Econ 102 Quiz Week 12 - Game Theory

The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the Nash equilibrium, Firm A will set a price of ________ and Firm B will set a price of ________.

$10; $10

Refer to above figure, which represents a duopoly industry. What would be the likely total industry payoff or profit?

$8 million

Refer to Figure e. What is the Nash equilibrium?

Allie and Brandon both watch the Red Sox; or, Allie and Brandon both watch the Mets

Refer to the above payoff matrix (in years of sentence) for two people (A and B) charged for robbery. Which of the following is the outcome of the dominant strategy without cooperation?

Both A and B confess.

A ________ occurs if all players in a game play their best strategies given what their competitors do.

Nash equilibrium

Which of the following is TRUE for the game in Scenario 13.4?

Neither company has a dominant strategy.

A well-known example of an international cartel is:

OPEC.

The first law designed to curb monopoly power in the United States was the ________ Act.

Sherman Antitrust

Refer to Figure d. In the game described in the figure above, Travis's dominant strategy is

South

Refer to Figure a. What is the Nash equilibrium in the figure above?

There is not one

The dominant strategy allows a firm to

obtain the highest benefit, regardless of its rivals' actions.

A strategy in which players play cooperatively initially, but then mimic what the other players do, is referred to as:

tit-for-tat strategy.

Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. Is there a dominant strategy for Star Connections and if so, what is it?

No, its outcome depends on what Godrickporter does.

Refer to Figure e. Brandon and Allie want to go on a date one summer evening. Allie is a Red Sox fan, while Brandon is a Mets fan. Both teams are playing that evening, but not against each other. Each would rather watch their team, neither can force the other to watch a particular game and each is willing to suffer through the other's game if it means time together. Figure e illustrates both Allie and Brandon's payoffs for each choice, with Allie's payoff in the southwest corner of each cell and Brandon's in the northwest corner. If Brandon watch the Mets, what is Allie's best response?

Watch the Mets

Refer to Figure e. If Allie watches the Mets, what is Brandon's best response?

Watch the Mets

Refer to Figure e. If Allie watches the Red Sox, what is Brandon's best response?

Watch the Red Sox

Refer to Figure e. If Brandon watches the Red Sox, what is Allie's best response?

Watch the Red Sox

Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. Let's suppose the game starts with each firm adhering to its original budget so that Godrickporter earns a profit of $6,000 and Star Connections earns a profit of $12,000. Is there an incentive for any one firm to increase its advertising budget?

Yes, Godrickporter has an incentive to increase its advertising budget, but Star Connections does not.

Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. Is there a dominant strategy for Godrickporter and if so, what is it?

Yes, Godrickporter should increase its advertising spending.

Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 14-3 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota. Refer to Table 14-3. Is there a dominant strategy for Nigeria and, if so, what is it?

Yes, the dominant strategy is to produce a high output.

Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 14-3 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota. Refer to Table 14-3. Is there a dominant strategy for Saudi Arabia and, if so, what is it?

Yes, the dominant strategy is to produce a low output.

Table 14-2 shows the payoff matrix for Wal-Mart and Target from every combination of pricing strategies for the popular PlayStation 3. At the start of the game each firm charges a low price and each earns a profit of $7,000. Refer to Table 14-2. For each firm, is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000?

Yes, the firms can implicitly collude and agree to charge a higher price.

Which of the following is true for the game in Scenario 13.3?

Zport's dominant strategy is the low-profile tires.

Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. Gary and Frank decide to form a cartel. Later, Gary summarizes his pricing strategy as, "I'll cheat on the cartel because regardless of what Frank does, cheating gives me the best payoff." This is an example of:

a dominant strategy.

Your economics professor has decided that your class will not be graded on a curve but on an absolute scale. Therefore, it is possible for every student in the class to get an "A." Your grade will not depend in any way on your classmates' performance. Based on this information, you decide that you should study economics three hours each day, regardless of what your classmates do. In the language of game theory, your decision to study three hours each day is:

a dominant strategy.

An industry that consists of two firms is:

a duopoly.

A cartel is

a group of firms that enter into a formal agreement to fix prices to maximize joint profits.

Both monopolists and cartel members will find that a drop in price leads to:

a price effect that negatively affects total revenue.

Oligopoly is a market structure characterized by:

a small number of interdependent firms.

An oligopoly knows that its ________ affect its ________ and that the ________ of its rivals will affect it.

actions; rivals; reactions

If both players in a game have dominant strategies, we say that the game has:

an equilibrium in dominant strategies.

An industry dominated by a few firms, where each firm recognizes that its own choices will affect the choices of its rivals and vice versa, is:

an oligopoly.

