requesting $50 and the labor union accepting $0 nor management requesting $30 and the labor union accepting $10 are Nash equilibria.

Question 26

Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the normal-form game shown below. $\begin{array}{c}\text { Worker }\\\text { Manager}\begin{array}{|l|l|l|} \hline & \text { Work } & \text { Shirk } \\\hline & & \\\text { Monitor } & -1,1 & 1,-1 \\\hline \text { Don't } \\\text { Monitor }& 1,-1 & -1,1\\\hline\end{array}\end{array}$ Management and a labor union are bargaining over how much of a $50 surplus to give to the union.The $50 is divisible up to one cent.The players have one shot to reach an agreement.Management has the ability to announce what it wants first,and then the labor union can accept or reject the offer.Both players get zero if the total amounts asked for exceed $50.Which of the following is true?

A) There are multiple Nash equilibria.
B) ($25, $25) is a Nash equilibrium.
C) A Nash equilibrium is also a perfect equilibrium.
D) There are multiple Nash equilibria, and ($25, $25) is a Nash equilibrium.

Question 27

Which of the following conditions are necessary for the existence of a Nash equilibrium?

A) The existence of dominant strategies for both players.
B) The existence of a dominant strategy for one player and the existence of a secure strategy for another player.
C) The existence of a secure strategy for both players.
D) None of the preceding answers is correct.

Question 28

Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the normal-form game shown below. $\begin{array}{c}\text { Worker }\\\text { Manager}\begin{array}{|l|l|l|} \hline & \text { Work } & \text { Shirk } \\\hline & & \\\text { Monitor } & -1,1 & 1,-1 \\\hline \text { Don't } \\\text { Monitor }& 1,-1 & -1,1\\\hline\end{array}\end{array}$ Management and a labor union are bargaining over how much of a $50 surplus to give to the union.The $50 is divisible up to one cent.The players have one shot to reach an agreement.Management has the ability to announce what it wants first,and then the labor union can accept or reject the offer.Both players get zero if the total amounts asked for exceed $50.Which of the following is a perfect equilibrium?

A) Management requests $49.99, and the labor union accepts $0.01.
B) Management requests $25, and the labor union accepts $25.
C) Management requests $0, and the labor union accepts $50.
D) None of the preceding answers is correct.

Question 29

Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the normal-form game shown below. $\begin{array}{c}\text { Worker }\\\text { Manager}\begin{array}{|l|l|l|} \hline & \text { Work } & \text { Shirk } \\\hline & & \\\text { Monitor } & -1,1 & 1,-1 \\\hline \text { Don't } \\\text { Monitor }& 1,-1 & -1,1\\\hline\end{array}\end{array}$ What should the manager do to solve the shirking problem?

A) Always monitor.
B) Never monitor.
C) Sincerely tell workers not to shirk.
D) Engage in "random" spot checks of the workplace.

Question 30

Refer to the following game. $\begin{array}{l}\quad\quad\quad\quad\quad\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|}\hline & \text {Low Price } & \text { High Price } \\\hline \text { Low Price } & (9,10) & (8,15) \\\hline \text { High Price } & (7,-10) & (11,11) \\\hline\end{array}\end{array}$ Which of the following is true?

A) A dominant strategy for firm A is "high price."
B) There does not exist a dominant strategy for firm A.
C) A dominant strategy for firm B is "low price."
D) None of the preceding answers is correct.

Question 31

The dominant strategy for player 1 in the following game is:
$\begin{array}{c}\text { Player 2 }\\\text { Player 1}\begin{array}{|l|l|l|l|}\hline & \mathrm{t} 1 & \mathrm{t} 2 & \mathrm{t} 3 \\\hline & & & \\ \mathrm{S} 1 & 4,10 & 3,0 & 1,3 \\\hline & & & \\\mathrm{S} 2 & 0,0 & 2,10 & 10,3 \\\hline\end{array}\end{array}$

A) S1.
B) S2.
C) S1 and S2.
D) None of the preceding answers is correct.

Question 32

Collusion is:

A) legal in the United States.
B) not possible when firms interact repeatedly forever.
C) more likely in industries with a large number of firms.
D) None of the preceding answers is correct.

