Deck 20: Game Theory, Strategic Decision Making, and Behavioral Economics

Question 1

The prisoner's dilemma is a theoretical tool with little in the way of practical applications.

Answer 1

False

Question 2

Game theory replaces the standard supply and demand model used by economists.

Answer 2

False

Question 3

Game theory:

A) is more restrictive than the standard supply/demand model.
B) is more flexible than the standard supply/demand model.
C) replaces the standard supply/demand model.
D) replaces the monopoly model.

Answer 3

B

Question 4

"Framing effects" suggest that the wording of questions affects people's survey responses.

Question 5

Game theory suggests that acting in our own immediate best interest leads to the best possible outcome.

Question 6

If a player has a dominant strategy, that player will always win the game.

Question 7

The payoff matrix shows the outcome for only one player in a game situation.

Question 8

Taking explicit account of a rival's expected response to a decision you are making is called:

A) economic decision making.
B) monopolistic decision making.
C) strategic decision making.
D) competitive decision making.

Question 9

When some people do not act rationally, others can profit from that irrationality.

Question 10

The formal game theory model assumes that:

A) markets are contestable when no barriers to entry exist.
B) the dominant firm in the industry will set product price and other firms will follow.
C) each player tries to anticipate the reaction of his or her rivals when making a decision.
D) each player ignores the possible reaction of his or her rivals when making a decision.

Question 11

"Leaving money on the table" refers to the potential gains to be made when people act irrationally.

Question 12

The prisoner's dilemma is a well-known game in which:

A) cooperation between prisoners is always the best independent action.
B) noncooperation between prisoners is not the best joint action but is the best independent action.
C) players always cheat.
D) players never cheat.

Question 13

A screening question is structured to:

A) screen unqualified applicants for a job.
B) extract information from prisoners.
C) alter a respondent's behavior.
D) reveal strategic information about the person who answers.

Question 14

The prisoner's dilemma provides an explanation of why detectives interview suspects separately in television crime shows.

Question 15

Game theory:

A) is the best model for perfect competition.
B) replaces the standard supply/demand model.
C) is the best model for monopoly.
D) complements the standard supply/demand model.

Question 16

Strategic reasoning applies to situations in which decisions are interdependent.

Question 17

Formal economic reasoning applied to situations in which decisions are interdependent is called:

A) economic decision making.
B) monopolistic decision making.
C) competitive decision making.
D) game theory.

Question 18

Game theory tells how to win at games of chance.

Question 19

Game theory is designed to study situations in which each agent's decisions are:

A) interdependent.
B) independent.
C) constrained.
D) uninformed.

Question 20

In experiments testing game theory, cheap talk does not affect the outcome of a game.

Question 21

The equilibrium solution for the following payoff matrix is: $\begin{array} { | l | l | l | } \hline & { \text { A } } & \text { A } \\\hline B & \text { A: } - 1 , B : - 1 & \text { A: } 5 , B : 0 \\\hline B & \text { A: } 2 , B : 2 & \text { A: } 10 , B : 1 \\\hline\end{array}$

A) ?1, ?1.
B) 5, 0.
C) 2, 2.
D) 10, 1.

Question 22

The National Hockey League locked out the hockey players in an effort to negotiate a salary cap with the players' union. A cap would limit the payroll of each team. League officials acknowledged that the teams have brought the problem on themselves by overspending and overpaying some players in an effort to compete for the best players. Why would the teams have caused this problem for themselves?

A) They used explicit collusion instead of implicit collusion.
B) They tried to create a contestable market and now suffer because there are no barriers to entry.
C) They were caught in the logic of the prisoner's dilemma in which each player maximizing his own self-interest leads to an outcome that is worse off for everyone.
D) They tried to create a cartel and suffered the consequences of too much collusion.

