Question 1

Scenario: Suppose two soda brands, Mountain Dew and Mello Yello, are trying to decide whether to launch advertising campaigns for their respective products. These decisions will be taken simultaneously, the brands will not be cooperating, and we will assume each brand's strategist knows her own and her opponent's payoffs in all cases. The payoff matrix for this game is shown below.
 
-Refer to the scenario above.Does Mello Yello have a dominant strategy?
A) No.
B) Yes. Regardless of whether Mountain Dew chooses to advertise, Mello Yello's profits are always highest if it advertises.
C) Yes. Regardless of whether Mountain Dew chooses to advertise, Mello Yello's profits are always highest if it does not advertise.
D) Not enough information is provided to answer the question.

Accepted Answer

A dominant strategy is one that results in the highest payoff for a player no matter what the other player does. In this scenario, if Mello Yello's profits are always highest when it chooses to advertise, regardless of Mountain Dew's actions, then advertising is Mello Yello's dominant strategy.

Question 2

A ________ is a complete plan describing how a player will act.
A) strategy
B) payoff
C) hypothesis
D) policy

Accepted Answer

A strategy is a complete plan describing how a player will act, while a payoff is the reward received by a player at the end of a game or decision-making situation, a hypothesis is a testable prediction or explanation of a phenomenon, and a policy is a course of action adopted and pursued by a government, organization, or individual.

Question 3

Which of the following is true of a payoff matrix?
A) It represents only the best response of each player in a game.
B) It takes into account all relevant costs and benefits associated with each action of the players.
C) It shows the payments made to the owners of each factor of production for the production of a good.
D) It does not represent all the costs and benefits associated with the choices of the players.

Accepted Answer

A payoff matrix takes into account all relevant costs and benefits associated with each action of the players in a game. It shows the outcomes and payoffs associated with each possible combination of choices made by the players. Therefore, option B is true of a payoff matrix. Option A is not true, as a payoff matrix can also show suboptimal choices made by players. Option C is incorrect, as a payoff matrix does not relate to factor payments. Option D is also not true, as a payoff matrix attempts to represent all the relevant costs and benefits associated with the choices of the players.

Question 4

In a simultaneous-move game,________.
A) each player has to make his choice after knowing his rival's choice
B) each player has to make his choice without knowing his rival's choice
C) there is always more than one Nash equilibrium
D) there is always more than one dominant strategy equilibrium

Accepted Answer

In a simultaneous-move game, each player has to make his choice without knowing his rival's choice. This means that the players are acting at the same time and cannot take into consideration the reaction of the other player. Therefore, they have to make their choice based on their own preferences and beliefs about the other player's likely move.

Question 5

A payoff matrix shows the ________.
A) various combinations of inputs required to produce a good
B) return from each action that players can take in a game
C) different combinations of two goods that can be bought with a given income
D) payments made to the owners of each factor of production for the production of a good

Accepted Answer

A payoff matrix shows the return (or payoffs) from each action that players can take in a game. It is a tool used in game theory to analyze and predict the outcomes of strategic interactions between players. The best choice(s) in a game can be determined by analyzing the payoffs for each option and selecting the one that yields the highest payoff.

Question 6

Scenario: Suppose two soda brands, Mountain Dew and Mello Yello, are trying to decide whether to launch advertising campaigns for their respective products. These decisions will be taken simultaneously, the brands will not be cooperating, and we will assume each brand's strategist knows her own and her opponent's payoffs in all cases. The payoff matrix for this game is shown below.
 
-Refer to the scenario above.Does Mountain Dew have a dominant strategy?
A) No.
B) Yes. Regardless of whether Mello Yello chooses to advertise, Mountain Dew's profits are always highest if it advertises.
C) Yes. Regardless of whether Mello Yello chooses to advertise, Mountain Dew's profits are always highest if it does not advertise.
D) Not enough information is provided to answer the question.

Accepted Answer

Mountain Dew has a dominant strategy if one of its strategies always results in the highest profit regardless of the strategy chosen by Mello Yello. If advertising always leads to higher profits for Mountain Dew, regardless of Mello Yello's actions, then advertising is Mountain Dew's dominant strategy.

Question 7

Scenario: Suppose two soda brands, Mountain Dew and Mello Yello, are trying to decide whether to launch advertising campaigns for their respective products. These decisions will be taken simultaneously, the brands will not be cooperating, and we will assume each brand's strategist knows her own and her opponent's payoffs in all cases. The payoff matrix for this game is shown below.
 
-Refer to the scenario above.If both brands choose to advertise,their respective payoffs are ________.
A) profits of 10 cents per can for Mountain Dew and of 5 cents per can for Mello Yello
B) profits of 15 cents per can for Mountain Dew and of 0 cents per can for Mello Yello
C) profits of 6 cents per can for Mountain Dew and of 8 cents per can for Mello Yello
D) profits of 10 cents per can for Mountain Dewand of 2 cents per can for Mello Yello

Accepted Answer

Looking at the payoff matrix, the payoffs for both brands when they both advertise are listed in the bottom right cell as 10 cents for Mountain Dew and 5 cents for Mello Yello. This is the highest payoff for both brands if they choose to advertise simultaneously. Therefore, the best choice for both brands is to advertise.

Question 8

Which of the following is likely to use the concepts of game theory?
A) Household budgeting
B) The exit decisions of competitive firms in the long run
C) International trade negotiation
D) The pricing decision of a firm operating in a competitive market

Accepted Answer

Game theory is commonly used to analyze and predict the outcomes of strategic interactions between two or more parties, which makes it highly applicable to international trade negotiations. The other options are mainly related to microeconomics and do not involve strategic interactions between parties, making them less likely to use game theory.

Question 9

Scenario: Suppose two soda brands, Mountain Dew and Mello Yello, are trying to decide whether to launch advertising campaigns for their respective products. These decisions will be taken simultaneously, the brands will not be cooperating, and we will assume each brand's strategist knows her own and her opponent's payoffs in all cases. The payoff matrix for this game is shown below.
 
-Refer to the scenario above.Is there a dominant strategy equilibrium?
A) No
B) Yes: Mountain Dew does not advertise, Mello Yello does not advertise
C) Yes: Mountain Dew advertises, Mello Yello advertises
D) Yes: Mountain Dew advertises, Mello Yello does not advertise

Accepted Answer

A dominant strategy equilibrium occurs when each player's best response does not change regardless of what the other player does. In this scenario, if both Mountain Dew and Mello Yello find their best strategy is to advertise regardless of the other's action, it indicates a dominant strategy equilibrium where both choose to advertise.

Question 10

Scenario: Contiguous states often use tax policy to attract residents, firms, and economic activity. These "tax competitions" between states can be modeled with game theory. Suppose New Jersey currently has a state sales tax of 7 percent and Pennsylvania has a state sales tax of 6 percent. The game shown below models the effect of a reduction in each state's sales tax rate to 3 percent on each state's sales tax revenue. Assume the motivation of each state is to maximize tax revenue. The first number in a cell is the payoff to New Jersey; the second number is the payoff to Pennsylvania.
  
(Source: John Greenwald, "A No-Win War Between the States," Time, April 8, 1996, 44-45.
-Refer to the scenario above.Is there a set of payoffs that is superior to the payoffs realized at the dominant strategy equilibrium?
A) No.
B) Yes, New Jersey maintains its sales tax rate, realizing $18 million in tax revenues, and Pennsylvania lowers its sales tax rate, realizing $22 million in tax revenues.
C) Yes, New Jersey maintains its sales tax rate, realizing $24 million in tax revenues, and Pennsylvania also maintains its sales tax rate, realizing $20 million in tax revenues.
D) Yes, New Jersey lowers its sales tax rate, realizing $26 million in tax revenues, and Pennsylvania maintains its sales tax rate, realizing $14 million in tax revenues.

Accepted Answer

The correct answer is C because it describes a scenario where both states maintain their sales tax rates, resulting in a higher combined total of tax revenues ($44 million) compared to any unilateral decision to lower the tax rate by either state. This suggests a cooperative outcome that is superior to the competitive equilibrium, assuming the dominant strategy leads to both states lowering their rates for lesser combined revenue.

Question 11

A game is called a simultaneous-move game if ________.
A) players choose their actions at the same time
B) one player chooses her action after the other player makes a move
C) players choose mixed strategies to play the game
D) players choose their dominant strategies to play the game

Accepted Answer

In the simultaneous-move game, players choose their actions at the same time without knowing the other players' choices. This type of game is also known as a strategic game or a game of complete information. Option B is incorrect because it refers to a sequential game. Options C and D are incorrect because they do not necessarily apply to simultaneous-move games.

Question 12

Scenario: Contiguous states often use tax policy to attract residents, firms, and economic activity. These "tax competitions" between states can be modeled with game theory. Suppose New Jersey currently has a state sales tax of 7 percent and Pennsylvania has a state sales tax of 6 percent. The game shown below models the effect of a reduction in each state's sales tax rate to 3 percent on each state's sales tax revenue. Assume the motivation of each state is to maximize tax revenue. The first number in a cell is the payoff to New Jersey; the second number is the payoff to Pennsylvania.
  
(Source: John Greenwald, "A No-Win War Between the States," Time, April 8, 1996, 44-45.
-Refer to the scenario above.Is there a dominant strategy equilibrium?
A) No.
B) Yes, New Jersey lowers its sales tax rate to 3 percent and Pennsylvania maintains its sales tax rate.
C) Yes, both New Jersey and Pennsylvania maintain their sales tax rates.
D) Yes, both New Jersey and Pennsylvania lower their sales tax rates to 3 percent.

Accepted Answer

Both New Jersey and Pennsylvania have a dominant strategy to lower their sales tax rates to 3 percent. This results in a Nash equilibrium where neither state can improve its payoff by changing its strategy, given the other state's strategy. Both states would see a decrease in tax revenue, but not as much as if they maintained their high tax rates while the other state lowered theirs. Therefore, the best choice for both states is to lower their sales tax rates to 3 percent.

Question 13

Scenario: Contiguous states often use tax policy to attract residents, firms, and economic activity. These "tax competitions" between states can be modeled with game theory. Suppose New Jersey currently has a state sales tax of 7 percent and Pennsylvania has a state sales tax of 6 percent. The game shown below models the effect of a reduction in each state's sales tax rate to 3 percent on each state's sales tax revenue. Assume the motivation of each state is to maximize tax revenue. The first number in a cell is the payoff to New Jersey; the second number is the payoff to Pennsylvania.
  
(Source: John Greenwald, "A No-Win War Between the States," Time, April 8, 1996, 44-45.
-Refer to the scenario above.Does New Jersey have a dominant strategy?
A) No.
B) Yes. Regardless of whether Pennsylvania decides to lower its sales tax rate, New Jersey will always gain more revenue by lowering their sales tax rate to 3 percent.
C) Yes. Regardless of whether Pennsylvania decides to lower its sales tax rate, New Jersey will always gain more revenue by maintaining their sales tax rate at 7 percent.
D) Not enough information is provided to answer the question.

Accepted Answer

A dominant strategy is one that results in the highest payoff for a player, no matter what the other player does. In this scenario, if New Jersey gains more revenue by lowering their sales tax rate to 3 percent regardless of Pennsylvania's actions, it means lowering the sales tax rate to 3 percent is New Jersey's dominant strategy.

Question 14

Which of the following games is a simultaneous-move game?
A) In a Senate race, an incumbent senator (from a rightist party) runs against a challenger (from a leftist party)
B) The game of chess
C) The rock-paper-scissor game
D) The game of poker

Accepted Answer

In a simultaneous-move game, each player makes their decision without knowing the other player's decision. In the rock-paper-scissor game, both players make their move at the same time without knowing the opponent's move, making it a simultaneous-move game. The other options are not simultaneous-move games. In option A, a Senate race election is sequential, as the outcome of the first round influences the choices in the second round. In option B, chess is a turn-based game where players move one piece at a time. In option D, poker is also sequential, where players make their moves in a specified order.

Question 15

Which of the following games is not a simultaneous-move game?
A) A tourist bargains with a local vendor for the price of souvenirs on a beach in the Dominican Republic.
B) Two bidders place a bid in a sealed envelope during an auction. The highest bidder wins the auction.
C) Two drivers drive toward each other on a collision course; the first to swerve loses.
D) Ann and Bob must meet at 8 P.M. However, there are two possible meeting points, and they cannot communicate before the meeting.

Accepted Answer

In a simultaneous-move game, players make their decisions at the same time without knowledge of the other players' actions. A tourist bargaining with a local vendor involves back-and-forth negotiation, which is sequential rather than simultaneous.

Question 16

Scenario: Contiguous states often use tax policy to attract residents, firms, and economic activity. These "tax competitions" between states can be modeled with game theory. Suppose New Jersey currently has a state sales tax of 7 percent and Pennsylvania has a state sales tax of 6 percent. The game shown below models the effect of a reduction in each state's sales tax rate to 3 percent on each state's sales tax revenue. Assume the motivation of each state is to maximize tax revenue. The first number in a cell is the payoff to New Jersey; the second number is the payoff to Pennsylvania.
  
(Source: John Greenwald, "A No-Win War Between the States," Time, April 8, 1996, 44-45.
-Refer to the scenario above.Does Pennsylvania have a dominant strategy?
A) No.
B) Yes. Regardless of whether New Jersey decides to lower its sales tax rate, Pennsylvania will always gain more revenue by lowering their sales tax rate to 3 percent.
C) Yes. Regardless of whether New Jersey decides to lower its sales tax rate, Pennsylvania will always gain more revenue by maintaining their sales tax rate at 6 percent.
D) Not enough information is provided to answer the question.

Accepted Answer

Pennsylvania has a dominant strategy to lower its sales tax rate to 3 percent regardless of what New Jersey does. This is because if New Jersey also lowers its sales tax rate, Pennsylvania will still gain more revenue by lowering its tax rate than by keeping it at 6 percent. If New Jersey does not lower its sales tax rate, Pennsylvania will still gain more revenue by lowering its tax rate to 3 percent than by keeping it at 6 percent. Therefore, regardless of the actions of the other state, Pennsylvania has a dominant strategy to lower its sales tax rate to 3 percent.

Question 17

Which of the following is true of a simultaneous-move game?
A) Players choose their actions after knowing the action of the first player.
B) All relevant benefits and costs of each action are taken into account.
C) It involves strategic interactions among a large number of players.
D) It cannot be represented by a payoff matrix.

Accepted Answer

In a simultaneous-move game, players choose their actions at the same time without knowledge of the other players' actions. Therefore, all relevant benefits and costs of each action are taken into account by each player while making their decision. Choice A is incorrect because players do not know the action of the first player before making their decision. Choice C is incorrect because simultaneous-move games can involve strategic interactions among a small number of players. Choice D is incorrect because a payoff matrix can be used to represent a simultaneous-move game.

Question 18

Game theory is the study of ________.
A) policy analysis
B) strategic interactions
C) program evaluation
D) irrational decision making

Accepted Answer

Game theory is the study of strategic interactions between rational actors or decision-makers in situations containing set rules and outcomes. It aims to analyze how these actors' decisions can affect the overall outcome of the situation. It is not concerned with policy analysis, program evaluation, or irrational decision making as its main focus is on strategic decision making.

Question 19

________ helps an individual make economic decisions when the individual's behavior determines the payoffs to others.
A) Empiricism
B) Macroeconomics
C) Game theory
D) Public economics

Accepted Answer

Game theory is a branch of economics that helps individuals make decisions when their behavior affects the outcomes of others in a given scenario. It involves analyzing the strategic interactions between individuals or groups and predicting the most rational decision for each party involved. Therefore, game theory is specifically designed to address situations where an individual's actions will have an impact on the behavior of others.

Question 20

________ describes an individual's optimal actions in settings where interactions with others determine her well-being.
A) Game theory
B) Utility optimization
C) Strategic equilibrium
D) Cost-benefit analysis

Accepted Answer

Game theory is the study of how individuals behave in strategic situations where the outcome depends on the choices of all individuals involved. It provides a framework for analyzing the choices of individuals in interdependent situations, such as those involving competition, cooperation, conflict, or negotiation. In settings where interactions with others determine one's well-being, game theory can help identify an individual's optimal actions, taking into account the behavior and incentives of others. Thus, game theory is the best choice for describing an individual's optimal actions in such settings.

Quiz 13: Game Theory and Strategic Play

A ________ is a complete plan describing how a player will act.

Which of the following is true of a payoff matrix?

In a simultaneous-move game,________.

A payoff matrix shows the ________.

Which of the following is likely to use the concepts of game theory?

A game is called a simultaneous-move game if ________.

Which of the following games is a simultaneous-move game?

Which of the following games is not a simultaneous-move game?

Which of the following is true of a simultaneous-move game?

Game theory is the study of ________.

________ helps an individual make economic decisions when the individual's behavior determines the payoffs to others.

________ describes an individual's optimal actions in settings where interactions with others determine her well-being.