Question 33

The dominant strategy of player 1 in the following game is:
$\begin{array}{c}\text { Player 2 }\\\text { Player 1}\begin{array}{|l|l|l|l|}\hline & \mathrm{t} 1 & \mathrm{t} 2 & \mathrm{t} 3 \\\hline & & & \\ \mathrm{S} 1 & 10,0 & 5,1 & 4,-200 \\\hline & & & \\\mathrm{S} 2 & 10,100 & 5,0 & 0,-100 \\\hline\end{array}\end{array}$

A) S1.
B) S2.
C) S1 and S2.
D) A dominant strategy does not exist.

Question 34

Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the normal-form game shown below. $\begin{array}{c}\text { Worker }\\\text { Manager}\begin{array}{|l|l|l|} \hline & \text { Work } & \text { Shirk } \\\hline & & \\\text { Monitor } & -1,1 & 1,-1 \\\hline \text { Don't } \\\text { Monitor }& 1,-1 & -1,1\\\hline\end{array}\end{array}$ Which of the following pairs of strategies constitutes a Nash equilibrium?

A) Manager monitors and worker works.
B) Manager does not monitor and worker works.
C) Manager monitors and worker shirks.
D) None of the preceding answers is correct.

Question 35

Which of the following is true for a Nash equilibrium of a two-player game?

A) The joint payoffs of the two players are highest compared to other strategy pairs.
B) Given another player's strategy stipulated in that Nash equilibrium, a player cannot improve his welfare by changing his strategy.
C) A Nash equilibrium is always unique in real-world problems.
D) Given another player's strategy stipulated in that Nash equilibrium, a player cannot improve his welfare by changing his strategy, and a Nash equilibrium is always unique in real-world problems.

Question 36

Refer to the following game. $\begin{array}{c}\text { Player 2 }\\\text { Player 1}\begin{array}{|l|l|l|l|}\hline & \mathrm{t} 1 & \mathrm{t} 2 & \mathrm{t} 3 \\\hline & & & \\ \mathrm{S} 1 & 4,10 & 3,0 & 1,3 \\\hline & & & \\\mathrm{S} 2 & 0,0 & 2,10 & 10,3 \\\hline\end{array}\end{array}$ Which of the following strategies constitutes a Nash equilibrium?

A) S1, t1
B) S2, t2
C) S2, t3
D) S1, t2

Question 37

Which of the following enhances the ability of waste companies to collude?

A) Decals on waste receptacles
B) High interest rates
C) Differentiated nature of products
D) Large number of firms

Question 38

Game theory is especially useful for analysis in the following markets:

A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly

Question 39

Based on the following game,what are the secure strategies for player 1 and player 2?
$\begin{array}{c}\text { Player 2 }\\\text { Player 1}\begin{array}{|l|l|l|} \hline & \mathrm{t} 1 & \mathrm{t} 2 \\\hline & & \\\mathrm{S} 1 & 10,15 & 15,8 \\\hline & & \\\text { S2 } & -10,7 & 10,20\\\hline\end{array}\end{array}$

A) S1 and t2
B) S1 and t1
C) S2 and t2
D) S2 and t1

Question 40

Economists use game theory to predict the behavior of oligopolists.Which of the following is crucial for the success of the analysis?

A) Make sure the payoffs reflect the true payoffs of the oligopolists.
B) Determine whether the oligopolists move simultaneously or sequentially.
C) Determine whether the problem considered is of a one-shot or a repeated nature.
D) All of the statements associated with this question are correct.

Question 41

If you advertise and your rival advertises,you each will earn $5 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million.Which of the following is true?

A) A secure strategy for firm A is to not advertise.
B) A secure strategy for firm B is to not advertise.
C) Firm A does not have a secure strategy.
D) None of the preceding answers is correct.

Question 42

There are two existing firms in the market for computer chips.Firm A knows how to reduce the production costs for the chip and is considering whether to adopt the innovation or not.Innovation incurs a fixed setup cost of C,while increasing the revenue.However,once the new technology is adopted,another firm,B,can adopt it with a smaller setup cost of C/2.If A innovates and B does not,A earns $20 in revenue while B earns $0.If A innovates and B does likewise,both firms earn $15 in revenue.If neither firm innovates,both earn $5.Under what condition will firm B have an incentive to adopt if firm A adopts the innovation?