Question 23

Consider the following payoff matrix facing two criminals. $\begin{array} { | l | l | l | } \hline & { \text { A: Confess } } & \text { A: Not Confess } \\\hline \text { B: Confess } & \text { A: 20yrs, B: 20yrs } & \text { A: 50yrs, B: 2yrs } \\\hline \text { B: Not Confess } & \text { A: 2yrs, B: 50yrs } & \text { A: 10yrs, B: 10yrs } \\\hline\end{array}$ Their options are to confess or not to confess. The payoffs represent the number of years each will spend in jail. The Nash equilibrium for the payoff matrix shown is:

A) A: 20 years, B: 20 years.
B) A: 50 years, B: 2 years.
C) A: 2 years, B: 50 years.
D) A: 10 years, B: 10 years.

Question 24

When suspects are interviewed in different rooms, they do not know what the other suspects are going to do and hence seek the best deal for themselves. This illustrates:

A) that criminals are irrational.
B) the idea of a cooperative game.
C) the idea of a noncooperative game.
D) that the police are not taking into account the suspects' rights.

Question 25

The equilibrium solution for the following payoff matrix is: $\begin{array} { | l | l | l | } \hline& { \text { A } } & \text { A } \\\hline \text { B } & \text { A: } - 1 , B : - 1 & \text { A: } 2 , B : 0 \\\hline \text { B } & \text { A: } 0 , B : 2 & \text { A: } 1 , B : 1 \\\hline\end{array}$

A) 1, 1.
B) 2, 0.
C) 0, 2.
D) ?1, ?1.

Question 26

What is true about the following payoff matrix? $\begin{array} { | l | l | c | } \hline & { \text { A: not cooperate } } & \text { A: cooperate } \\\hline \text { B: do not cooperate } & \text { A: } 2 , \text { B: } 2 & \text { A: } 1 , \text { B: } 3 \\\hline \text { B: cooperate } & \text { A: } 3 , \text { B: } 1 & \text { A: } 0 , B : 0 \\\hline\end{array}$

A) Only player A has a dominant strategy.
B) Only player B has a dominant strategy.
C) Both player A and player B have dominant strategies.
D) Neither player A nor player B has a dominant strategy.

Question 27

TV crime shows illustrate the prisoner's dilemma when the:

A) judge ponders the sentence for the crimes.
B) prisoners go to prison for the first time.
C) police interview suspects in the same room.
D) police interview suspects in different rooms.

Question 28

A Nash equilibrium assumes that a player follows his or her best strategy:

A) given that the other players follow a random strategy.
B) given that the other players follow their worst strategy.
C) given that the other players follow their best strategy.
D) regardless of what other players do.

Question 29

A strategy that is preferred by an individual regardless of an opponent's decision is called a:

A) Nash equilibrium.
B) Vickrey position.
C) framing strategy.
D) dominant strategy.

Question 30

A Nash equilibrium is the:

A) payoff that maximizes the joint payoff.
B) output level that minimizes average total cost.
C) strategy that maximizes the outcome of all the players.
D) set of strategies such that no player can improve his or her position by changing his or her own action.

Question 31

A set of strategies in which no player can improve his or her payoff by changing his or her own action is called a:

A) Nash equilibrium.
B) Vickrey position.
C) framing strategy.
D) dominant strategy.

Question 32

If individuals can credibly cooperate and split the gains, which payoff is the most likely? $\begin{array} { | l | l | l | } \hline & \text { A: Not Cheat } & \text { A: Cheat } \\\hline \text { B: Not Cheat } & \text { A: } 1 , \text { B: } 50 & \text { A: } 1 , \text { B: } 1 \\\hline \text { B: Cheat } & \text { A: } 2 , \text { B: } 1 & \text { A: } 5 , \text { B: } 5 \\\hline\end{array}$

A) 1, 11
B) 1, 1
C) 2, 1
D) 5, 5

Question 33

Every value in a payoff matrix represents the:

A) gains and losses of decisions for each player regardless of the decisions of other players.
B) best possible outcomes of various players in a game.
C) gain or loss of a decision for each player given the decisions of other players.
D) worst possible outcomes of various players in a game.

