Test Bank Chapter 13
Chapter 13—Best Practice Tactics: Game Theory
MULTIPLE CHOICE
1. In ____ 2-person, nonzero-sum games there is no communication between the participants and no way
to enforce agreements.
a.
noncooperative
b.
cooperative
c.
a and b
d.
none of the above
2. A strategy game is
a.
any pricing competition among firms
b.
a situation arising from independent decision making among economic participants
c.
interpendent choice behavior by individuals or groups who share a common goal
d.
none of the above
3. Essential components of a game include all of the following except:
a.
players
b.
payoffs
c.
actions
d.
an information set
e.
cooperation
4. In a zero-sum game
a.
all players receive a $0 payoff
b.
all players can simultaneously win
c.
the gains to the winners equal the losses of the losers
d.
none of the above
5. When airlines post prices on an electronic bulletin board at 8:00 a.m. each morning, the decision-
makers are engaged in
a.
a single play game
b.
a sequential game
c.
an entry decision
d.
a simultaneous game
e.
an infinite repetition game
Test Bank Chapter 13
6. The starting point of many methods for predicting equilibrium strategy in sequential games is
a.
designing proactive reactions to rival actions
b.
information sets
c.
uncertain outcomes
d.
backwards induction based on an explicit order of play
e.
endgame analysis
7. Consider the game known as the Prisoner‘s Dilemma. What’s the dilemma?
a. By both not confessing, both get to the cooperative solution and minimize time in prison.
b. By both confessing, both get to the noncooperative solution and both serve significant time in prison.
c. As a group, they are better off cooperating by not confessing, but each player has an incentive to be
first to confess in a double cross.
d. The problem is that the spies should never have been caught; they should move to Rio.
8. When there is an Equilibrium (or a Nash Equilibrium), we expect that:
a. once the firm’s get there, no one will change their strategy.
b. firms will tend to select a randomized strategy.
c. neither firm will care what it does.
d. this is always a dominated strategy.
9. The Prisoner’s Dilemma involves two spies who are held in separate soundproof rooms. But even if
the two spies could communicate, what makes it difficult for them to achieve the cooperative solution
(both not confessing)?
a. The problem is their lack of information.
b. The problem is that it is a nonzero sum game.
c. The problem is that both spies have incentives to double cross each other.
d. The problem is that all the outcomes are not particularly good for either player.
10. When there is no Equilibrium (or no Nash Equilibrium), we expect that:
a. the firms end up in the cooperative strategy.
b. a firm will follow a randomized strategy.
c. a firm will not care what it does.
d. a firm will very likely have a dominant strategy.
11. In a game, a dominated strategy is one where:
a. It is always the best strategy
b. It is always the worst strategy
c. It is the strategy that is the best among the group of worst possible strategies.
d. Is sometimes the best and sometimes the worst strategy
Test Bank Chapter 13
12. If two firms operate in a market that is characterized as being a Prisoner’s Dilemma, and the two
strategies given them are to restrict output or expand output, which of the following strategy pairs
would represent the cooperative solution in a duopoly for firm 1 and firm 2, and firm 1 given first in
each pair?
a. {expand output, restrict output}
b. {restrict output, expand output}
c. {restrict output, restrict output}
d. {expand output, expand output}
13. A key to analyzing subgame perfect equilibrium strategy in sequential games is
a.
predictable behavior
b.
an explicit order of play for at least some participants
c.
information sets that are known with certainty
d.
credible threats clearly communicated
e.
randomness
14. Credibility in threats and commitments in sequential games is based on
a.
randomizing one’s actions so they are unpredictable
b.
explicit communications with competitors
c.
effective scenario planning
d.
analyzing best reply responses
e.
none of the above
15. In making promises that are not guaranteed by third parties and in imposing penalties that are not
enforced by third parties, all of the following are credibility-enhancing mechanisms except
a.
establishing a bond forfeited by violating the commitment
b.
investing in a non-redeployable reputational asset tied to the promise or threat
c.
interrupting the communication of negotiated compromises
d.
offering a warranty
e.
delivering a hostage (e.g., a patent license triggered by violating the promise)
16. The difference between cooperative and non-cooperative games is
a.
cooperative games allow side payments to support collusion
b.
non-cooperative games encourage communication of sensitive information between arms-
length competitors
c.
cooperative games involve randomized behavior
d.
cooperative games necessitate an explicit order of play
e.
inconsequential except when players have contractual relationships
Test Bank Chapter 13
17. An illustration of a non-credible commitment is the promise
a.
to not increase capacity in a declining industry
b.
to match a new entrant’s discount price
c.
to enter a profitable industry
d.
to restrain output to the quota assigned by a cartel
e.
to exit in the face of projected losses.
