Deck 10: Game Theory: Inside Oligopoly

Question 1

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 advertise, 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 be in business for only one year, the Nash equilibrium is

A)For each firm to advertise.
B)For neither firm to advertise.
C)For your firm to advertise and the other not to advertise.
D)None of the statements associated with this question are correct.

Answer 1

A

Question 2

If you advertise and your rival advertises, you each will earn $4 million in profits.If neither of you advertise, 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 $1 million and the non advertising firm will earn $5 million.If you and your rival plan to be in business for only one year, the Nash equilibrium is

A)For each firm to advertise.
B)For neither firm to advertise.
C)For your firm to advertise and the other not to advertise.
D)None of the statements associated with this question are correct.

Answer 2

B

Question 3

If you advertise and your rival advertises, you each will earn $4 million in profits.If neither of you advertise, 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 $1 million and the non advertising firm will earn $5 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 is for each firm to

A)not advertise until the rival does, and then to advertise for ever.
B)never advertise.
C)always advertise.
D)advertise until the rival does not advertise, and then not advertise forever.

Answer 3

B

Question 4

Which of the following are important determinants of collusion in pricing games?

A)The number of firms.
B)Firm size.
C)History.
D)All of the statements associated with this question are correct.

Question 5

What are secure strategies for firm A and firm B respectively?

A)(low price, high price).
B)(high price, low price).
C)(high price, high price).
D)(low price, low price).

Question 6

What are the secure strategies for Firm A and Firm B respectively?

A)(low price, high price).
B)(high price, low price).
C)(high price, high price).
D)(low price, low price).

Question 7

If this one-shot game is repeated 100 times, the Nash-equilibrium payoffs of the players will be ________________ each period.

A)(2, 2)
B)(10, -8)
C)(-8, 10)
D)(6, 6)

Question 8

Suppose the game is infinitely repeated.Then the "best" the firms could do in a Nash equilibrium is to earn ___ per period.

A)(0, 0)
B)(5, -5)
C)(-5, 5)
D)(10, 10)

Question 9

Which of the following is true?
A)

A)A dominant strategy for Firm A is "high price".
B)There does not exist a dominant strategy for Firm
C)A dominant strategy for Firm B is "low price".
D)none of the statements associated with this question are correct.

Question 10

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 advertise, 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 be in business for 10 years, then the Nash equilibrium is

A)For each firm to advertise every year.
B)For neither firm to advertise in early years, but to advertise in later years.
C)For each firm to not advertise in any year.
D)For each firm to advertise in early years, but not advertise in later years.

Question 11

What are dominant strategies for Firm A and Firm B respectively?

A)(low price, high price).
B)(high price, low price).
C)(high price, high price).
D)(low price, low price).

Question 12

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 perfect equilibrium strategies?

A)(enter, soft).
B)(not enter, soft).
C)(enter, hard).
D)(not enter, hard).

Question 13

Which of the following are the Nash equilibrium payoffs (each period) if the game is repeated 10 times?

A)(0, 0).
B)(5, -5).
C)(-5, 5).
D)(10, 10).

Question 14

Which of the following are Nash equilibrium payoffs in the one-shot game?

A)(0, 0).
B)(5, -5).
C)(-5, 5).
D)(10, 10).

Question 15

What are the Nash equilibrium strategies for Firm A and Firm B respectively in a one-shot game?

A)(low price, low price).
B)(high price, high price).
C)(low price, high price).
D)(low price, low price) and (high price, high price).

Question 16

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?

A)(enter, hard) and (not enter, hard).
B)(enter, soft) and (not enter, soft).
C)(not enter, hard) and (enter, soft).
D)(enter, hard) and (not enter, soft).

Question 17

What are the Nash equilibrium strategies for firm A and B respectively?

A)(low price, high price).
B)(high price, low price).
C)(high price, high price).
D)(low price, low price).

Question 18

If this one-shot game is repeated three times, the Nash equilibrium payoffs for Firm A and B will be ______ each period.