Question 34

The Nash equilibrium in the following payoff matrix is: $\begin{array} { | l | l | c | } \hline &{ \text { A: Cheat } } & \text { A: Not Cheat } \\\hline \text { B: Cheat } & \text { A: 1, B:-1 } & \text { A: } - 1 , \text { B: 1 } \\\hline \text { B: Not Cheat } & \text { A:-1,B:1 } & \text { A: } 1 , \text { B: } - 1 \\\hline\end{array}$

A) ?1, ?1.
B) ?1, 1.
C) 1, ?1.
D) There is no Nash equilibrium.

Question 35

The prisoner's dilemma is an example of a:

A) noncooperative game.
B) cooperative game.
C) nonstrategic game.
D) sequential game.

Question 36

What is true about the following payoff matrix? $\begin{array} { | l | l | c | } \hline & { \text { A: not cooperate } } & \text { A: cooperate } \\\hline \text { B: do not cooperate } & \text { A: } 2 , \mathrm {~B} : 2 & \text { A: } 1 , \text { B: } 3 \\\hline \text { B: cooperate } & \text { A: } 3 , \mathrm {~B} : 1 & \text { A: } 0 , \text { B: } 0 \\\hline\end{array}$

A) Players cannot jointly do better by cooperating.
B) Players cannot escape the 0-0 payoff.
C) Player A is better off lying that he will not cooperate and then cooperate.
D) Player B is better off lying that she will not cooperate and then cooperate.

Question 37

In standard game theory, cheap talk:

A) will fool all the players into cooperating.
B) doesn't affect the outcome of the game.
C) benefits only trustworthy people.
D) changes the payoffs.

Question 38

A Nash equilibrium refers to a:

A) cooperative game.
B) a sequential game.
C) a repeated game.
D) a noncooperative game.

Question 39

What is true about the following payoff matrix? $\begin{array} { | l | l | c | } \hline & { \text { A: cooperate } } & \text { A: not cooperate } \\\hline \text { B: cooperate } & \text { A: } 2 , \text { B: } 2 & \text { A: } 5 , \text { B: } 5 \\\hline \text { B: do not cooperate } & \text { A: } 3 , \text { B: } 1 & \text { A: } 0 , \text { B: } 0 \\\hline\end{array}$

A) Only player A has a dominant strategy.
B) Only player B has a dominant strategy.
C) Both player A and player B have dominant strategies.
D) Neither player A nor player B has a dominant strategy.

Question 40

Don and Susanne have both been accused of insider trading. Don knows that if he confesses while Susanne keeps silent, he will receive a 1-month jail sentence. He also knows that if Susanne confesses and he keeps silent, he will receive a 12-month jail sentence. If neither of them confesses, there will be insufficient evidence to convict either of insider trading, but there is enough evidence to convict each of them individually of obstructing justice, which carries a 2-month sentence. If both of them confess, they will both serve a 3-month jail sentence. This situation is:

A) an example of cartel behavior.
B) an application of the prisoner's dilemma.
C) not realistic because those accused of insider trading always keep silent.
D) not realistic because those accused of insider trading are never encouraged to confess.

Question 41

In a sequential game:

A) the first player always has the advantage.
B) the second player always has the advantage.
C) neither player ever has any advantage.
D) either player could have the advantage depending on the game.

Question 42

Consider the following payoff matrix facing two firms selling the same product in the same market. They must choose whether to price the good at a high or low price. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { COMPANY } B$
$\begin{array}{|l|l|l|l|}\hline & & {\text { Low Price }} & {\text { High Price }} \\\hline \text { COMPANY A } & \text { Low Price } & \text { A: } 2, \text { B: }: 2 & \text { A: } 4, \text { B: } 1 \\\hline & \text { High Price } & \text { A: } 1, \text { B: } 3 & \text { A: } 6, \text { B: } 2 \\\hline\end{array}$ Given this information:

A) A has a dominant strategy but B does not.
B) B has a dominant strategy but A does not.
C) both A and B have dominant strategies.
D) neither A nor B has a dominant strategy.

