Deck 13: Strategies Over Time

Question 1

When a prisoners' dilemma game is repeated a finite number of times (T)

A)cooperation unravels during the first round of the game, resulting in the static game Nash equilibrium.
B)cooperation continues until the T-2 round, where the players will switch to a non-cooperative Nash equilibrium.
C)firms cooperate and achieve the collusive Nash equilibrium for all rounds.
D)None of the above.

Answer 1

cooperation unravels during the first round of the game, resulting in the static game Nash equilibrium.

Question 2

In a Stackelberg oligopoly

A)the leader moves first, and the follower chooses its price in the second stage of the game.
B)the leader moves first, and the follower chooses its output in the second stage of the game.
C)both firms act simultaneously, but one chooses price and the other output level.
D)there is no Nash equilibrium.

Answer 2

the leader moves first, and the follower chooses its output in the second stage of the game.

Question 3

In an indefinitely repeated game, a firm might use a ________ to ________ a rival that defects from a cooperative strategy.

A)trigger strategy; threaten
B)trigger strategy; punish
C)legal maneuver; sue
D)tacit threat; dissuade

Answer 3

trigger strategy; punish

Question 4

In a finitely repeated prisoners' dilemma game

A)firms will only cooperate if they each adopt a tit-for-tat strategy.
B)firms cooperate and achieve the collusive Nash equilibrium for all rounds.
C)firms cooperate for most of the rounds, but switch to the non-cooperative outcome in the final couple of rounds.
D)firms do not cooperate and the static game Nash equilibrium is the outcome for each round.

Question 5

A sub-game perfect Nash equilibrium is defined as

A)a set of strategies that are a Nash equilibrium in every subgame of a static game.
B)a set of strategies that are a Nash equilibrium in every subgame of a dynamic game.
C)a set of strategies that are a Nash equilibrium in a single subgame of a dynamic game.
D)the game within the game.

Question 6

In the Stackelberg model, the leader has a first-mover advantage because it

A)has lower costs than the follower.
B)chooses its output to manipulate the follower to produce the output that most benefits the leader.
C)reacts to the follower's decision.
D)differentiates its output.

Question 7

A an example of a game in which a leader moves first, and then the other rivals follow is a ________ game.

A)Stackelberg model
B)Cournot model
C)finite move
D)tit-for-tat

Question 8

The trench warfare case during World War I is an example of a(n)

A)tit-for-tat strategy.
B)explicit agreement.
C)non-cooperative Nash equilibrium.
D)None of the above.

Question 9

Which of the following is a dynamic game?

A)rock-paper-scissors (Roshambo)
B)flipping pennies
C)chess
D)None of the above.

Question 10

In a tit-for-tat strategy, a player

A)randomly punishes its rival.
B)ensures that the joint profit is maximized in each round.
C)copies the action of its rival's prior move in the subsequent rounds.
D)maximizes the joint profit in the game.

Question 11

In a repeated prisoners' dilemma game

A)the players act sequentially.
B)the outcomes are the same as in a static prisoners' dilemma game.
C)firms' choices are not influenced by their opponents' actions.
D)cooperation may result if the game is played indefinitely.

Question 12

If firms execute a strategy that triggers a permanent punishment, the result in an indefinitely repeated game is

A)undefined.
B)the non-cooperative Nash equilibrium.
C)the collusive Nash equilibrium.
D)economically inefficient.

Question 13

Repeated games are conducive to

A)explicit cooperation.
B)tacit cooperation.
C)corruption.
D)failing to have a Nash equilibrium.

Question 14

Which of the following is a sequential game?

A)rock-paper-scissors (Roshambo)
B)paintball
C)Monopoly
D)boxing

Question 15

The Cournot and Stackelberg models are similar, EXCEPT Cournot ________ and Stackelberg ________.

A)sets price; sets output
B)sets output; sets price
C)is dynamic; is static
D)is static; is dynamic

Question 16

Implicit collusion, where players do NOT have an explicit agreement

A)are strictly prohibited under antitrust laws.
B)are not strictly prohibited under antitrust laws.
C)results in cheating.
D)maximizes total surplus in the market.

Question 17

A dynamic game is a game

A)in which the players are highly animated.
B)that is sequential or repeated.
C)where the payoffs change frequently.
D)that has actions instead of strategies.