A) C > 30
B) C < 30
C) 10 > C > 0
D) 35 > C > 25

Question 43

A finitely repeated game differs from an infinitely repeated game in that:

A) the former needs a lower interest rate to support collusion than the latter needs.
B) there is an end-of-period problem for the former.
C) a collusive outcome can usually be sustained in the former but not the latter.
D) All of the statements associated with this question are correct.

Question 44

Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the normal-form game shown below. $\begin{array}{c}\text { Worker }\\\text { Manager}\begin{array}{|l|l|l|} \hline & \text { Work } & \text { Shirk } \\\hline & & \\\text { Monitor } & -1,1 & 1,-1 \\\hline \text { Don't } \\\text { Monitor }& 1,-1 & -1,1\\\hline\end{array}\end{array}$ Management and a labor union are bargaining over how much of a $50 surplus to give to the union.The $50 is divisible up to one cent.The players have one shot to reach an agreement.Management has the ability to announce what it wants first,and then the labor union can accept or reject the offer.Both players get zero if the total amounts asked for exceed $50.If you were the labor union,which type of "rules of play" would you prefer to divide the $50 surplus?

A) One-shot, simultaneous-move game
B) One-shot, sequential-move game with management as the first mover
C) One-shot, sequential-move game with labor union as the first mover
D) One-shot, simultaneous-move game and one-shot, sequential-move game with management as the first mover

Question 45

Which of the following is a factor(s)affecting collusion in an infinitely repeated pricing game?

A) Number of firms
B) Firm size
C) History
D) All of the statements associated with this question are correct.

Question 46

Which of the following is a valid critique of the use of game theory in economics?

A) Payoffs to players may be difficult to measure.
B) Players may not have complete information about each other's payoffs.
C) Game theory assumes rational players.
D) All of the statements associated with this question are correct.

Question 47

It is easier to sustain tacit collusion in an infinitely repeated game if:

A) the present value of cheating is higher.
B) there are more players in the game.
C) the interest rate is lower.
D) the present value of cheating is higher and the interest rate is lower.

Question 48

Refer to the normal-form game of price competition in the payoff matrix below. $\begin{array}{c}\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|} \hline & \text { Low Price } & \text { High Price } \\\hline & & \\\text { Low Price } & 0,0 & 50,-10 \\\hline & & \\\text { High Price } & -10,50 & 20,20\\\hline\end{array}\end{array}$ Suppose the game is infinitely repeated,and the interest rate is 10 percent.Both firms agree to charge a high price,provided no player has charged a low price in the past.If both firms stick to this agreement,then the present value of firm A's payoffs are:

A) 220.
B) 110.
C) 330.
D) 550.

Question 49

There are two existing firms in the market for computer chips.Firm A knows how to reduce the production costs for the chip and is considering whether to adopt the innovation or not.Innovation incurs a fixed setup cost of C,while increasing the revenue.However,once the new technology is adopted,another firm,B,can adopt it with a smaller setup cost of C/2.If A innovates and B does not,A earns $20 in revenue while B earns $0.If A innovates and B does likewise,both firms earn $15 in revenue.If neither firm innovates,both earn $5.Under what condition will firm A innovate?

A) C > 30
B) C < 30
C) 10 > C > 0
D) 35 > C > 25

Question 50

When a worker announces that he plans to quit,say next month,the "threat" of being fired has no bite.The worker may find it in his interest to shirk.What can the manager do to overcome this problem?

A) Fire the worker as soon as he announces his plans to quit.
B) Provide the worker some rewards for good work that extend beyond the termination of employment with your firm.
C) Monitor the worker more often than usual and fire him when he is caught shirking.
D) Pay the worker some rewards when he announces his plan to quit.

Question 51

Which of the following is the major means to signal good quality of goods by firms?

A) Sales
B) Advertisements
C) Warranties/guarantees
D) Both sales and advertisements

Question 52

Which of the following is NOT true?