Question 43

In the two-thirds game, in which you choose a number between 1 and 100 that is two-thirds of the average chosen by the group, the rollback strategy is to:

A) choose a number randomly.
B) be the last person to choose a number.
C) be the first person to choose a number.
D) choose zero.

Question 44

In a mixed strategy:

A) the payoffs are mixed during each round.
B) the order of who chooses first is mixed.
C) moves can be predicted.
D) players try to avoid demonstrating a pattern.

Question 45

The best strategy for each player if this game is repeated is: $\begin{array} { | l | l | c | } \hline & \text { A: Cheat } & \text { A: Collaborate } \\\hline \text { B: Cheat } & \text { A: } 1 , \text { B: } - 1 & \text { A: } - 1 , \text { B: } 1 \\\hline \text { B: Collaborate } & \text { A: } - 1 , \text { B:1 } & \text { A: } 1 , \text { B: } - 1 \\\hline\end{array}$

A) his or her dominant strategy.
B) a mixed strategy.
C) to cheat.
D) to collaborate.

Question 46

Backward induction means a player:

A) studies his opponent's moves to figure out what she did wrong.
B) studies what other players have done in similar situations.
C) studies the rules of the game to determine how to make his next move.
D) works from the desired outcome to determine the decisions that lead to that outcome.

Question 47

Consider the following payoff matrix facing Harry and Sally when each chooses to go to the coffee shop listed. Both Harry and Sally would like to meet each other but are shy about asking the other out on a date. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Haryy }$
$\begin{array}{|l|l|l|l|}\hline & & {\text { Starbucks }} & \text { Dunkin Donuts } \\\hline \text { Sally } & \text { Starbucks } & \text { H: } 1, \mathrm{~S}: 1 & \text { H: } 0, \mathrm{~S}: 0 \\\hline & \text { Dunkin Donuts } & \text { H: } 0, \mathrm{~S}: 0 & \text { H: } 1, \mathrm{~S}: 1 \\\hline\end{array}$ What is Harry's best strategy?

A) Harry has no best strategy.
B) Go to Dunkin' Donuts.
C) Go to Starbucks.
D) Stay at home.

Question 48

Optimal rollback strategies are most difficult in:

A) sequential games.
B) simultaneous games.
C) zero sum games.
D) repeated games.

Question 49

A mixed strategy means a player:

A) makes random moves in a sequential game.
B) makes random moves in a simultaneous game.
C) mixes random moves with nonrandom moves.
D) mixes optimal and suboptimal moves to confuse her opponent.

Question 50

The potential for return to cooperation is greatest in:

A) zero sum games.
B) repeated games.
C) sequential games.
D) simultaneous move games.

Question 51

Consider the following payoff matrix facing two criminals. $\begin{array} { | l | l | l | } \hline & { \text { A: Confess } } & \text { A: Not Confess } \\\hline \text { B: Confess } & \text { A: 20yrs, B: 20yrs } & \text { A: 50yrs, B: 2yrs } \\\hline \text { B: Not Confess } & \text { A: 2yrs, B: 50yrs } & \text { A: 10yrs, B: 10yrs } \\\hline\end{array}$ Their options are to confess or not to confess. Given this information:

A) A has a dominant strategy but B does not.
B) B has a dominant strategy but A does not.
C) both A and B have dominant strategies.
D) neither A nor B has a dominant strategy.

