Economics 202 Module #12
Sunk costs
are costs that have already been paid and cannot be recaptured in any significant way
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money. Refer to the scenario above. A player should use ________ to play this game.
backward induction
Arnold Kim began blogging about Apple products during his fourth year of medical school. Kim's Website, MacRumors.com, became so successful that he decided to give up his medical career and work full time on his Website, despite the nearly $200,000 he had invested in his education. In making his decision, the $200,000 he spent on his education
should be ignored since it represents a sunk cost.
A player has a dominant strategy when:
she has only one best response to every possible strategy of the other player.
Which of the following is true of a simultaneous move game?
All relevant benefits and costs of each action are taken into account.
What is the dominant strategy in the prisoner's dilemma?
Each prisoner confesses because this is the rational action to pursue
Scenario: Two firms in a market must choose between two alternative strategies—X and Y. The figure below shows the game tree that these firms can use to make their decisions
Firm 1 will follow Strategy Y, and Firm 2 will follow Strategy X
Rob Neyer is a baseball writer for sbnation.com. He has described attending a Red Sox game at Fenway Park in Boston and having a great seat in the sun on a hot, humid day: "Granted, I could have moved under the overhang and enjoyed today's contest from a nice, cool, shady seat. But when you paid forty-five dollars for a ticket in the fourth row, it's tough to move back to the twenty-fourth [row]." Source: Rob Neyer, Feeding the Green Monster, New York: iPublish.com, 2001, p.50. What should Rob do?
He should weigh the marginal cost of moving into the shade (a less desirable view) versus the marginal benefit of being under the shade.
Suppose you pre-ordered a non-refundable movie ticket to X-Men: Apocalypse. On the day of the movie you decide that you would rather not go to the movie. According to economists, what is the rational thing to do?
Since the cost of the movie ticket is a sunk cost, it should not influence your decision. Your decision should be based solely on whether you want to see the movie or not.
Which of the following is true of an extensive-form game?
It involves sequential decision making by the players
Which of the following is true of a payoff matrix?
It takes into account all relevant costs and benefits associated with each action of the players.
A situation in which each firm chooses the best strategy given the strategies chosen by other firms is called a
Nash equilibrium
Which of the following is true of a Nash equilibrium?
No player can improve his payoff by changing his strategy once in Nash equilibrium
The average price of gasoline in your neighborhood is $2.15 per gallon. Your neighbor, Diana tells you that you can "save a lot" by frequenting a gas station 20 miles outside your neighborhood where the price of gasoline is $2.06 per gallon However, she cautions you that there are usually long lines at that station. Is her suggestion beneficial to you?
No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station
Prisoner's dilemma games imply that cooperative behavior between two people or two firms always breaks down. But reality teaches us that people and firms often cooperate successfully to achieve their goals. Why do the results from prisoner's dilemma games fail to predict real-world results?
The prisoner's dilemma does not apply to most business situations that are repeated over and over.
One possible reason as to why consumers respond to sales is that by displaying a "high" regular price and a "low" sale price, sales provide consumers with a reference point to interpret the prices being offered
True
One reason college students do not study enough to get high grades is that they are unrealistic about their future behavior.
True
Scenario: Your car broke down while you were driving to the office one morning. You took it to the nearest service center and were told by the mechanic that you need to pay $500 for the repair. You are confused whether or not to trust him. If you do not trust him, you have to take it to another service center, which is far away and inconvenient. If you trust him, he can either cooperate or defect (do an honest job or not). If he does an honest job, both of you will gain from the trade. If he does not do an honest job, he will gain $500 while you will lose your money. Clearly, he will gain more by defecting rather than cooperating with you. Refer to the scenario above. Which of the following is likely to happen if the service center has a reputation of trustworthiness?
You will trust the mechanic and he will cooperate
A sequential game can be used to analyze whether a retail firm should build a large store or a small store in a city, when the correct choice depends on whether a competing firm will build a new store in the same city. Which of the following is used to analyze this type of decision?
a decision tree
What is a prisoner's dilemma?
a game in which players act in rational, self-interested ways that leave everyone worse off
A firm can use anchoring to influence consumer choices so as to increase sales by marking
a high "regular price" on a product, which makes the discounted "sale price" appear to be a bargain
A dominant strategy is
a strategy that is the best for a firm no matter what strategies other firms use
Scenario: You walk onto a used-car lot to buy a car. You are willing to pay up to $15,000 for a car of good quality but you value a lemon at $0.You are now wondering whether you should trust the car dealer regarding the quality of the car. If you choose to trust him, he can choose to cooperate or defect. If you do not trust him, neither will he earn money nor will you be able to buy a car and use it. If you trust him and he cooperates, both of you will gain because the dealer values a good-quality car at $13,000. However, if he defects, he will earn $15,000 while you will not derive any satisfaction. Refer to the scenario above. You should use ________ to arrive at a decision.
backward induction
The first mover in an extensive-form game should use ________ to win the game
backward induction
Decision trees are commonly used to illustrate how firms make business decisions that depend on the actions of rival firms. A decision tree has boxes that contain points that represent when firms must make the decisions contained in the boxes. What are these points called?
decision nodes
A Nash equilibrium occurs if ________.
each player chooses strategies that are mutual best responses
Anchoring is relating a value to some other known value
even if the second value is irrelevant.
Scenario: Two firms in a market must choose between two alternative strategies—X and Y. The figure below shows the game tree that these firms can use to make their decisions.
extensive-form game
The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called
game theory
A ________ is an extensive -form representation of a game.
game tree
In an extensive-form game, payoff to a player is usually higher if ________.
he is the first mover
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund. Refer to the scenario above. If Joseph prefers fairness to money, ________.
he will accept the offer if offered an equal share of the money
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund. Refer to the scenario above. If Joseph prefers money to fairness, ________.
he will always accept any offer made to him
A Nash equilibrium occurs when ________.
none of the players can increase their payoffs by choosing a different strategy
A best response is ________
one player's optimal action choice taking the other player's action as given
A game is called a simultaneous move game if _______
players choose their actions at the same time
A Nash equilibrium is
reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group
A dominant strategy ________.
results in a higher payoff irrespective of the strategy chosen by the other player
In many business situations one firm will act first, and then other firms will respond. To help analyze these types of situations economists use
sequential games.
Sequential games are used to analyze
situations in which one firm acts and other firms respond
A ________ is a complete plan describing how a player will act.
strategy
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money. Refer to the scenario above. This is an example of a(n) ________.
ultimatum game
Scenario: Robert and Alice are participating in a reality show on television. Robert is offered an amount of $500 and told that he can keep the money provided he shares some of it with Alice. Robert can offer Alice as much or as little as he likes, but if Alice rejects his offer, neither of them will get to keep any money. Refer to the scenario above. This is an example of a(n) ________.
ultimatum game