Question 18

Dynamic and static games have outcomes that

A)may be different.
B)are always different.
C)are not Nash equilibria.
D)result from dominant strategies.

Question 19

When there's uncertainty as to the length of a game

A)cooperation still does not occur, because cooperation unravels at the beginning of the game.
B)cooperation can potentially occur if trigger strategies are adopted.
C)firms will cooperate because they treat the game as one that is infinitely repeated.
D)firms will randomly pick among the Nash equilibria.

Question 20

If firms adopt a strategy that triggers a permanent punishment, the result in an indefinitely repeated game is

A)undefined.
B)the noncooperative Nash equilibrium.
C)the collusive Nash equilibrium.
D)economically inefficient.

Question 21

An incumbent firm uses limit pricing

A)to set price below a potential rival's marginal cost, thus making entry unprofitable.
B)to set one price for a quantity of a good below a certain limit, and a second price for purchases above the limit.
C)when it has no other advantages over a potential rival.
D)if it is limited in the quantity of inputs it can purchase to produce output.

Question 22

The above figure shows the payoff matrix facing an incumbent firm and a potential entrant. Assuming a fixed cost of entry, the incumbent will deter entry because

A)it is more profitable than accommodating entry.
B)it increases consumer surplus.
C)the potential entrant winds up with zero profit.
D)the incumbent would earn zero profit if it accommodated entry.

Question 23

An incumbent announces it will significantly increase output in the next period, but only has contracts for the amount produced this period. The announcement is a

A)credible threat.
B)non-credible threat.
C)commitment.
D)mixed strategy.

Question 24

In the mini-case on pay-for-delay

A)incumbents are attempting to delay entry of generic drugs.
B)the deals incumbents made with potential entrants may be illegal.
C)the deals are only profitable for approximately six months.
D)All of the above.

Question 25

If a Cournot duopolist announced that it will double its output, the other firm does not view the announcement as credible because

A)the announcing firm's profits will fall if it carries out the threat.
B)the other firm's profits will fall if the announcing firm carries out the threat.
C)the other firm's profits will rise if the announcing firm carries out the threat.
D)the other firm will double output also.

Question 26

In a Stackelberg game, a monopolist could deter entry from a potential rival by

A)telling the potential rival not to enter.
B)strategically moving first.
C)moving to a Bertrand model.
D)None of the above.

Question 27

With regard to preventing entry, if identical firms act simultaneously

A)they cannot credibly threaten each other.
B)they will all incur losses.
C)only one firm will enter the market.
D)none of them will enter the market.

Question 28

The above figure shows the payoff to two gasoline stations, A and B, deciding to operate in an isolated town. Suppose a $60 fee is required to enter the market. If firm A chooses its strategy first, then

A)firm A will not enter.
B)neither firm will enter.
C)both firms will enter.
D)firm A will enter and firm B will not.

Question 29

A player that starts at the end of the game and progresses to the first move to determine best responses

A)doesn't understand how to play a game.
B)is acting irrationally.
C)is using backward induction.
D)is using the Stackelberg Strategy.

Question 30

Deterring entry might require a firm to

A)price their product closer to the competitive price than to the monopoly price.
B)price their product closer to the monopoly price than to the competitive price.
C)drop output almost to zero to show the consumers "who's boss."
D)drop price almost to zero to get price below marginal cost.

Question 31

The above figure shows the payoff to two gasoline stations, A and B, deciding to operate in an isolated town. If firm A chooses its strategy first, then

A)firm A will not enter.
B)firm B's entry is blockaded.
C)both firms will enter.
D)firm A will enter and firm B will not.

Question 32

The above figure shows the payoff matrix facing an incumbent firm and a potential entrant. The potential entrant cannot earn a profit if the incumbent

A)chooses the Cournot level of output.
B)chooses the Stackelberg leader level of output.
C)shuts down.
D)deters entry.

Question 33

An exclusion contract

A)is a form of entry deferral.
B)gives a firm the right to be the exclusive provider of a good in a particular market.
C)may not always be profitable for the incumbent.
D)All of the above.

Question 34

The ability to deter entry requires

A)a credible threat that if entry occurs the firm is willing to produce more than they would otherwise.
B)a credible threat that if entry occurs the firm will not produce more than they would otherwise.
C)a good lawyer.
D)a clever accounting department.

Question 35

If a Cournot duopolist announced that it will double its output

A)it becomes the leader.
B)the other firm does not view the announcement as credible.
C)the other firm will shut down.
D)the other firm will double output also.

Question 36

In a dynamic game, rational players

A)will reject outcomes that are not subgame perfect.
B)use backward induction to determine best responses.
C)have strategies that select a Nash equilibrium in the game as a whole.
D)All of the above.

Question 37

If firms have different costs and market demand only supports the quantity the incumbent produces, then the incumbent's threat to use limit pricing

A)is credible.
B)is not credible.
C)would be illegal.
D)is unable to be determined with the information given.

Question 38

The above figure shows the payoff to two gasoline stations, A and B, deciding to operate in an isolated town. Suppose a $30 fee is required to enter the market. If firm A chooses its strategy first, then

A)firm A will not enter.
B)neither firm will enter.
C)both firms will enter.
D)firm A will enter and firm B will not.

Question 39

The above figure shows the payoff matrix facing an incumbent firm and a potential entrant. Assuming a fixed cost of entry, the outcome will be that the incumbent

A)deters entry.
B)chooses the Stackelberg leader level of output but the potential entrant does not enter anyway.
C)chooses the Stackelberg leader level of output and the potential entrant enters.
D)deters entry and earns zero profit.

Question 40

An incumbent's threat to use limit pricing if a firm enters the market

A)is credible if the firms have identical costs and market demand supports both firms.
B)is credible if the firms have different costs and market demand won't support both firms.
C)is not credible if the firms have different costs and market demand won't support both firms.
D)is cheap talk, because the other firm will enter and the incumbent will still be able to charge monopoly pricing.

Question 41

Behavioral game theory assumes

A)people act rationally.
B)people are subject to biases that cause them to act irrationally.
C)that people behave differently when playing games than when "playing for real."
D)people optimize using all available information.

Question 42

By vertically integrating, two firms can

A)increase market share.
B)avoid holdup problems.
C)limit the problems inherent in moving too quickly.
D)avoid antitrust issues.

Question 43

One way to avoid holdups is to

A)use contracts.
B)vertically integrate.
C)use multiple sources.
D)All of the above.

Question 44

Assume a firm is a monopoly and enjoys $10 million in profits per year. The firm lobbies to have a moratorium passed by Congress on new firms in its market for the next 25 years. If there is no discount rate, how much would any firm(s)arguing against the moratorium be willing to spend to block it?

A)something less than $250 million
B)$250 million
C)$251 million
D)$250 billion

Question 45

Regarding fixed costs of entry

A)both incumbents and potential entrants are affected by them.
B)potential entrants are affected by them while incumbents are not.
C)neither incumbents nor potential entrants consider them.
D)incumbent's decisions are affected by them, while the potential entrant ignores them.

Question 46

A holdup problem occurs

A)when a financial institution undertakes too little investment in security.
B)when one firm must make a specific investment and a second firm takes advantage of it.
C)if the firm that moves second in a Stackelberg game chooses the incorrect output level.
D)if you are entering into a contract with a government entity.

Question 47

Assume a firm is a monopoly and enjoys $10 million in profits per year. The firm lobbies to have a moratorium passed by Congress on new firms in its market for the next 25 years. If there is no discount rate, how much would the firm be willing to pay to deter entry?

A)$250 million
B)$25 million
C)$100 million
D)$250 billion

Question 48

An incumbent monopolist producing more output than necessary might be able to keep potential rivals from entering

A)by flooding the market with products below its marginal cost in the short run.
B)if learning by doing reduces marginal cost.
C)if the long-run marginal cost can be lowered below the potential entrant's short-run marginal cost.
D)All of the above.

Question 49

Incumbents are unaffected by fixed costs of entry while potential entrants are affected by them because

A)for potential entrants the cost is avoidable, while for the incumbent, it is not.
B)fixed costs will be greater for the potential entrant than for the incumbent.
C)fixed costs are zero for the incumbent.
D)incumbents will act to prevent entry at all costs.

Question 50

If Intel moves first and makes a large investment in a chip fabrication plant in Bolivia in exchange for tax credits, Intel has made ________ and Bolivia ________.