Question 52

Consider the following payoff matrix facing Harry and Sally when each chooses to go to the coffee shop listed. Harry wants to avoid Sally at the coffee shop and is not happy when Sally ends up in the same shop he chooses. Sally would like to see Harry, and so she is not happy when Harry ends up in a different coffee shop. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Haryy }$
$\begin{array}{|l|l|l|l|}\hline & & {\text { Starbucks }} & {\text { Dunkin Donuts }} \\\hline \text { Sally } & \text { Starbucks } & \text { H: }-1, \mathrm{~S}: 1 & \text { H: } 1, \mathrm{~S}:-1 \\\hline & \text { Dunkin Donuts } & \text { H: } 1, \mathrm{~S}:-1 & \text { H: }-1, \mathrm{~S}: 1 \\\hline\end{array}$
Given this payoff:

A) Harry has a dominant strategy but Sally does not.
B) Sally has a dominant strategy but Harry does not.
C) both Harry and Sally have dominant strategies.
D) neither Harry nor Sally has a dominant strategy.

Question 53

A simultaneous game is one in which:

A) players act together to achieve a common goal.
B) players take turns making moves and/or decisions.
C) players make their moves and/or decisions at the same time.
D) there is never a winner if players act rationally.

Question 54

A sequential game is one where:

A) players act together to achieve a common goal.
B) players take turns making moves and/or decisions.
C) players make their moves and/or decisions at the same time.
D) there is never a winner if players act rationally.

Question 55

Consider the following payoff matrix facing Harry and Sally when each chooses to go to the coffee shop listed. Both Harry and Sally would like to meet each other but are shy about asking the other out on a date. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Haryy }$
$\begin{array}{|l|l|l|l|}\hline & & {\text { Starbucks }} & \text { Dunkin Donuts } \\\hline \text { Sally } & \text { Starbucks } & \text { H: } 1, \mathrm{~S}: 1 & \text { H: } 0, \mathrm{~S}: 0 \\\hline & \text { Dunkin Donuts } & \text { H: } 0, \mathrm{~S}: 0 & \text { H: } 1, \mathrm{~S}: 1 \\\hline\end{array}$ If Harry and Sally go to the coffee shop every day, what is Harry's best strategy?

A) Harry has no best strategy.
B) Choose one shop to go to and keep going to it.
C) Randomly choose between the two shops and hope Sally will end up there too.
D) Stay at home.

Question 56

Consider the following payoff matrix facing Harry and Sally when each chooses to go to the coffee shop listed. Harry wants to avoid Sally at the coffee shop and is not happy when Sally ends up in the same shop he chooses. Sally would like to see Harry, and so she is not happy when Harry ends up in a different coffee shop. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Haryy }$
$\begin{array}{|l|l|l|l|}\hline & & {\text { Starbucks }} & {\text { Dunkin Donuts }} \\\hline \text { Sally } & \text { Starbucks } & \text { H: }-1, \mathrm{~S}: 1 & \text { H: } 1, \mathrm{~S}:-1 \\\hline & \text { Dunkin Donuts } & \text { H: } 1, \mathrm{~S}:-1 & \text { H: }-1, \mathrm{~S}: 1 \\\hline\end{array}$
Assuming that Sally and Harry go to the coffee shop each day, what is Harry's best strategy?

A) Go to Starbucks because Sally won't go there.
B) Go to Dunkin' Donuts because Sally won't go there.
C) Go to Starbucks one day and Dunkin' Donuts the next and maintain that pattern.
D) Randomly choose between going to Starbucks and going to Dunkin' Donuts.

Question 57

The rationality assumptions of game theory:

A) always hold in the real world.
B) never hold in the real world.
C) sometimes hold in the real world.
D) make game theory irrelevant.

Question 58

A mixed strategy is most useful:

A) in sequential games.
B) in simultaneous games.
C) in both sequential and simultaneous games.
D) only when the outcome is random.

Question 59

Which of the following games has a first-mover advantage?

A) Tic-tac-toe
B) Prisoner's dilemma
C) Rock, paper, scissors
D) Vickrey auction

Question 60

Backward induction will not lead to a determinate sequence of actions for:

A) games with dominant strategies.
B) sequential games.
C) simultaneous move games.
D) mixed strategy games.