A)(10, 9)
B)(11, 11)
C)(-10, 7)
D)(15, 8)

Question 19

If you advertise and your rival advertises, you each will earn $4 million in profits.If neither of you advertise, 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 $1 million and the non advertising firm will earn $5 million.If you and your rival plan to be in business for 10 years, then the Nash equilibrium is

A)For each firm to advertise every year.
B)For neither firm to advertise in early years, but to advertise in later years.
C)For each firm to not advertise in any year.
D)For each firm to advertise in early years, but not advertise in later years.

Question 20

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 advertise, 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

A)for each firm to not advertise until the rival does, and then to advertise forever.
B)for your firm to never advertise.
C)for your firm to always advertise when your rival does.
D)for each firm to advertise until the rival does not advertise, and then not advertise forever.

Question 21

Which of the following strategies constitutes a Nash equilibrium of the game:

A)S1, t1.
B)S2, t2.
C)S2, t3.
D)S1, t2.

Question 22

Use the following information to answer question:
Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the following normal form game.
What should the manager do to solve the shirking problem?

A)Always monitor.
B)Never monitor.
C)Sincerely tell workers not to shirk.
D)Engage in "random" spot checks of the work place.

Question 23

Use the following information to answer question:
Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the following normal form game.
Which of the following pair of strategies constitute a Nash equilibrium?

A)Manager monitors and worker works.
B)Manager does not monitor and worker works.
C)Manager monitors and worker shirks.
D)None of the statements associated with this question are correct.

Question 24

Collusion is:

A)legal in the United States.
B)not possible when firms interact repeatedly forever.
C)more likely in industries with a large number of firms.
D)none of the statements associated with this question are correct.

Question 25

Game theory is especially useful for analysis in the following types of markets:

A)perfect competition.
B)monopolistic competition.
C)oligopoly.
D)monopoly.

Question 26

The dominant strategy of Player 1 is:

A)S1.
B)S2.
C)S1 and S2.
D)a dominant strategy does not exist.

Question 27

Which of the following is true?

A)In a one-shot game, a collusive strategy always represents a Nash equilibrium.
B)A perfect equilibrium occurs when each player is doing the best he can regardless of what the other player is doing.
C)Each Nash equilibrium is a perfect equilibrium.
D)Every perfect equilibrium is a Nash equilibrium.

Question 28

Which of the following conditions are necessary for the existence of a Nash equilibrium?

A)The existence of dominant strategies for both players.
B)The existence of a dominant strategy for one player and the existence of secure strategy for another player.
C)The existence of secure strategy for both players.
D)none of the statements associated with this question are correct.

Question 29

Which of the following is true for a Nash equilibrium of a two-player game?

A)The joint payoffs of the two players are highest compared to other strategy pairs.
B)Given another player's strategy stipulated in that Nash equilibrium, a player cannot improve his welfare by changing his strategy.
C)A Nash equilibrium is always unique in real world problems.
D)Given another player's strategy stipulated in that Nash equilibrium, a player cannot improve his welfare by changing his strategy and a Nash equilibrium is always unique in real world problems.

Question 30

The dominant strategy for Player 1 is:

A)S1.
B)S2.
C)S1 and S2.
D)none of the statements associated with this question are correct.

Question 31

Which of the following enhances the ability of waste companies to collude?

A)Decals on waste receptacles.
B)High interest rates.
C)Differentiated nature of products.
D)Large number of firms.

Question 32

What are the Nash equilibrium strategies for Firm A and Firm B respectively?

A)(low price, low price).
B)(high price, high price).
C)(low price, high price).
D)(low price, low price) and (high price, high price).

Question 33

Which of the following is true?

A)For a finitely repeated game, the game is played enough times to effectively punish cheaters and therefore collusion is likely.
B)In an infinitely repeated game with a low interest rate, collusion is unlikely because the game unravels so that effective punishment cannot be used during any time period.
C)A secure strategy is the optimal strategy for a player no matter what the opponent does.
D)None of the statements associated with this question are correct.

Question 34

Which of the following is true?

A)In an infinitely repeated game, collusion is always a Nash equilibrium.
B)In a finitely repeated game with a certain end period, collusion is unlikely because effective punishments cannot be used during any time period.
C)All of the statements associated with this question are correct.
D)None of the statements associated with this question are correct.