A) An extensive form representation usually provides more information than a normal-form representation of a game.
B) A normal-form game is most useful for sequential-move games.
C) The notion of perfect equilibrium is more useful in analyzing extensive-form games than normal-form games.
D) The notion of credible threats makes more sense in extensive-form representations than in normal-form representations of a game.

Question 53

A Nash equilibrium with a noncredible threat as a component is:

A) a perfect equilibrium.
B) not a perfect equilibrium.
C) a sequential equilibrium.
D) a somewhat perfect equilibrium.

Question 54

Which of the following is true?

A) A Nash equilibrium is always perfect.
B) A perfect equilibrium is always Nash.
C) A Nash equilibrium is always perfect in a multistage game.
D) Perfect equilibrium and Nash equilibrium are the same concept but with different names.

Question 55

Refer to the normal-form game of price competition in the payoff matrix below. $\begin{array}{c}\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|} \hline & \text { Low Price } & \text { High Price } \\\hline & & \\\text { Low Price } & 0,0 & 50,-10 \\\hline & & \\\text { High Price } & -10,50 & 20,20\\\hline\end{array}\end{array}$ Suppose that firm A deviates from a trigger strategy to support a high price.What is the present value of A's payoff from cheating?

A) 70
B) 50
C) 30
D) 20

Question 56

There are two existing firms in the market for computer chips.Firm A knows how to reduce the production costs for the chip and is considering whether to adopt the innovation or not.Innovation incurs a fixed setup cost of C,while increasing the revenue.However,once the new technology is adopted,another firm,B,can adopt it with a smaller setup cost of C/2.If A innovates and B does not,A earns $20 in revenue while B earns $0.If A innovates and B does likewise,both firms earn $15 in revenue.If neither firm innovates,both earn $5.If C = 15,which is the perfect equilibrium of the game?

A) A innovates, B does not.
B) A innovates, B innovates.
C) Neither firm innovates.
D) None of the preceding answers is correct.

Question 57

If you advertise and your rival advertises,you each will earn $5 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million.Which of the following is true?

A) A dominant strategy for firm A is to advertise.
B) A dominant strategy for firm B is to advertise.
C) A Nash equilibrium is for both firms to advertise.
D) All of the statements associated with this question are correct.

Question 58

Refer to the normal-form game of price competition in the payoff matrix below. $\begin{array}{c}\text { Firm B }\\\text { Firm A}\begin{array}{|l|l|l|} \hline & \text { Low Price } & \text { High Price } \\\hline & & \\\text { Low Price } & 0,0 & 50,-10 \\\hline & & \\\text { High Price } & -10,50 & 20,20\\\hline\end{array}\end{array}$ What is the maximum interest rate that can sustain collusion?

A) 30 percent
B) 15 percent
C) 66.7 percent
D) 20 percent

Question 59

A coordination problem arises whenever there:

A) is no Nash equilibrium in a game.
B) is a unique Nash equilibrium but it is not very desirable.
C) are multiple Nash equilibria.
D) are no dominant strategies for both players.

Question 60

Game theory suggests that,in the absence of patents,the privately motivated innovation decisions of firms might lead to:

A) too little innovation.
B) too much innovation.
C) the socially efficient level of innovation.
D) None of the preceding answers is correct.

Question 61

If you advertise and your rival advertises,you each will earn $4 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million. Which of the following is true?

A) A secure strategy for firm A is to not advertise.
B) A secure strategy for firm B is to advertise.
C) Firm A does not have a secure strategy.
D) None of the preceding answers is correct.

Question 62

If you advertise and your rival advertises,you each will earn $4 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million.Suppose this game is repeated for a finite number of times,but the players do not know the exact date at which the game will end.The players can earn profits of $10 each period as a Nash equilibrium to a repeated play of the game if the probability the game terminates at the end of any period is:

A) close to 1.
B) close to 0.
C) between 0 and 1.
D) All of the statements associated with this question are correct.

Question 63

The following provides information for a one-shot game. $\begin{array}{l}\quad\quad\quad\quad\quad\quad\text { Firm B}\\\text { Firm A}\begin{array}{|l|l|l|} \hline &\text { Low Price } & \text { High Price }\\\hline & & \\\text { Low Price } & (2,2) & (10,-8)\\\hline & & \\\text { High Price } & (-8,10) & (15,15)\\\hline\end{array}\end{array}$ What are the dominant strategies for firm A and firm B respectively?