Question 61

In a Vickrey auction, a bidder's strategy:

A) is to bid what he or she would be willing to pay.
B) is to bid just slightly more than the next bidder.
C) is to bid just below the next highest bidder.
D) requires the bidder to understand game theory to bid properly.

Question 62

Why might the economy as a whole conform to the predictions of a model even if not all people are rational?

A) The standard model doesn't assume rationality.
B) People who are rational will profit from those who are not.
C) People who are irrational will profit from those who are not.
D) It won't; for the standard model to work, all people must be rational.

Question 63

Most games in real life:

A) require intuition, common sense, and calculations.
B) require a mixed strategy.
C) require a rollback strategy.
D) have a best solution.

Question 64

In a sealed-bid Vickrey auction, the person who bids the:

A) highest gets the object of the bid at the price he or she bid.
B) second highest bidder gets the good and pays that price.
C) second highest bidder has the option to receive the good if he or she pays the price of the highest bidder.
D) highest bidder gets the object but pays the price bid by the second highest bidder.

Question 65

Behavioral economics helps explain:

A) why people are rational.
B) why people are selfish.
C) why being selfish is rational.
D) the degree to which people are altruistic.

Question 66

Informal game theory:

A) relies on deductive logic.
B) shows how the Nash equilibrium is reached.
C) assumes people calculate their optimal strategy.
D) considers how people actually think and behave.

Question 67

In a standard sealed-bid auction, the person who bids the:

A) highest gets the object of the bid.
B) second highest gets the good and pays that price.
C) second highest has the option to receive the good if she pays the price of the highest bidder.
D) highest gets the object but pays the price bid by the second highest bidder.

Question 68

If two choices are the same but one is presented in a positive manner and one in a negative context, people:

A) are rational and respond the same.
B) respond the same because of the endowment effect
C) respond differently because of the endowment effect.
D) respond differently because of the framing effect.

Question 69

If people are given one of two items of the same value and are given the choice to exchange it:

A) about 50 percent will make the change since half prefer the item they have and half prefer the item they do not have.
B) everyone will keep the first item since it was free.
C) everyone will trade since people like to trade.
D) most will keep the original item since people tend to value what they have more than a product that they do not.

Question 70

Assuming the standard assumptions, in an infinitely long repeated-play ultimatum game, the second player's best strategy is most likely to:

A) reject offers that appear unfair.
B) will always accept any offer.
C) will always accept only those offers over 50 percent of the total.
D) reject all offers.

Question 71

A Nash equilibrium:

A) will always be reached.
B) is always reached in game playing.
C) sometimes may not be reached because people assume others react rationally.
D) sometimes may not be reached because people do not assume that others act rationally.

Question 72

The fact that airlines offer off-peak airline discounts rather than peak-time surcharges is an example of:

A) the endowment effect.
B) framing effects.
C) non-zero sum game.
D) irrational behavior.

Question 73

The endowment effect in behavioral economics refers to how people:

A) are averse losses in a game of chance such as poker.
B) prefer stock market gains over losses.
C) value things more if they own them.
D) avoid the loss of something of high value.

Question 74

Assuming the standard assumptions, in a single-play ultimatum game, the second player's best strategy in the last round is to:

A) reject all but evenly split offers.
B) accept any offer greater than zero.
C) accept only those offers over 50 percent of the total.
D) reject all offers.

Question 75

Assuming the standard assumptions, in a repeated-play ultimatum game, the first player's best strategy in the last round is to:

A) split the money evenly with a bit more going to him or herself.
B) give the most money to the opponent.
C) give the most money to oneself.
D) take all the money for oneself.

Question 76

In a standard highest sealed-bid auction, a bidder's best strategy:

A) is to bid what he or she would be willing to pay.
B) is to bid slightly more than what he or she expects the second highest bidder to bid.
C) always ensures that the person who wants it the most will get the bid.
D) requires the bidder to understand game theory to bid properly.