Question 35

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

A)Make sure the payoffs reflect the true payoffs of the oligopolists.
B)Make sure whether the oligopolists move simultaneously or sequentially.
C)Make sure the problem considered is of a one-shot or repeated nature.
D)All of the statements associated with this question are correct.

Question 36

Which of the following is true?
A)

A)A dominant strategy for Firm A is "high price".
B)There does not exist a dominant strategy for Firm
C)A dominant strategy for Firm B is "low price".
D)none of the statements associated with this question are correct.

Question 37

The dominant strategy for Player 2 is:

A)t1.
B)t1 and t2.
C)t3.
D)none of the statements associated with this question are correct.

Question 38

Which of the following pair of strategies constitute a Nash equilibrium of the game?

A)S1, t1.
B)S1, t2.
C)S2, t1.
D)S1, t2 and S2, t1.

Question 39

Based on the following game, what are the secure strategies for Player One and Player Two?

A)S1 and t2.
B)S1 and t1.
C)S2 and t2.
D)S2 and t1.

Question 40

Use the following information to answer question:
Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the following normal form game.
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 true?

A)There are multiple Nash equilibria.
B)($25, $25) is a Nash equilibrium.
C)A Nash equilibrium is also a perfect equilibrium.
D)There are multiple Nash equilibria and ($25, $25) is a Nash equilibrium.

Question 41

What is the maximum interest rate that can sustain collusion?

A)30%.
B)15%.
C)66.7%.
D)20%.

Question 42

A Nash equilibrium with a non-credible threat as a component is:

A)a perfect equilibrium.
B)not a perfect equilibrium.
C)a sequential equilibrium.
D)a somewhat perfect equilibrium.

Question 43

When a worker announces that he plans to quit, say next month, the "threat" of being fired has no bite.The worker may find it in his interest to shirk.What can the manager do to overcome this problem?

A)"Fire" the worker as soon as he announces his plans to quit.
B)Provide the worker some rewards for good work that extend beyond the termination of employment with your firm.
C)Monitor the worker more frequently than usual and fire him when he is caught shirking.
D)Pay the worker some rewards when he announces his plan to quit.

Question 44

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

A)sales.
B)advertisement.
C)warranties/guarantees.
D)both sales and advertisements.

Question 45

Which of the following is a factor(s) affecting collusion in an infinitely repeated pricing game?

A)Number of firms.
B)Firm size.
C)History.
D)All of the statements associated with this question are correct.

Question 46

A coordination problem arises whenever there:

A)is no Nash equilibrium in a game.
B)is a unique Nash equilibrium but it is not very desirable.
C)are multiple Nash equilibria.
D)are no dominant strategies for both players.

Question 47

Game theory suggests that, in the absence of patents, the privately motivated innovation decisions of firms might lead to:

A)too little innovation.
B)too much innovation.
C)the socially efficient level of innovation.
D)none of the statements associated with this question are correct.

Question 48

If C = 15, which is the perfect equilibrium of the game?

A)A innovates, B does not.
B)A innovates, B innovates.
C)Neither firm innovates.
D)None of the statements associated with this question are correct.

Question 49

Suppose that Firm A deviates from a trigger strategy to support a high price.What is the present value of A's payoff from cheating?

A)70.
B)50.
C)30.
D)20.

Question 50

A finitely repeated game differs from an infinitely repeated game in that:

A)The former needs a lower interest rate to support collusion than the latter needs.
B)There is an "end-of-period" problem for the former.
C)A collusive outcome can usually be sustained in the former but not the latter.
D)All of the statements associated with this question are correct.

Question 51

Under what condition will Firm B have an incentive to adopt if Firm A adopts the innovation?

A)C > 30.
B)C < 30.
C)10 > C > 0.
D)35 > C > 25.

Question 52

Which of the following is not true?

A)An extensive form representation usually provides more information than a normal form representation of a game.
B)A normal form game is most useful for sequential-move games.
C)The notion of perfect equilibrium is more useful in analyzing extensive form games than normal form games.
D)The notion of credible threats makes more sense in extensive form representations than in normal form representations of a game.

Question 53

Use the following information to answer question:
Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the following normal form game.
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.If you were the labor union, which type of "rules of play" would you prefer to divide the $50 surplus?