A) (low price, high price)
B) (high price, low price)
C) (high price, high price)
D) Neither firm has a dominant strategy.

Question 64

The following provides information for a one-shot game. $\begin{array}{l}\quad\quad\quad\quad\quad\quad\text { Firm B}\\\text { Firm A}\begin{array}{|l|l|l|} \hline &\text { Low Price } & \text { High Price }\\\hline & & \\\text { Low Price } & (2,2) & (10,-8)\\\hline & & \\\text { High Price } & (-8,10) & (15,15)\\\hline\end{array}\end{array}$ What are secure strategies for firm A and firm B respectively?

A) (low price, low price)
B) (high price, low price)
C) (high price, high price)
D) Neither firm has a secure strategy.

Question 65

In the game depicted below,firms 1 and 2 must independently decide whether to charge high or low prices. $\begin{array}{c}\text { Firm 2}\\\text { Firm 1}\begin{array}{|l|l|l|} \hline &\text { High Price } & \text { Low Price }\\\hline & & \\\text { High Price } & (10,10) & (5,-5) \\\hline & & \\\text { Low Price } & (-5,5) & (0,0)\\\hline\end{array}\end{array}$ Which of the following are secure strategies for players 1 and 2,respectively?

A) (high price, high price)
B) (high price, low price)
C) (low price, high price)
D) (low price, low price)

Question 66

If you advertise and your rival advertises,you each will earn $3 million in profits.If neither of you advertises,you will each earn $7 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $10 million and the non-advertising firm will earn $1 million.If you and your rival plan to be in business for only one year,the Nash equilibrium is for your firm:

A) and your rival to advertise.
B) and your rival not to advertise.
C) to advertise and your rival not to advertise.
D) not to advertise and your rival to advertise.

Question 67

If you advertise and your rival advertises,you each will earn $5 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million.Suppose this game is repeated for a finite number of times,but the players do not know the exact date at which the game will end.The players can earn collusive profits as a Nash equilibrium to the repeated play of the game if the probability the game terminates in any period is:

A) 1.
B) greater than 1.
C) close to zero.
D) None of the preceding answers is correct.

Question 68

Consider the following innovation game: Firm A must decide whether or not to introduce a new product.Firm B must decide whether or not to clone firm A's product.If firm A introduces and B clones,then firm A earns $1 and B earns $10.If A introduces and B does not clone,then A earns $10 and B earns $2.If firm A does not introduce,both firms earn profits of 0.Which of the following is true?

A) The subgame perfect Nash equilibrium profits are ($10, $2).
B) It is not in A's interest to introduce.
C) Firm A does not care if B clones.
D) None of the preceding answers is correct.

Question 69

Which of the following is a correct statement?

A) A Nash equilibrium is always perfect.
B) A perfect equilibrium is always Nash.
C) A Nash equilibrium is always perfect in a multistage game.
D) None of the preceding answers is correct.

Question 70

Game theory is best applied to the analysis of:

A) perfect competition.
B) oligopoly.
C) monopoly.
D) All of the statements associated with this question are correct.

Question 71

When analyzing the behavior of oligopolists,which of the following is crucial for the success of game theoretic analysis?

A) Payoffs do not need to reflect the true payoffs of the oligopolists, they just need to be greater than or equal to zero.
B) Assume that oligopolists always move simultaneously.
C) Do not construct the payoffs of the oligopolists to be interdependent, as the payoff of one player usually does not affect the payoff of the other players.
D) Make sure the problem you are considering is of a one-shot or repeated nature, and you model it accordingly because the order in which players make decisions is important.

Question 72

If you advertise and your rival advertises,you each will earn $3 million in profits.If neither of you advertises,you will each earn $7 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $10 million and the non-advertising firm will earn $1 million.If you and your rival plan to be in business for 15 years,then the Nash equilibrium is for:

A) you and your rival to not advertise in any year.
B) you and your rival to advertise every year.
C) neither firm to advertise in early years, but to advertise in later years.
D) each firm to advertise in early years, but not advertise in later years.

Question 73

In the game depicted below,firms 1 and 2 must independently decide whether to charge high or low prices. $\begin{array}{c}\text { Firm 2}\\\text { Firm 1}\begin{array}{|l|l|l|} \hline &\text { High Price } & \text { Low Price }\\\hline & & \\\text { High Price } & (10,10) & (5,-5) \\\hline & & \\\text { Low Price } & (-5,5) & (0,0)\\\hline\end{array}\end{array}$ If player 1 charges a high price when player 2 charges a low price,then player 2 earns:

A) 10.
B) 5.
C) ?5.
D) 0.

Question 74

Which of the following is a correct statement about a Nash equilibrium in a two-player game?

A) The joint payoffs of the two players are highest compared to other strategy pairs.
B) A Nash equilibrium is always unique in real-world problems.
C) Given another player's strategy, no player can improve her welfare by unilaterally changing her strategy.
D) All of the statements associated with this question are correct.

Question 75

Management and a labor union are bargaining over how much of a $50 surplus to give to the union.The $50 is divisible up to one cent.The players have one shot to reach an agreement.Management has the ability to announce what it wants first,and then the labor union can accept or reject the offer.Both players get zero if the total amounts asked for exceed $50.Which of the following is a Nash equilibrium?

A) Management requests $50 and the labor union accepts $0.
B) Management requests $35 and the labor union accepts $10.
C) Management requests $20 and the labor union accepts $20.
D) Management requests $25 and the labor union accepts $10.

Question 76

If you advertise and your rival advertises,you each will earn $4 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million. Which of the following is true?

A) A dominant strategy for firm A is to advertise.
B) A dominant strategy for firm B is to advertise.
C) A Nash equilibrium is for both firms to advertise.
D) None of the preceding answers is correct.

Question 77

The following provides information for a one-shot game. $\begin{array}{l}\quad\quad\quad\quad\quad\quad\text { Firm B}\\\text { Firm A}\begin{array}{|l|l|l|} \hline &\text { Low Price } & \text { High Price }\\\hline & & \\\text { Low Price } & (2,2) & (10,-8)\\\hline & & \\\text { High Price } & (-8,10) & (15,15)\\\hline\end{array}\end{array}$ What are the Nash equilibrium strategies for this game?

A) (low price, low price)
B) (high price, high price)
C) (low price, low price) and (high price, high price)
D) None of the preceding answers is correct.

Question 78

In the game depicted below,firms 1 and 2 must independently decide whether to charge high or low prices. $\begin{array}{c}\text { Firm 2}\\\text { Firm 1}\begin{array}{|l|l|l|} \hline &\text { High Price } & \text { Low Price }\\\hline & & \\\text { High Price } & (10,10) & (5,-5) \\\hline & & \\\text { Low Price } & (-5,5) & (0,0)\\\hline\end{array}\end{array}$ A dominant strategy for firm 1 is:

A) high price.
B) low price.
C) different from firm 1's secure strategy.
D) low price and different from firm 1's secure strategy.

Question 79

If you advertise and your rival advertises,you each will earn $3 million in profits.If neither of you advertises,you will each earn $7 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $10 million and the non-advertising firm will earn $1 million.If you and your rival plan to hand your business down to your children,and this "bequest" goes on forever,then a Nash equilibrium when the interest rate is zero is for:

A) your firm to never advertise.
B) your firm to always advertise when your rival does, provided that the interest rate is sufficiently large.
C) each firm to not advertise until the rival does, and then to advertise forever provided the interest rate is sufficiently low.
D) each firm to advertise until the rival does not advertise, and then not advertise forever.

Question 80

Consider the following innovation game: Firm A must decide whether or not to introduce a new product.Firm B must decide whether or not to clone firm A's product.If firm A introduces and B clones,then firm A earns $1 and B earns $10.If A introduces and B does not clone,then A earns $10 and B earns $2.If firm A does not introduce,both firms earn profits of 0.How many Nash equilibria are there for this game?

A) 0
B) 1
C) 2
D) 0, but there are secure strategies.