Refer to Figure 12.7 The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy.In the Nash equilibrium:

both firms would charge a low price

Suppose that each of two firms has the independent choice of advertising its product or not advertising. If neither advertises, each gets $20 million in profit; if both advertise, their profits will be $10 million each; and if one advertises while the other does not, the advertiser gets $25 million profit while the other gets $4 million profit. According to game theory, the likely strategy by the firms is:

both will advertise.

According to the kinked demand model of oligopolies, oligopolistic firms often choose not to compete much on:

price.

Oligopoly is a market structure that is characterized by a ________ number of ________ firms that produce ________ products.

small; interdependent; identical or differentiated

A strategy A is "dominant" for a player X if

strategy A is the best response to every strategy of the other player.

To calculate the Herfindahl-Hirschman Index (HHI), one must:

sum the squared market shares of all firms in the industry.

One of the earliest actions of antitrust policy was the breakup of:

the Standard Oil Company.

In the game in Scenario 13.5,

there are two equilibria: either can expand in the West, and the other expands in the South.

When one firm responds to a rival's cheating by cheating and to a rival's cooperation by cooperating, that firm is practicing a:

tit-for-tat strategy.

Refer to the information provided in Table 14.3 below to answer the question that follows. Table 14.3 B's Strategy Advertise Don't Advertise A's profit $75 million A's profit $200 million Advertise B's profit $75 million B's profit $50 million A's Strategy Don't A's profit $50 million A's profit $100 million Advertise B's profit $200 million B's profit $100 million Refer to Table 14.3. Firm Aʹs dominant strategy is

to advertise

The Sherman Antitrust Act:

was aimed at preventing the creation of more monopolies and was the beginning of antitrust policy.

Engaging in price competition or Bertrand behavior will most likely mean oligopolists:

will likely end up behaving like a perfectly competitive industry.

If an industry initially has an HHI of 1,250, a merger between two of the largest firms in the industry:

would not likely be allowed since it most likely would reduce the competitive nature of the industry.

A dominant strategy is a

player's best strategy regardless whatever strategies are adopted by his rivals.

The prisoner's dilemma shows that

players would be better off if they cooperated

Which of the following scenarios best describes an oligopolistic industry?

Coca-Cola and Pepsi sell most of the soft drinks consumed around the world.

Refer to the above figure. The figure gives the payoff matrix for two individuals who are being accused of robbing a bank together. If Bob does not confess, what is the best strategy for Harry?

Confess.

Refer to the above figure. The figure gives the payoff matrix for two individuals who are being accused of robbing a bank together. What is dominant strategy for Bob?

Confess.

In an oligopoly:

firms recognize their interdependence.

The market structure characterized by a few interdependent firms and in which there are barriers to entry is called:

oligopoly.

Which of the following would make it difficult for Georgia peach suppliers to collude?

Buyers of peaches have a great deal of bargaining power, since peaches are homogeneous.

Suppose Intel and AMD can each charge either $300 or $200 for a CPU (the computing unit of a computer). The above table illustrates the payoffs, in millions of dollars, from each of the four possible outcomes that could occur in their duopoly setting. If Intel charges $300 and AMD charges $300, then Intel's profit will be ________ million and AMD's profit will be ________ million.

$320; $160

Refer to Table 14.3. What is the Nash equilibrium in the game?

(Advertise, Advertise)

A major application of the Sherman Antitrust Act was in ________ against ________.

1911; Standard Oil

Industry Z is made up of five firms. Three of the firms make up 20% of the total market sales, one firm makes up 25% of the total market sales, and the remaining firm makes up 15% of the total market sales. What is the HHI for this industry?

2,050

Which of the following factors increases the likelihood that oligopolists collude?

A firm and its rivals are currently operating at maximum productive capacity.

Refer to the above payoff matrix (in years of sentence) for two people (Bo and Max) charged for robbery. Which of the following is the outcome of the dominant strategy without cooperation?

Both Bo and Max confess.

Refer to the above payoff matrix for the profits (in $ millions) of two firms (A and B) and two pricing strategies (high and low). Which of the following is the outcome of the dominant strategy without cooperation?

Both firm A and firm B choose the low price.

Refer to Figure 12.7. The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy. If both firms follow their individual dominant strategy:

Both will earn $150 daily profit.

Refer to Figure 12.7. The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy. If both firms choose a high-price strategy:

Both will earn $200 daily profit.

The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. In the above game, in the Nash equilibrium,

Firm A and Firm B are both making $40,000 in economic profit.

