Chapter 7 Smartbook

In economics, the three basic elements of a game are:

1) the players, 2) the list of possible actions available to each player, and 3) the payoffs received for each possible combination of actions

Consider the decision tree to the right. What is each player's equilibrium payoff?

10 for the waiter and 5 for the diner

True or false: Historically, cartel agreements have been easy to maintain.

False

A ____ is a coalition of firms that agrees to restrict output for the purpose of earning an economic profit.

cartel

Players face a ____(Enter one word) problem when they cannot achieve their goals because of an inability to make credible threats and promises.

commitment

In repeated prisoner's dilemmas, tit-for-tat strategies have been shown to be effective at limiting defection in

computer simulations but not real-world cartel agreements.

A ____ threat is a threat to take an action that is in the threatener's interest to carry out.

credible

If someone makes a threat that's in their interest to carry out, then it's a ____ threat.

credible

The diagram on the right is a:

decision tree

A commitment ____ changes incentives so as to make otherwise empty threats or promises credible.

device

Cartel agreements are notoriously _____ to maintain.

difficult

A ____ strategy is a strategy that yields a higher payoff no matter what the other players in the game choose.

dominant

If a player has a strategy that yields a higher payoff no matter what the other players in a game choose, then that strategy is a _____.

dominant strategy

If a player has a dominant strategy, then any other strategy available to that player is a ____ strategy

dominated

Shouting at parties

may make everyone worse off, but is a dominant strategy for each individual.

The player who moves first in a sequential game _____ a strategic advantage.

may or may not have

A tit-for-tat strategy is a strategy for the repeated prisoner's dilemma in which players cooperate on the first move and then

mimic their partner's last move on each successive move.

Consider the payoff matrix on the right. GM and Chrysler must decide whether to invest in a new process. What is the Nash equilibrium of this game?

GM invests, and Chrysler doesn't invest

Any combination of strategy choices in which each player's choice is his or her best choice, given the other players' choices is a

Nash equilibrium.

Consider the payoff matrix on the right. GM and Chrysler must decide whether to invest in a new product. Is this game a prisoner's dilemma?

No

A coalition of firms that agree to restrict output for the purpose of earning an economic profit is

a cartel

Brushing your teeth after lunch to avoid snacking in the afternoon is an example of

a commitment device.

Deleting games from your computer to avoid spending too much time playing them is an example of

a commitment device.

Leaving only $20 in your wallet to avoid spending too much is an example of

a commitment device.

Leaving your laptop at work to avoid working from home in the evening is example of

a commitment device.

A diagram that describes the possible moves in a game in sequence and lists the payoffs that correspond to each possible combination of moves is

a decision tree (or game tree).

Even though everyone might be better off if people didn't shout at parties, shouting is

a dominant strategy for each individual.

Consider the decision tree to the right. Who has the first move in this game?

The waiter

Consider the decision tree to the right. What is the equilibrium outcome of this game?

The waiter gives bad service.

Consider the payoff matrix on the right. United and American must decide whether to increase ad spending. What is the Nash equilibrium of this game?

United leaves spending the same, and American raises spending

Consider the decision tree to the right. Who has the second move in this game?

jones

Consider the table on the right. For United, the dominant strategy is to

leave ad spending the same.

A commitment problem is a situation in which people cannot achieve their goals because of an inability to

make credible threats and promises.

A game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy is called a(n) _____.

prisoner's dilemma

Consider the table on the right. For American, the dominant strategy is to

raise ad spending.

Question Mode Fill in the Blank Question A prisoner's dilemma that confronts the same players not just once but many times is called a ____ prisoner's dilemma.

repeated

A standard prisoner's dilemma that confronts the same players not just once but many times is known as a

repeated prisoner's dilemma.

Consider the decision tree to the right. In the equilibrium of this game, Smith's payoff is ____, and Jones's payoff is ____(enter numeric values).

60, 105

Consider the payoff matrix on the right. GM and Chrysler must decide whether to invest in a new process. What is the Nash equilibrium of this game?

Both invest

Consider the table on the right. For American, leaving ad spending the same is

a dominated strategy.

Consider the table on the right. For United, raising ad spending is:

a dominated strategy.

If a player has a dominant strategy, then any other strategy available to that player is

a dominated strategy.

A strategy for the repeated prisoner's dilemma in which players cooperate on the first move, then mimic their partner's last move on each successive move is known as

a tit-for-tat strategy.

Cartel agreements are difficult to maintain because

each cartel member has an incentive to undercut its competitor's price in order to capture the entire market.

A Nash equilibrium is any combination of strategy choices in which

each player's choice is his or her best choice, given the other players' choices.

You would expect it to be _____ to solve commitment problems when people feel a strong sense of guilt when they break a promise.

easier

True or false: Psychological incentives are not useful in solving commitment problems.

false

True or false: With regard to repeated prisoner's dilemmas, tit-for-tat strategies have been shown to be effective at limiting defection in both computer simulations and in real-world cartel agreements.

false

A firm in a cartel agreement

has a strong incentive to undercut the prices of the other cartel members.

Consider the payoff matrix on the right. In this game:

neither Dodge nor Chevrolet have a dominant strategy

The fact that monopolistic competitors often sell products that are similar to one another

occurs because each firm wants to attract as many customers as possible.

In order to attract as many customers as possible, monopolistic competitors like gas stations and convenience stores

often cluster geographically.

The geographic clustering of gas stations is

optimal from the standpoint of gas station owners.

A table that describes the payoffs in a game for each possible combination of strategies is a

payoff matrix.

A commitment device is a way to change incentives

so as to make otherwise empty threats or promises credible.

A new firm entering into a market should _____ offer a product that is similar to those already sold in the market

sometimes

In a sequential game, the player who moves last _____ has a strategic advantage

sometimes

It is _____ in a firm's best interest to offer a product that is similar those already being sold by its competitors.

sometimes

In the game to the right, relative to the equilibrium outcome, both players would be better off if:

the diner could make a credible promise to tip

The three basic elements of a game are (select three):

the payoffs each player receives the players the strategies available to each player

A payoff matrix is a table that describes

the payoffs in a game for each possible combination of strategies.

The problem confronting oligopolists who are trying to form a cartel is a classic illustration of

the prisoner's dilemma

Cartel agreements confront participants with the economic incentives inherent in

the prisoner's dilemma.

A prisoner's dilemma is a game in which every player has a dominant strategy, and if each plays it

the resulting payoffs are smaller than if each had played a dominated strategy.

Relative to the equilibrium outcome in the game to the right, Jones could increase his payoff if he were able to make a credible promise to choose the:

top branch

A decision ____ is a diagram that describes the possible moves in a game in sequence and lists the payoffs that correspond to each possible combination of moves.

tree

Consider the payoff matrix on the right. GM and Chrysler must decide whether to invest in a new product. Is this game a prisoner's dilemma?

yes

A dominant strategy is one that

yields a higher payoff no matter what the other players in the game choose.

A dominated strategy is a strategy that

yields a lower payoff than an alternative choice, regardless of the other player's choice.