Question 1

In game theory, a strategy
A)is useless, because firms are subject to bounded rationality.
B)is useful in static games, but not in dynamic games.
C)defines the specific actions a firm will make.
D)determines the payoff matrix of the game.

Accepted Answer

A strategy is a specific plan of action that a firm will take in order to achieve its objectives. It is an important concept in game theory, as it helps to determine the outcome of a game. Strategies can vary depending on the type of game being played, and can be influenced by factors such as the number of players, the available information, and the level of uncertainty in the game. Therefore, C is the best choice as it provides the most accurate definition of a strategy in game theory.

Question 2

Rock-paper-scissors (Roshambo)is an example of a ________ game.
A)simultaneous
B)sequential
C)dominant strategy
D)weakly dominant

Accepted Answer

Rock-paper-scissors is a simultaneous game, meaning both players make their choices at the same time without knowing the other player's choice. As a result, there is no dominant strategy in this game, and the best choice is to play randomly.

Question 3

A payoff matrix
A)shows the payoffs (i.e. bribes)required to government officials for firms undertaking specific actions.
B)details the actions each firm takes.
C)shows the payoffs to each firm for each possible outcome.
D)is optional in game theory.

Accepted Answer

A payoff matrix shows the payoffs to each firm for each possible outcome. Therefore, choice C is correct. Choice A is incorrect as it describes a different type of matrix. Choice B may be included in the matrix, but it alone does not provide the necessary information. Choice D is incorrect as the payoff matrix is a fundamental concept in game theory.

Question 4

A Nash equilibrium occurs when
A)players choose their best strategy given the strategies chosen by others.
B)the efficient allocation of resources is achieved by setting marginal revenue equal to marginal cost.
C)a monopolist is forced to produce the efficient level of output.
D)oligopolists cooperate with each other.

Accepted Answer

A Nash equilibrium occurs when each player chooses their best strategy given the strategies chosen by others. In other words, no player has an incentive to deviate from their current strategy given what others are doing. This is a stable outcome in game theory, and it is named after economist John Nash. B is incorrect because it describes the condition for allocative efficiency in a competitive market, not a Nash equilibrium. C is incorrect because a monopolist would not necessarily produce the efficient level of output without intervention. D is incorrect because cooperation among oligopolists would result in a different outcome, namely a collusive equilibrium. A Nash equilibrium occurs when each player in a game chooses their best strategy given the strategies chosen by others. In other words, no player can unilaterally improve their own payoff by changing their strategy, given the actions of the other players. This results in a stable outcome where no player has an incentive to deviate from their chosen strategy.

Question 5

In a static game, firms
A)compete multiple times until there is a winner.
B)compete only once.
C)must have complete information.
D)act sequentially.

Accepted Answer

In a static game, firms compete only once. This means that their strategies and decisions are made simultaneously, without knowledge of the other firm's actions. Therefore, it is a one-time decision that has no opportunity for repetition or adjustment based on the competitor's actions.

Question 6

Common knowledge in game theory
A)is information known to be known by all players.
B)is required for dynamic games.
C)is complete.
D)Both A and B.

Accepted Answer

Common knowledge in game theory refers to information that is known by all players, and importantly, all players know that all others also know it, and so on ad infinitum. This concept does not necessarily require the game to be dynamic nor does it imply completeness of information.

Question 7

One interesting feature of a prisoner's dilemma game is that
A)non-cooperative behavior leads to lower payoffs than cooperative behavior.
B)there is never a dominated strategy.
C)individuals behave irrationally when they behave non-cooperatively.
D)cooperative behavior leads to lower payoffs than non-cooperative behavior.

Accepted Answer

In a prisoner's dilemma game, both players have a dominant strategy of defecting (non-cooperative behavior), which leads to a worse outcome for both players compared to if they had both cooperated. This is why non-cooperative behavior leads to lower payoffs than cooperative behavior.

Question 8

Firms in an oligopolistic market ________ because they are ________.
A)attempt to predict the behavior of other firms; strategically interdependent
B)form cartels; unable to predict the behavior of other firms
C)ignore other firms' actions; strategically independent
D)advertise; unable to differentiate their products

Accepted Answer

In an oligopolistic market, firms are strategically interdependent, meaning that they take into account the actions of other firms when making their own business decisions. As a result, they attempt to predict the behavior of other firms in order to stay competitive and maintain their market share. This is why choice A is the best answer. Choices B, C, and D are not accurate representations of how firms operate in an oligopolistic market.

Question 9

Dominant strategies
A)are always present in simultaneous games.
B)result in a prisoners' dilemma.
C)result in one firm winning and the other losing.
D)None of the above.

Accepted Answer

Dominant strategies can be present in simultaneous games, but not always. Additionally, the result of dominant strategies does not necessarily have to be a prisoners' dilemma or one firm winning and the other losing. Therefore, none of the options presented are accurate.

Question 10

A game includes
A)a strategy.
B)payoffs.
C)rules.
D)All of the above.

Accepted Answer

All of the above are essential components of a game. A strategy refers to a player's plan of action, payoffs are the outcomes or rewards associated with different choices or actions, and rules establish the framework and requirements for how the game is played. Without these components, a game cannot exist.

Question 11

The term prisoners' dilemma refers to a game in which
A)there are no Nash equilibria.
B)there are no dominant strategies.
C)the payoff from both players playing their dominant strategies is the same for each player.
D)the payoff from both players playing their dominant strategies is not the highest payoff possible.

Accepted Answer

In a prisoners' dilemma game, both players have a dominant strategy to defect, which results in a lower payoff than if they both cooperate. Therefore, the payoff from both players playing their dominant strategies is not the highest payoff possible.

