Question 1

In a Stackelberg duopoly,

Accepted Answer

In a Stackelberg duopoly, one firm is the leader and the other is the follower. The leader moves first and chooses its output level, which the follower observes before choosing its own output level. This sequential game structure gives the leader an advantage, as it can take into account the follower's response when making its decision. Therefore, the correct choice is D, which states that one firm is the leader, and the other is the follower.

Question 2

(Consider This) The prisoner's dilemma is generally demonstrated through

Accepted Answer

The prisoner's dilemma is a concept in game theory that shows how two individuals may not cooperate even if it is in their best interest to do so. Players are given a set of options and have to choose whether to cooperate or defect. The best outcome occurs when both players cooperate, but the temptation to defect is high because the payoff is greater if one player chooses to defect while the other cooperates.

Question 3

In game theory, the credibility of a threat

Accepted Answer

The credibility of a threat influences the degree of cooperation between two rivals in a game. If a player makes a credible threat, the opponent is more likely to choose a strategy that avoids triggering that threat, which can lead to more cooperation. Alternatively, if a threat is not credible, the opponent may choose to ignore it and continue pursuing their preferred strategy, which can lead to less cooperation. The credibility of a threat is therefore an important factor in determining the level of cooperation between players in a game.

Question 4

Suppose that currently there are no airlines serving the city of South Podunk. Both Accommodating Airlines and Friendly Flyers are looking to enter that market. (They are the only two.) The figure shows in extensive form the possible outcomes of the two firms' decisions. The payoffs represent, in thousands per month, the profit (or loss) the firm will realize from its decision. Assuming the two firms have perfect information about this game, what can we conclude about the existence of a Nash equilibrium?

Accepted Answer

The answer of Suppose that currently there are no airlines...

Question 5

(Last Word) Which market structure best characterizes the various Internet markets?

Accepted Answer

The answer of (Last Word) Which market structure best characterizes...

Question 6

The primary advantage of displaying a game in extensive form instead of strategic form is that extensive form allows one to

Accepted Answer

Extensive form displays the sequence of actions taken by each player, whereas strategic form only shows each player's possible strategies and their payoffs. This allows for a more detailed analysis of the game and can help identify subgame perfect equilibrium, which cannot be found in strategic form alone.

Question 7

Suppose that currently there are no airlines serving the city of South Podunk. Both Accommodating Airlines and Friendly Flyers are looking to enter that market. (They are the only two.) The figure shows in extensive form the possible outcomes of the two firms' decisions. The payoffs represent, in thousands per month, the profit (or loss) the firm will realize from its decision. What is the solution to this extensive form game?

Accepted Answer

The answer of Suppose that currently there are no airlines...

Question 8

(Last Word) Microsoft

Accepted Answer

While Microsoft once dominated the PC market, their focus has shifted to gaining market share in the internet, smartphone, and tablet markets. This is because the PC market has been shrinking in recent years. They are competing in these markets with companies like Google and Apple. Option A is incorrect as Microsoft does not dominate the primary internet markets. Option C is also incorrect as there is no evidence to suggest Microsoft colluded with Amazon and Google to fix online advertising prices. Option D is incorrect as Microsoft does not hold a near-monopoly in the internet search market, as Google dominates this market.

Question 9

(Last Word) In the Internet search market,

Accepted Answer

According to the statement, Google holds about 64 percent of the internet search market share, while Bing and Yahoo together hold about 34 percent, making option C the correct choice. Option A is incorrect as the statement mentions that the market shares are not equal, and option B is faulty mathematically as the maximum value of the Herfindahl index is 10,000, which can only occur when there is a monopoly. Finally, option D is incorrect as there is no mention of government subsidies providing search engines for free.

Question 10

(Last Word) Major Internet-related firms such as Google, Apple, Amazon, Microsoft, and Facebook each have an area of the market that they dominate. Which of the following is true about their interaction in the market?

Accepted Answer

Major internet-related firms like Google, Apple, Amazon, Microsoft, and Facebook do not collude or behave according to a price leadership model. They are fiercely competitive, looking for opportunities to gain profits by expanding into each other's markets. They regularly introduce new products and services to attract customers, which results in intense competition among them.

Question 11

The terminal nodes in an extensive form representation

Accepted Answer

Terminal nodes represent the possible outcomes of a game, i.e. the end-points of the game tree where players receive their payoffs. Therefore, option D is the best choice. Option A is incorrect as Nash equilibrium is not the only criterion for the presence of a terminal node. Option B is incorrect as starting points are represented by initial nodes, and option C is incorrect as strategies are represented by decision nodes.

Question 12

(Consider This) The prisoner's dilemma reveals that

Accepted Answer

The prisoner's dilemma is a scenario in game theory where two individuals acting in their own self-interest do not achieve the optimal outcome. This scenario reveals that sometimes, even if it appears to be in an individual's best interest to act selfishly, everyone could be worse off than if they had cooperated. Therefore, the best choice is D, which says that sometimes when individuals act independently in their own self-interest, everyone is worse off than if they had cooperated.

Question 13

(Last Word) Which of the following statements best describes the Internet market structure?

Accepted Answer

The Internet market structure is characterized by a few large firms like Google, Facebook, and Amazon, each dominating specific sectors but also competing to expand their influence into other areas.

Question 14

Which of the following best describes a Nash equilibrium?

Accepted Answer

Nash equilibrium is a situation in which both competitors select their best strategy given the strategy of their rival. It is a stable outcome in a non-cooperative game where each player does not have the incentive to change their strategy individually. Therefore, option D is the correct answer as it describes the Nash equilibrium effectively.

Question 15

(Consider This) The Native American arts and crafts story illustrates the twin ideas of

Accepted Answer

The answer of (Consider This) The Native American arts and...

Question 16

Backward induction in an extensive form game

Accepted Answer

Backward induction is a technique used to determine the Nash equilibrium of a game by starting at the end of the game and working backwards. The method involves determining the best strategies for a player at each decision node by considering the possible outcomes and payoffs. By iteratively working backwards through the game, the Nash equilibrium of the game can be identified. Therefore, option B is the correct choice. The other options do not accurately describe the purpose of backward induction.

Question 17

Suppose that currently there are no airlines serving the city of South Podunk. Both Accommodating Airlines and Friendly Flyers are looking to enter that market. (They are the only two.) The figure shows in extensive form the possible outcomes of the two firms' decisions. The payoffs represent, in thousands per month, the profit (or loss) the firm will realize from its decision. What does this extensive form game indicate about the decision to enter the South Podunk market?

Accepted Answer

Both airlines are better off by entering the market as they both have positive payoffs in the event that the other firm also enters. This is known as a mutual benefit scenario or a coordination game. Neither firm has a dominant strategy and there is no first-mover advantage. Therefore, both firms are better off by entering the market together.

Question 18

Game trees are most useful for

Accepted Answer

Game trees are a visual representation used to map out sequential games, in which players make decisions in a specific order. They allow for the analysis of various decision points and outcomes, and help determine the best course of action for each player in the game. While game trees can also be used to identify dominant strategies and determine the possible outcomes of a game, their primary purpose is to map out sequential games. Nash equilibrium is a concept used to describe a set of strategies in which no player can improve their outcome by unilaterally changing their strategy, and is not directly related to game trees. Similarly, determining whether a game is positive-sum, zero-sum, or negative-sum does not require the use of game trees, but rather an understanding of the payoff structure of the game.

Question 19

Which of the following terms best defines the choices available to the players of a game?

Accepted Answer

Decision nodes represent the points in a game where a player must make a decision, and the choices available to the player are known as the player's "decision set." Therefore, option C best defines the choices available to the players of a game. Option A refers to the end points of a game tree, option B describes a decision-making method used to solve a game, and option D refers to a solution concept in game theory.

Question 20

(Consider This) The story about three sellers of Native American arts and crafts best illustrates the idea of

Accepted Answer

The story about three sellers of Native American arts and crafts involves each seller considering their competitors' pricing and adjusting their own prices strategically to compete while still maintaining profitability. This demonstrates strategic behavior, which is the idea of considering the actions of competitors and making decisions accordingly. The other options, excess capacity, the role of advertising, and product differentiation, are not directly related to the story.

Quiz 14: Oligopoly and Strategic Behavior