A)One-shot simultaneous-move game.
B)One-shot sequential-move game with management as the first mover.
C)One-shot sequential-move game with labor union as the first mover.
D)One-shot simultaneous-move game and one-shot sequential-move game with management as the first mover.

Question 54

Under what condition will Firm A innovate?

A)C > 30.
B)C < 30.
C)10 > C > 0.
D)35 > C > 25.

Question 55

It is easier to sustain tacit collusion in an infinitely repeated game if:

A)the present value of cheating is higher.
B)there are more players in the game.
C)the interest rate is lower.
D)the present value of cheating is higher and the interest rate is lower.

Question 56

Which of the following is a valid critique of the use of game theory in economics?

A)Payoffs to players may be difficult to measure.
B)Players may not have complete information about each other's payoffs.
C)Game theory assumes rational players.
D)All of the statements associated with this question are correct.

Question 57

Suppose the game is infinitely repeated, and the interest rate is 10%.Both firms agree to charge a high price, provided no player has charged in low price in the past.If both firms stick to this agreement, then the present value of Firm A's payoffs are:

A)220.
B)110.
C)330.
D)550.

Question 58

Use the following information to answer question:
Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the following normal form game.
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 not a Nash equilibrium?

A)Management requests $50 and the labor union accepts $0.
B)Management requests $30 and the labor union accepts $10.
C)Management requests $25 and the labor union accepts $25.
D)Neither management requesting $50 and the labor union accepting $0 nor management requesting $30 and the labor union accepting $10 are Nash equilibria.

Question 59

Use the following information to answer question:
Suppose that you are a manager.You are considering whether or not to monitor employees with the payoffs in the following normal form game.
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 perfect equilibrium?

A)Management requests $49.99, and the labor union accepts $0.01.
B)Management requests $25, and the labor union accepts $25.
C)Management requests $0, and the labor union accepts $50.
D)None of the statements associated with this question are correct.

Question 60

Which of the following is true?

A)A Nash equilibrium is always perfect.
B)A perfect equilibrium is always Nash.
C)A Nash equilibrium is always perfect in a multistage game.
D)Perfect equilibrium and Nash equilibrium are the same concept but with different names.

Question 61

A dominant strategy for firm one is

A)high price.
B)low price.
C)different from firm one's secure strategy.
D)low price and different from firm one's secure strategy.

Question 62

If you advertise and your rival advertises, you each will earn $4 million in profits.If neither of you advertise, 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 $1 million and the non advertising firm will earn $5 million. Which of the following is true?

A)A dominant strategy for Firm A is to advertise.
B)A dominant strategy for Firm B is to advertise.
C)A Nash equilibrium is for both firms to advertise.
D)None of the statements associated with this question are correct.

Question 63

Consider the following innovation game.Firm A must decide whether or not to introduce a new product.Firm B must decide whether or not to clone firm A's product.If firm A introduces and B clones, then firm A earns $1 and B earns $10.If A introduces and B does not clone, then A earns $10 and B earns $2.If firm A does not introduce, both firms earn profits of 0.Which of the following is true.

A)The subgame perfect Nash equilibrium profits are ($10,2).
B)It is not in A's interest to introduce.
C)Firm A does not care if B clones.
D)None of the statements associated with this question are correct.

Question 64

Game theory is best applied to analysis of

A)perfect competition.
B)oligopoly.
C)monopoly.
D)All of the statements associated with this question are correct.

Question 65

Which of the following is a correct statement about a Nash equilibrium in a two-player game?

A)The joint payoffs of the two players are highest compared to other strategy pairs.
B)A Nash equilibrium is always unique in real world problems.
C)Given another player's strategy, no player can improve her welfare by unilaterally changing her strategy.
D)All of the statements associated with this question are correct.

Question 66

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

A)your firm to never advertise.
B)your firm to always advertise when your rival does provided that the interest rate is sufficiently large.
C)each firm to not advertise until the rival does, and then to advertise forever provided the interest rate is sufficiently low.
D)each firm to advertise until the rival does not advertise, and then not advertise forever.

