Question 1

Consider the following decision tree.This tree illustrates hypothetical payoffs to General Mills (GM)and Quaker Oats (Q)if they engage in a price war. 
If GM cuts prices,the greatest potential gain is:

Accepted Answer

If GM cuts prices, they have two possible outcomes: 
1) Quaker Oats matches the price cut and both companies make $10 million profit each. 
2) Quaker Oats does not match the price cut and GM gains a larger market share, resulting in a profit of $15 million per year.

Therefore, the greatest potential gain for GM is $15 million per year, which is option A.

Question 2

The difference between game trees and decision trees is:

Accepted Answer

Game trees are used to model strategic situations involving multiple players and their interactive payoffs. Decision trees, on the other hand, are useful in situations where an individual or organization faces a decision-making problem with uncertain outcomes. Decision trees describe actions that depend on the state of nature, but not necessarily on the behavior of rivals, making option C the correct answer. Options A, B, and D are incorrect as they do not accurately describe the differences between game trees and decision trees.

Question 3

Which pair of strategies would competing firms A and B choose given this payoff matrix?

Accepted Answer

C

Question 4

If player 1 has a dominant strategy,then player 2:

Accepted Answer

If player 1 has a dominant strategy, player 2 may or may not have a dominant strategy. Having a dominant strategy is not a requirement for reaching a Nash equilibrium, so option B is incorrect. Option D is not true because even if player 2 does not have a dominant strategy, they can still reach an optimal solution through other means. Option E does not make sense because a player cannot block another player's dominant strategy - it is dominant precisely because it is the best strategy no matter what the other player does.

Question 5

By definition,a Nash equilibrium in a duopoly is the situation in which each player:

Accepted Answer

In a Nash equilibrium, each player plays the best strategy given the other's strategies, meaning neither player can improve their payoff by unilaterally changing their strategy. While playing a dominant strategy can lead to a Nash equilibrium, it is not a requirement. Similarly, getting the highest possible payoff and being happy with the outcome are related to a Nash equilibrium but not necessarily the defining characteristics. Finally, option D is incorrect as a Nash equilibrium does not necessarily require players to avoid lowering the opponent's payoff, it only requires them to play the best strategy given the other's choices.

Question 6

Potential entrant E threatens to enter incumbent I's market and I threatens to lower price to P should E enter.It is crucial for E to believe I's threat that:

Accepted Answer

The answer of Potential entrant E threatens to enter incumbent...

Question 7

Game theory is useful for understanding oligopoly behavior because:

Accepted Answer

Game theory is particularly useful for understanding oligopoly behavior because in an oligopoly market structure, the actions of one firm depend on the reactions of other firms. The firms recognize that because there are only a few players in the market, mutual interdependence is important. Game theory helps to analyze the strategic behavior of firms in such interdependent situations.

Question 8

A Nash equilibrium occurs when:

Accepted Answer

Nash equilibrium occurs when each player believes it is doing the best it can given the behavior of rivals. It does not necessarily involve dominant strategies or equal payoffs, and players' payoffs can be affected by the actions of rivals. Therefore, option C is the correct answer.

Question 9

A dominant strategy is one that:

Accepted Answer

A dominant strategy is one that beats all others regardless of the opponent's choice. Therefore, the best choice is the one with a dominant strategy that ensures a win regardless of what the opponent chooses.

Question 10

In a two-player game in which each player has four options,how many outcomes can there be?

Accepted Answer

Each player has 4 options, so the total number of outcomes is 4*4=16. Therefore, the best choice is D) 16.

Question 11

Getting to a Nash equilibrium requires:

Accepted Answer

A Nash equilibrium is reached when each player chooses their best response given the other players' strategies, without needing cooperation or knowledge of the opponent's payoffs.

Question 12

Useful strategies to deter entry include:

Accepted Answer

Increasing advertising can create a stronger brand loyalty or awareness, making it harder for new entrants to compete. Increasing capacity can lead to economies of scale, lowering the unit cost and making it less attractive for new entrants due to the high initial investment required.

Question 13

Consider the following decision tree.This tree illustrates hypothetical payoffs to General Mills (GM)and Quaker Oats (Q)if they engage in a price war.If GM cuts prices and Quaker Oats follows this behavior:

Accepted Answer

The best choice for GM is to cut prices, as this will result in a lower loss of $2 million compared to the potential loss of $10 million if they do not cut prices and Quaker Oats does. For Quaker Oats, the best choice is to not cut prices, as this will result in a loss of $5 million, which is better than the potential loss of $10 million if they follow GM's price cut. Therefore, the best choice(s) for the firms are as follows:

GM: Cut prices
Quaker Oats: Do not cut prices.

Question 14

Given the following payoff matrix,what will A's profits be?

Accepted Answer

The answer of Given the following payoff matrix,what will A's...

Question 15

Radio City promises if you can find a lower advertised price for anything you bought at Radio City,anywhere in town within 30 days,it will return the difference plus 20%.A sophisticated game theoretic analysis suggests Radio City may be:

Accepted Answer

The answer of Radio City promises if you can find...

Question 16

Given the following payoff matrix,who has a dominant strategy?

Accepted Answer

The answer of Given the following payoff matrix,who has a...

Question 17

If a firm has a dominant strategy:

Accepted Answer

A dominant strategy is a strategy that is always the best option for a player regardless of the strategies chosen by the other players. Therefore, the optimal strategy of a firm with a dominant strategy is independent of the play of rivals.

Question 18

Which pair of strategies would cooperative cartel members A and B choose given this payoff matrix?

Accepted Answer

The answer of Which pair of strategies would cooperative cartel...

Question 19

A feasible strategy set is:

Accepted Answer

A feasible strategy set should include all actions that have a nonzero probability of occurring. This allows for a full range of options and flexibility in decision making. Excluding certain actions with lower probabilities may constrain the firm's potential profits or limit their ability to respond to unexpected events.

Question 20

A player in a game theoretic model is:

Accepted Answer

A player in a game theoretic model is a decision-making entity at a firm involved in a strategic game. Therefore, choice B is the best option as it directly refers to such an entity. Choices A, C, D, and E are not accurate as they do not necessarily involve decision-makers participating in a strategic game.

Quiz 12: Game Theory

Consider the following decision tree.This tree illustrates hypothetical payoffs to General Mills (GM) and Quaker Oats (Q) if they engage in a price war. If GM cuts prices,the greatest potential gain is: