Chapter 10 Quiz

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?

Management requests $50, and the labor union accepts $0

Refer to the accompanying game. Firm AFirm B Low PriceHigh PriceLow Price(10,9)(15,8)High Price(−10,7)(11,11) Which of the following is true?

None of the answers is correct.

Refer to the accompanying payoff matrix. Player 1Player 2 t1t2t3S122,015, 1 8, −100S220, 20010, 05, −50 The dominant strategy of player 1 is

S1

Refer to the accompanying game. Player 1Player 2 t1t2t3S14,103,01,3S20,02,1010,3 Which of the following strategies constitutes a Nash equilibrium?

S1, t1

Refer to the accompanying normal-form game of price competition. Firm AFirm B CDA0,75,2B5,10,8 What is(are) the Nash equilibrium(equilibria) strategy(ies) for this game?

There is no Nash equilibrium for this game

Which of the following is not an important determinant of collusion in pricing games?

the average fixed cost to produce the product

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

warranties/guarantees

In the accompanying game, firms 1 and 2 must independently decide whether to charge high or low prices. Firm OneFirm Two High PriceLow PriceHigh Price(10,10)(−50,50)Low Price(50,−50)(0,0) Which of the following are the Nash equilibrium payoffs (each period) if the game is repeated 10 times?

(0, 0)

Refer to the accompanying normal-form game of price competition. Firm AFirm B CDA50, 50500−x, 200B100, 500−x50, 50 For what values of x is strategy D strictly dominant for firm B?

All x > 450

Refer to the accompanying payoff matrix. Player 1Player 2 t1t2t3S122,015, 1 8, −100S220, 20010, 05, −50 Which of the following pairs of strategies constitutes a Nash equilibrium of the game?

S1, t2

Refer to the accompanying normal-form game of advertising depicted here. Firm AFirm B AdvertiseDo Not AdvertiseAdvertise$0, $0$175, −$100Do Not Advertise−$100, $175$125, $125 Suppose there is a 20 percent chance that the advertising game depicted shown above will end in the next period. What is the present value to firm B of cheating on the collusive strategy?

$175

The accompanying figure presents information for a one-shot game. Firm AFirm B Low PriceHigh PriceLow Price(2,2)(10,-8)High Price(-8,10)(6,6) What are secure strategies for firm A and firm B, respectively?

(low price, low price)

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?

(not enter, hard) and (enter, soft)

The accompanying graph depicts a normal-form game of price competition. Firm AFirm B Low PriceHigh PriceLow Price0,025,−5High Price−5,2510,10 What is the maximum interest rate that can sustain collusion?

66.7 percent

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

All of the statements associated with this question are correct.

Refer to the accompanying normal-form game of bargaining. Union Management$0$250$500$0($0, $0)($0, $250)($0, $500)$250($250, $0)($250, $250)(−$10, −$10)$500($500, $0)(−$10, −$10)(−$10, −$10) Suppose that management and the union are bargaining over how much of a $500 surplus to give to the union. It is assumed that the surplus can only be split into $250 increments. Furthermore, negotiations are set up such that management and the union must simultaneously and independently write down the amount of surplus to allocate to the union. The payoff structure to this one-shot bargaining game is shown above. Find the Nash equilibrium(ia) to this game.

All of the statements associated with this question constitute Nash equilibria

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

and your rival to advertise

A Nash equilibrium is a condition that

describes a set of circumstances in which no player can improve her payoff by unilaterally changing her own strategy, given the other players' strategies

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

for each firm to not advertise until the rival does and then to advertise forever.

Game theory is best applied to the analysis of

oligopoly