Consider the following game in which two firms decide how much of a homogeneous good to produce. The annual profit payoffs for each firm are stated in the cell of the game matrix, and Firm A's payoffs appear first in the payoff pairs: Firm B - low output Firm B - high output Firm A - low output 300, 250 200, 100 Firm A - high output 200, 75 75, 100 What are the dominant strategies in this game?

Firm A's dominant strategy is to produce low levels of output, but Firm B does not have a dominant strategy.

In which of the following situations does overt collusion exist?

Firms in an industry agree openly on price, output, and other decisions aimed at achieving monopoly profits.

Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 14-1 shows the payoff matrix for this advertising game. Refer to Table 14-1. What is the Nash equilibrium in this game?

Godrickporter increases its advertising budget, but Star Connections does not.

Use the following statements to answer this question: I. A player must have at least one dominant strategy in a game. II. If neither player in a game has a dominant strategy in a game, then there is no equilibrium outcome for the game.

I and II are false.

The only two firms in a market are trying to decide what price to charge. The payoff matrix for this duopoly game is shown above. The payoffs are thousands of dollars of economic profit. Which of the following statements is correct?

If the firms cooperate, both could make $55,000 in economic profit.

A strategy is dominant if

It is a player's only best response, regardless of other players' choices

Refer to Figure b. What is the Nash equilibrium in problem above?

Kate squeal, Alice squeal

Refer to Figure c. What is the Nash equilibrium in table above (Figure c)?

Kate squeal, Alice squeal

Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the best strategy for Greenco if Ajax decides on charging a low price?

Low price.

Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the dominant strategy for Greenco?

Low price.

Which of the following is true regarding the game in Scenario 13.5?

Neither company has a dominant strategy.

The market structure that is characterized by only a small number of producers is referred to as:

oligopoly.

The outcome of a strategic choice is a:

payoff.

Quantity competition or Cournot behavior is most likely when oligopolistic firms:

cannot increase their level of output quickly due to limits on their productive capacity.

An extreme case of oligopoly in which firms collude to raise joint profits is known as a:

cartel.

Refer to Figure 12.7. The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy. If Zeta commits to charging a high price Omega can earn the largest profit by:

charging a low price.

In an oligopoly, firms can increase their market power by

colluding to set prices.

If the only two firms in an industry agree to fix the price at a given level, this is an example of:

collusion.

Table 12.2 Refer to Table 12.2. Jeri and Tom are arrested for having committed a crime. They are being interrogated individually and need to decide if they should confess or not confess. The police have enough information to put them in jail for 5 years. They also know the pair have committed a more egregious crime but without the help of one of the suspects they will not be able to convict them on this charge. The first number in each cell refers to the number of years of prison time Jeri will receive if she confesses or does not confess and the second number in each cell refers to the number of years of prison time Tom will receive if he confesses or does not confess. The dominant strategy for Jeri is to ________ and the dominant strategy for Tom is to ________.

confess; confess

A game in which each player adopts its dominant strategy

could result in a Nash equilibrium.

In the game in Scenario 13.4, the equilibrium outcome:

does not exist.

Maximization of joint profits is most likely when firms are:

duopolists who collude.

The most important source of oligopoly is:

economies of scale.

The tool that economists use to analyze the mutual interdependence of oligopolies is

game theory.

In oligopoly, a firm must realize that:

it is in an industry in which another major firm may dominate, and the firm will need to judge its actions accordingly.

OPEC is a(n) ________that includes ________.

legal cartel; includes 13 national governments

Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. Gary believes he faces a kinked demand curve. This means Gary thinks the demand curve above the kink is:

more elastic than the demand curve below the kink.

Airlines are prone to price wars because:

most fliers choose airlines on the basis of schedule and price.

Table 12.2 Refer to Table 12.2. Jeri and Tom are arrested for having committed a crime. They are being interrogated individually and need to decide if they should confess or not confess. The police have enough information to put them in jail for 5 years. They also know the pair have committed a more egregious crime but without the help of one of the suspects they will not be able to convict them on this charge. The first number in each cell refers to the number of years of prison time Jeri will receive if she takes that action and the second number in each cell refers to the number of years of prison time Tom will receive if he takes that action. If Jeri and Tom can decide jointly then the best strategy is for Jeri to ________ and Tom to ________.

not confess; not confess

If there are two gas stations in the town of Smalltown, then the gasoline industry in Smalltown is probably best characterized as:

oligopolistic.

Given the large amount of interdependence among them, cooperation with one's competitors is the most profitable strategy for:

oligopolists.

The industry characterized by a few interdependent firms where there are barriers to entry is called:

oligopoly.