Managerial Economics, 7e (Keat)
Chapter 11 Game Theory and Asymmetric Information
Multiple-Choice Questions
1) Asymmetric information represents a market situation in which
A) all parties to a transaction possess less than full information.
B) one party in a transaction has more information than the other party.
C) some information possessed by the parties in a transaction may be false.
D) a zero-sum game exists.
2) In a zero-sum game
A) the gains of one player are less than the gains of the other player.
B) the gains of one player are greater than the gains of the other player.
C) the gains of one player directly reflect the losses of another player.
D) the gains and losses of players are all expressed in zeros.
3) The Prisoner’s Dilemma is an example of
A) market signaling.
B) a zero-sum game.
C) a non-zero sum, non-cooperative game with a dominant strategy.
D) adverse selection.
4) Moral hazard is the
A) outcome of a Prisoner’s Dilemma.
B) result of market signaling.
C) risk associated with a Dutch auction.
D) risk that one party to a contract may alter its post-contract behavior to the detriment of
another party.
5) If banks face a problem in loan markets when bad credit risks are the ones most likely to seek
bank loans, it is described as
A) moral hazard.
B) moral suasion.
C) adverse selection.
D) fraud.
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6) John takes out a student loan at a bank but spends his money in Las Vegas to play at the
casino. This situation is an example of
A) moral hazard.
B) moral suasion.
C) adverse selection.
D) fraud.
7) Market signaling
A) is a way of conveying information to other parties in a transaction where asymmetric
information exists.
B) represents a dominant strategy in a multi-player game.
C) results in an optimum solution to a beach kiosk scenario.
D) None of the above
Analytical Questions
1) What is “market signaling”?
2) What is “moral hazard”?
3) What is “asymmetric information”?
4) What is “adverse selection”?
5) What is “game theory”?
6) What is a “payoff matrix”?
7) In game theory analysis, what is a “dominant strategy”?
8) The following matrix shows the payoffs for an advertising game between Coke and Pepsi. The
firms can choose to advertise or to not advertise. Numbers in the matrix represent profits; the
first number in each cell is the payoff to Coke. (Numbers in millions.)
Coke (rows) / Pepsi
(columns) Advertise Don’t Advertise
Advertise (10, 10) (500, -50)
Don’t Advertise (-50, 500) (100, 100)
a. Explain why this would be described as a Prisoner’s Dilemma game.
b. Explain the probable outcome of this game.