Question 67

Consider the following innovation game.Firm A must decide whether or not to introduce a new product.Firm B must decide whether or not to clone firm A's product.If firm A introduces and B clones, then firm A earns $1 and B earns $10.If A introduces and B does not clone, then A earns $10 and B earns $2.If firm A does not introduce, both firms earn profits of 0.How many Nash equilibria are there for this game.

A)0.
B)1.
C)2.
D)0, but there are secure strategies.

Question 68

When analyzing the behavior of oligopolists, which of the following is crucial for the success of game theoretic analysis?

A)Payoffs do not need to reflect the true payoffs of the oligopolists, they just need to be greater than or equal to zero.
B)Assume that oligopolists always move simultaneously.
C)Do not construct the payoffs of the oligopolists to be interdependent, as the payoff of one player usually does not affect the payoff of the other players.
D)Make sure the problem you are considering is of a one-shot or repeated nature, and you model it accordingly because the order in which players make decisions is important.

Question 69

What are the dominant strategies for Firm A and Firm B respectively?

A)(low price, high price).
B)(high price, low price).
C)(high price, high price).
D)neither firm has a dominant strategy.

Question 70

If player one charges a High Price when player two charges a Low Price, then player two earns:

A)10.
B)5.
C)-5.
D)0.

Question 71

What are secure strategies for firm A and firm B respectively?

A)(low price, low price).
B)(high price, low price).
C)(high price, high price).
D)neither firm has a secure strategy.

Question 72

Which of the following are secure strategies for players one and two, respectively?

A)(High Price, High Price).
B)(High Price, Low Price).
C)(Low Price, High Price).
D)(Low Price, Low Price).

Question 73

If you advertise and your rival advertises, you each will earn $4 million in profits.If neither of you advertise, 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 $1 million and the non advertising firm will earn $5 million. Which of the following is true?

A)A secure strategy for Firm A is to not advertise.
B)A secure strategy for Firm B is to advertise.
C)Firm A does not have a secure strategy.
D)None of the statements associated with this question are correct.

Question 74

If you advertise and your rival advertises, you each will earn $5 million in profits.If neither of you advertise, 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.Which of the following is true?

A)A dominant strategy for Firm A is to advertise.
B)A dominant strategy for Firm B is to advertise.
C)A Nash equilibrium is for both firms to advertise.
D)All of the statements associated with this question are correct.

Question 75

If you advertise and your rival advertises, you each will earn $5 million in profits.If neither of you advertise, 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.Which of the following is true?

A)A secure strategy for Firm A is to not advertise.
B)A secure strategy for Firm B is to not advertise.
C)Firm A does not have a secure strategy.
D)None of the statements associated with this question are correct.

Question 76

If you and your rival plan to be in business for 15 years, then the Nash equilibrium is for

A)you and your rival to not advertise in any year.
B)you and your rival to advertise every year.
C)neither firm to advertise in early years, but to advertise in later years.
D)each firm to advertise in early years, but not advertise in later years.

Question 77

If you advertise and your rival advertises, you each will earn $4 million in profits.If neither of you advertise, 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 $1 million and the non advertising firm will earn $5 million.Suppose this game is repeated for a finite number of times, but the players do not know the exact date at which the game will end.The players can earn profits of $10 each period as a Nash equilibrium to a repeated play of the game if the probability the game terminates at the end of any period is

A)close to 1.
B)close to 0.
C)between zero and one.
D)all of the statements associated with this question are correct.

Question 78

If you and your rival plan to be in business for only one year, the Nash equilibrium is for your firm

A)and your rival to advertise.
B)and your rival not to advertise.
C)to advertise and your rival not to advertise.
D)not to advertise and your rival to advertise.

Question 79

What are the Nash equilibrium strategies for this game?

A)(low price, low price).
B)(high price, high price).
C)(low price, low price) and (high price, high price).
D)none of the statements associated with this question are correct.

Question 80

If you advertise and your rival advertises, you each will earn $5 million in profits.If neither of you advertise, 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.Suppose this game is repeated for a finite number of times, but the players do not know the exact date at which the game will end.The players can earn collusive profits as a Nash equilibrium to the repeated play of the game if the probability the game terminates in any period is

A)1.
B)greater than one.
C)close to zero.
D)none of the statements associated with this question are correct.