A)a tactical error; will nationalize the plant
B)a specific investment; will create the tax credit
C)a specific investment; has a hostage
D)a general investment; no longer has to grant the tax credits

Question 51

A disadvantage of moving too quickly is that

A)costs of entry are higher.
B)consumers aren't loyal.
C)firms are subject to holdup problems.
D)All of the above.

Question 52

Which of the following is a way to deter entry?

A)increase costs through legislation that affects only new entrants
B)raise switching costs for customers that use your products
C)obtain a patent so that others must license your invention
D)All of the above.

Question 53

With regard to preventing entry, if identical firms act simultaneously

A)they cannot credibly threaten each other.
B)they will all incur losses.
C)only one firm will enter the market.
D)none of them will enter the market.

Question 54

In a repeated game, deterring entry

A)is not possible.
B)is not a rational strategy if money is lost fighting the first potential entrant.
C)may require losing money fighting the first potential entrant.
D)cannot form a subgame perfect Nash equilibrium.

Question 55

Designing your products with proprietary technology, is a way to

A)protect intellectual property.
B)increase switching costs for your customers.
C)grandfather in your products.
D)decrease your marginal cost.

Question 56

A specific investment is

A)one that can only be used in a transaction with a single firm.
B)an investment that cannot be physically moved, such as an oil refinery.
C)reduces the possibility of a holdup occurring.
D)is more expensive than a general investment.

Question 57

An incumbent's threat to retaliate after a potential competitor enters the market will be taken seriously by potential competitors if

A)the incumbent can still earn a profit after carrying out the threat.
B)the incumbent earns greater profit carrying out the threat than by accommodating entry.
C)the potential entrant cannot earn a profit if the threat is carried out.
D)the potential entrant's profit exceeds the incumbent's if the threat is carried out.

Question 58

If a monopolist faces entry by a potential rival, investing to lower its marginal cost

A)is a credible way to deter entry.
B)is not a credible threat.
C)is credible but will not deter entry.
D)will not occur, even when there are no barriers to entry.

Question 59

A disadvantage of moving too quickly is that

A)costs of entry are higher.
B)the likelihood of misunderstanding the demand is greater.
C)followers gain an advantage by learning from the first-mover.
D)All of the above.

Question 60

If there are low barriers to entry, a monopolist

A)might undertake investment to lower marginal cost in the face of a potential rival.
B)will undertake investment to lower marginal cost in order to increase profits.
C)will not undertake investment to lower marginal cost under any circumstances because profits are lower.
D)Both A and B.

Question 61

In an ultimatum game where the payoff totals $100 and is split in $1 increments, the rational amount for the proposer to offer and the responder to take is

A)$0.
B)$1.
C)$50.
D)$100.

Question 62

In a beauty contest game such as predicting the average of respondents choosing a number between 0 and 100

A)the outcome is not normally the Nash equilibrium for the game.
B)the winner usually exhibits level-3 reasoning.
C)the winner must understand the non-rationality of the players.
D)All of the above.

Question 63

In the ultimatum game, one reason players don't choose the rational offer is

A)that there are too many possible outcomes to reasonably consider.
B)they are worse off by taking the offer.
C)most people believe in reciprocity, and will therefore get even if the prosper treats them badly.
D)that it is not a Nash equilibrium.

Question 64

In an ultimatum game

A)non-profit-maximizing behavior often occurs.
B)players move simultaneously.
C)players act in an economically rational way.
D)one player receives nothing.

Question 65

Behavioral game theory assumes

A)people act rationally.
B)people have limited calculation capability or psychological biases that cause them to act irrationally.
C)that people behave differently when playing games than when "playing for real."
D)people overcome their psychological biases.

Question 66

In the ultimatum game, one reason players don't choose the rational offer is

A)that there are too many possible outcomes to reasonably consider.
B)they are worse off by taking the offer.
C)they prefer to sacrifice to punish "unfair" behavior.
D)that it is not a Nash equilibrium.

Question 67

In the beauty contest where players predict the outcome of players choosing a number between 0 and 100

A)the Nash equilibrium is 0.
B)your prediction should be based on what you think the winning number will be.
C)the Nash equilibrium is 33.
D)there is no Nash equilibrium because people are not rational.