Question 12

Which of the following is a simultaneous decision game?
A)Tic-tac-toe
B)Chess
C)Poker
D)Rock-paper-scissors (Roshambo)

Accepted Answer

Rock-paper-scissors (Roshambo) is a simultaneous decision game because both players choose their action at the same time and reveal it simultaneously. The other options are not simultaneous decision games as they involve players taking turns and making decisions based on their opponent's previous moves.

Question 13

When both firms have dominant strategies
A)the outcome is called a dominant strategy solution.
B)joint profits are maximized.
C)there are multiple Nash equilibria.
D)there is a prisoners' dilemma.

Accepted Answer

When both firms have dominant strategies, it means that they both have a clear best action regardless of what their competitor does. In this case, the outcome is called a dominant strategy solution, where each firm plays its dominant strategy and the outcome is the most efficient one for both firms.

Question 14

A dominant strategy
A)maximizes the joint profit of the players in the game.
B)is the player's best response to all possible strategies of the other player.
C)cannot exist when there is a Nash equilibrium.
D)only exists when the game is limited to two players.

Accepted Answer

A dominant strategy is a player's best response to all possible strategies of the other player. It does not necessarily maximize the joint profit of the players and can exist in games with more than two players. It can coexist with a Nash equilibrium, but a Nash equilibrium does not require a dominant strategy for any player.

Question 15

A dominated strategy
A)exists when one firm is weaker than another.
B)only occurs in a mixed strategy scenario.
C)is one that is never used by a rational actor.
D)is a characteristic of games with multiple Nash equilibria.

Accepted Answer

A dominated strategy is one that is never used by a rational actor because it always leads to a worse outcome compared to choosing another strategy. Therefore, it is always in the player's best interest to choose a non-dominated strategy. Options A, B, and D are incorrect as they do not correctly describe a dominated strategy.

Question 16

A player's best response is
A)the strategy that maximizes his payoff given what he thinks the other player will do.
B)a dominant strategy.
C)impossible to find when there isn't a Nash equilibrium.
D)a way to avoid the prisoners' dilemma.

Accepted Answer

A player's best response is the strategy that maximizes his payoff given what he thinks the other player will do. It takes into account the opponent's likely moves and determines the best move to maximize one's own payoff. Dominant strategy is when one player has a clear best response regardless of what the opponent does, but not every game has a dominant strategy. Best response does not necessarily solve the prisoners' dilemma, but it can help players make rational decisions in the game.

Question 17

Mutually Assured Destruction was a standing policy during the Cold War, in which the United States and the USSR maintained and expanded nuclear arsenals beyond practical levels. What could explain such a phenomenon?
A)Insane public officials who were bent on world domination.
B)A prisoner's dilemma.
C)A leader-follower type game.
D)Tacit collusion.

Accepted Answer

Mutually Assured Destruction can be explained by the concept of the prisoner's dilemma. Both the US and the USSR had the incentive to develop and expand their nuclear arsenals for fear of being attacked by the other side. This led to a cycle of arms buildup that neither side could easily back down from without risking vulnerability. Each side expected the other to increase their nuclear capabilities, so they felt they had to as well. This created a situation where both sides were mutually deterred from launching a nuclear attack, because the resulting retaliation would lead to the complete destruction of both countries.

Question 18

A strategy is dominant if
A)it yields a greater payoff than any other player receives.
B)it yields a payoff at least as large as that from any other strategy, regardless of the actions of other players.
C)the player cannot gain by changing strategy, assuming that no other player changes strategy.
D)it is part of a Nash equilibrium.

Accepted Answer

A dominant strategy yields a payoff at least as large as that from any other strategy the player could use, no matter what the other players do. This definition does not necessarily relate to the payoffs other players receive, changing strategies, or being part of a Nash equilibrium.

Question 19

A game in economics is defined as
A)something that is shown on ESPN.
B)competition in which strategic decision making is integral.
C)competition in general.
D)an actual strategy chosen by one or more economic agents.

Accepted Answer

The definition of a game in economics specifically involves competition that requires strategic decision making, making option B the best choice. Option A is incorrect as ESPN does not play a role in defining economic games. Option C is too general as it does not include the strategic decision-making aspect. Option D is incorrect as a game in economics may involve multiple strategies chosen by agents, not just one. A game in economics refers to a strategic competition, which involves decision-making skills by one or more economic agents. It is not limited to being shown on a particular channel or any general competition. Therefore, option B is the best choice.

Question 20

Common knowledge in game theory
A)is information known by all players.
B)is required for static games.
C)does not impact the outcome of the game, since everyone has the information.
D)Both A and B.

Accepted Answer

Common knowledge refers to information that is known by all players in the game. Hence, option A is correct. Option B is incorrect, as common knowledge applies to both static and dynamic games. Option C is incorrect, as common knowledge can have a significant impact on the outcome of the game since it affects the players' strategies and decisions.

Quiz 12: Game Theory and Business Strategy

In game theory, a strategy

Rock-paper-scissors (Roshambo) is an example of a ________ game.

A payoff matrix

A Nash equilibrium occurs when

In a static game, firms

Common knowledge in game theory

One interesting feature of a prisoner's dilemma game is that

Firms in an oligopolistic market because they are .

Dominant strategies

A game includes

The term prisoners' dilemma refers to a game in which

Which of the following is a simultaneous decision game?

When both firms have dominant strategies

A dominant strategy

A dominated strategy

A player's best response is

Mutually Assured Destruction was a standing policy during the Cold War, in which the United States and the USSR maintained and expanded nuclear arsenals beyond practical levels. What could explain such a phenomenon?

A strategy is dominant if

A game in economics is defined as

Common knowledge in game theory