Question 1

A Nash equilibrium results when every firm in an industry chooses a strategy that is optimal given the strategies chosen by its competitors.

Accepted Answer

A) True 
 B)False

Question 2

Two grocery stores compete against each other in a community. Both are considering an increase in advertising expenditures. Their interdependent alternatives are described by the payoff matrix.
 $$\begin{array} { | l | l | l | l | } 
\hline & & { \text { Firm 2 } } \
\hline & & \text { Advertise } & \text { Don't Advertise } \
\hline { \text { Firm 1 } } & \text { Advertise } & ( 3,7 ) & ( 5,3 ) \
\hline  & \text { Don'tAdvertise } & ( 4,5 ) & ( 3,3 ) \
\hline
\end{array}$$ (i) Determine whether each firm has a dominant strategy and, if it does, identify the strategy.
(ii) Determine the optimal strategy for each firm.
(iii) Determine the Nash equilibrium.
(iv) Is this a prisoners' dilemma? How do you know?

Accepted Answer

The answer of Two grocery stores compete against each other...

Question 3

Oligopolistic firms often sacrifice profits in order to gain an advantage over competitors in the long run.

Accepted Answer

A) True 
 B)False

Question 4

A market has only two sellers. They are both trying to decide on a pricing strategy. If both firms charge a high price, then each firm will experience a 5 percent increase in profits. If both firms charge a low price, then each firm will experience a 3 percent decrease in profits. If Firm 1 charges a high price and Firm 2 charges a low price, then Firm 1 will experience a 4 percent decrease in profits and Firm 2 will experience a 6 percent increase in profits. If Firm 2 charges a high price and Firm 1 charges a low price, then Firm 2 will experience a 5 percent decrease in profits and Firm 1 will experience a 7 percent increase in profits.
(i) Construct a payoff matrix for this game.
(ii) Determine whether each firm has a dominant strategy and, if it does, identify the strategy.
(iii) Determine the optimal strategy for each firm.
(iv) Determine the Nash equilibrium.
(v) Is this a prisoners' dilemma? How do you know?

Accepted Answer

The answer of A market has only two sellers. They...

Question 5

Two car dealerships compete against each other in a small city. Both are considering an increase in marketing expenditures. Their interdependent alternatives and outcomes are described by the decision tree.
  What is each firm's optimal strategy and anticipated payoff?

Accepted Answer

The answer of Two car dealerships compete against each other...

Exam 11: Game Theory and Strategic Behavior

A Nash equilibrium results when every firm in an industry chooses a strategy that is optimal given the strategies chosen by its competitors.

Oligopolistic firms often sacrifice profits in order to gain an advantage over competitors in the long run.

Two car dealerships compete against each other in a small city. Both are considering an increase in marketing expenditures. Their interdependent alternatives and outcomes are described by the decision tree. What is each firm's optimal strategy and anticipated payoff?