18. A dominant strategy differs from a Nash equilibrium strategy in that
a.
Nash equilibrium strategy does not assume best reply responses
b.
dominant strategy assumes best reply responses
c.
only Nash strategy applies to simultaneous games
d.
one dominant strategy is sufficient to predict behavior in a multi-person game
e.
Nash strategy is often unique
19. In adopting mixed Nash equilibrium strategy, a player is attempting to
a.
randomize his or her own behavior
b.
make the opponent favor a course of action preferred by the first player
c.
randomize the outcome of actions
d.
make the opponent indifferent between one action and another
e.
none of the above
20. To trust a potential cooperator until the first defection and then never cooperate thereafter is
a.
a dominant strategy
b.
an irrational strategy
c.
a grim trigger strategy
d.
a non-cooperative finite game strategy
e.
a subgame imperfect strategy
21. Non-cooperative sequential games can incorporate all the following features except
a.
a single decision-maker in the endgame
b.
no communication
c.
finite or infinite time periods
d.
third-party enforceable agreements
e.
an explicit order of play
22. If one-time gains from defection are always less than the discounted present value of an infinite time
stream of cooperative payoffs at some given discount rate, the decision-makers have escaped
a.
the Folk Theorem
b.
the law of large numbers
c.
the Prisoner’s dilemma
d.
the paradox of large numbers
e.
the strategy of recusal
Test Bank Chapter 13
23. The chain store paradox of an incumbent who accommodates a finite stream of potential entrants
threatening to enter sequentially numerous markets illustrates
a.
backwards induction
b.
the unraveling problem
c.
subgame perfect equilibrium
d.
best reply responses
e.
all of the above
24. Cooperation in repeated prisoner’s dilemma situations seems to be enhanced by all of the following
except
a.
limited punishment schemes
b.
clarity of conditional rewards
c.
grim trigger strategy
d.
provocability—i.e., credible threats of punishment
e.
tit for tat strategy
25. Credible promises and hostage mechanisms can support a continuous stream of cooperative exchanges
except when
a.
the promisor is better off fulfilling than ignoring his promise
b.
neither party has a prior dominant strategy
c.
the hostage can be revoked for just causes
d.
the hostage is more valuable than any given exchange
e.
the hostage is difficult to replace
PROBLEMS
Exhibit 13-1
Consider the information below when answering the following question(s):
SIX
SEVEN
Harry’s
$550
$750
SIX
$700
$100
Harry’s
$120
$370
SEVEN
$640
$350
(Note: Payoffs in the upper right corner go to Pizza Spinners and payoffs in the lower left go to
Harry’s).
1. In choosing whether to deliver to six or seven neighborhoods, Pizza Spinners has to take into account
not only its own costs, but also the delivery area response of its competitor Harry’s Pizzeria. If the
payoffs per week from delivering in six and seven neighborhoods are as displayed in the exhibit above,
what will Pizza Spinner’s choose and why?
Test Bank Chapter 13
2. In choosing whether to deliver to six or seven neighborhoods, Harry’s Pizzeria has to take into account
not only its own costs but the delivery area response of its competitor Pizza Spinners. If the payoffs
per week from delivering in six and seven neighborhoods are as displayed in Exhibit 13-1, what will
Harry’s Pizzeria choose and why?
3. If the city-pair route from Orlando to New Orleans is served by only two air carriers, Northwest and
Delta, and if the payoffs from discounting or maintaining high prices are as below, what behavior
would you predict for Delta in a one-play game and why?
DELTA’S CHOICES
MAINTAIN
DISCOUNT
Northwest’s
$26,000
$32,000
MAINTAIN
$24,000
$18,000
Northwest’s
$21,000
$16,000
DISCOUNT
$28,000
$12,000
4. Retailers A and B anticipate many repetitions of the following pricing game in which they must
choose between discounting or maintaining higher prices. Under what circumstances will store A resist
discounting and choose MAINTAIN?
Test Bank Chapter 13
MAINTAIN
DISCOUNT
STORE B
$550
$950
MAINTAIN
$700
$100
STORE B
$120
$370
DISCOUNT
$640
$350
5. Suppose a new low cost discount firm must decide in advance between introducing LARGE or
SMALL capacity in a licensed cable TV market where the incumbent then will decide on a HIGH or
MATCHING pricing response. If the following table describes the payoffs from various combinations
of these strategies, what capacity will the new entrant choose and why?
Test Bank Chapter 13
Incumbent Profit
Entrant Profit
With LARGE Capacity
HIGH Prices
$50
$10
MATCHING Prices
$70
$3
With SMALL Capacity
HIGH Prices
$90
$5
MATCHING Prices
$60
$1