118. The players in a two-person game are choosing between Strategy X and Strategy Y. If the second player chooses
Strategy X, the first player’s best outcome is to select X. If the second player chooses Strategy Y, the first player’s best
outcome is to select X. For the first player, Strategy X is called a
a.
dominant strategy.
b.
collusive strategy.
c.
repeated-trial strategy.
d.
cartel strategy.
119. Suppose that two poker players believe that they are superior players to the rest of the people at their table. Further
suppose that the two players make an agreement to concede hands to each other in order to drive the other players from
the game first. Economists would model such behavior as
a.
monopolistic competition.
b.
game theory.
c.
predatory pricing.
d.
a dominant strategy.
120. After initial success, the OPEC cartel saw the price of oil and the revenues of its members decline due, in part, to
a.
b.
c.
d.
Table 17–22
Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for repair work and
a high price. The annual economic profit from each strategy is indicated in the table. The profits are shown as (Matt,
Brian) in each cell.
Brian
Low Price
High Price
Matt
Low Price
(1500, 1500)
(5000, 200)
High Price
(200, 3000)
(4000, 4000)
121. Refer to Table 17–22. Which of the following statements is correct?
a.
Matt’s dominant strategy is to charge a low price.
b.
Brian’s dominant strategy is to charge a high price.
c.
The dominant strategy for both Brian and Matt is to charge a low price.
d.
Matt’s dominant strategy is to charge a high price.
122. Refer to Table 17–22. Which of the following statements is correct if Brian and Matt will play this game only once?
a.
The Nash equilibrium is the high price.
b.
A Nash equilibrium cannot be established unless Brian and Matt collude.
c.
A Nash equilibrium cannot be established without the players repeating the game.
d.
The Nash equilibrium price is the low price.
Table 17–23
Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs, and thus increase
their profits, if they reduced their advertising budgets. But for the plan to work, each firm must agree to refrain from
advertising. Each firm believes that advertising works by increasing the demand for the firm’s product, but each firm also
believes that if neither firm advertises, the costs savings will outweigh the lost sales. Listed in the table below are the
individual profits for each firm.
Firm A
Breaks the agreement
and advertises
Maintains the agreement and
does not advertise
Firm B
Breaks the agreement
and advertises
Firm A profit = $9,000
Firm B profit = $4,000
Firm A profit = $8,000
Firm B profit = $6,000
Maintains the agreement
and does not advertise
Firm A profit = $11,000
Firm B profit = $3,500
Firm A profit = $10,000
Firm B profit = $5,000
123. Refer to Table 17-23. Suppose that the two firms, A and B, make an agreement to withhold any advertising for one
month to lower each firm’s costs and raise each firm’s profits. If the firms reach the Nash equilibrium,
a.
both firms will choose not to advertise.
b.
firm A will choose not to advertise, but firm B will break the agreement and choose to advertise.
c.
firm B will choose not to advertise, but firm A will break the agreement and choose to advertise.
d.
both firms will break the agreement and choose to advertise.
124. Refer to Table 17-23. At the Nash equilibrium, how much profit will Firm A earn?
a.
$8,000 because firm A will maintain the agreement not to advertise, but firm B will break the agreement and
choose to advertise.
b.
$9,000 because each firm will break the agreement and choose to advertise.
c.
$10,000 because each firm will maintain the agreement and choose not to advertise.
d.
$11,000 because firm B will maintain the agreement not to advertise, but firm A will break the agreement and
choose to advertise.
125. Refer to Table 17-23. At the Nash equilibrium, how much profit will Firm B earn?
a.
$3,500 because firm B will maintain the agreement not to advertise, but firm A will break the agreement and
choose to advertise.
b.
$4,000 because each firm will break the agreement and choose to advertise.
c.
$5,000 because each firm will maintain the agreement and choose not to advertise.
d.
$6,000 because firm A will maintain the agreement not to advertise, but firm B will break the agreement and
choose to advertise.
126. In which of the following games is it clearly the case that the cooperative outcome of the game is good for the two
players and good for society?
a.
Two guilty criminals have been captured by the police, and each prisoner decides whether to confess or to
remain silent.
b.
Two airlines dominate air travel between City A and City B, and each airline decides whether to charge a
“high” airfare or a “low” airfare.
c.
Two duopoly firms account for all of the production in a market, and each firm decides whether to produce a
“high” amount of output or a “low” amount of output.
d.
Two oil companies own adjacent oil fields over a common pool of oil, and each company decides whether to
drill one well or two wells.
127. In which of the following games is it clearly the case that the cooperative outcome of the game is good for the two
players and bad for society?
a.
Two oil companies own adjacent oil fields over a common pool of oil, and each company decides whether to
drill one well or two wells.
b.
Two airlines dominate air travel between City A and City B, and each airline decides whether to charge a
“high” airfare or a “low” airfare on flights between those two cities.
c.
Two superpowers decide whether to build new weapons or to disarm.
d.
In all of the above cases, the cooperative outcome of the game is good for the two players and bad for society
Table 17–24
Two firms are considering going out of business and selling their assets. Each considers what happens if the other goes
out of business. The payoff matrix below shows the net gain or loss to each firm.
Firm A
Stays in business
Sells business
Firm B
Stays in business
A gains $9 million
A gains $7 million
B gains $7million
B gains $15 million
Sells business
A gains $15 million
B gains $8 million
A gains $1 million
B gains $3 million
128. Refer to Table 17-24. Which firm’s dominant strategy is to sell?
a.
firm A’s and firm B’s
b.
firm A’s but not firm B’s
c.
firm B’s but not firm A’s
d.
neither firm A’s nor firm B’s
129. Refer to Table 17-24. Which firms have a dominant strategy?
a.
A and B
b.
Neither A nor B
c.
A but not B
d.
B but not A
130. Refer to Table 17-24. What is the Nash equilibrium?
a.
A and B both stay in business
b.
A stays in business, B sells
c.
B stays in business, A sells
d.
Both A and B sell
There are just two producers of a certain product. Each is considering offering promotional discounts.
Firm A
Does not offer discount
Offers discount
Firm B
Does not offer discount
Firm A profit = $90,000
Firm B profit = $90,000
Firm A profit = $120,000
Firm B profit = $70,000
Offers discount
Firm A profit = $70,000
Firm B profit = $120,000
Firm A profit = $80,000
Firm B profit = $80,000
131. Refer to Table 17-25. The dominant strategy
a.
for both firms is to offer the discount.
b.
for both firms is to not offer the discount.
c.
for firm A is to offer the discount. The dominant strategy for firm B is to not offer the discount.
d.
for firm A is to not offer the discount. The dominant strategy for firm B is to offer the discount.
132. Refer to Table 17-25. At the Nash equilibrium, how much profit will Firm A earn?
a.
$120,000
b.
$90,000
c.
$80,000
d.
$70,000
133. Which of the following is correct? When oligopolies collude
a.
they make higher profits and consumers of the product are better off.
b.
they make higher profits but consumers of the product are worse off.
c.
they make lower profits and consumers of the product are better off.
d.
they make lower profits and consumers of the product are worse off.
Table 17–26
Two prescription drug manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare
related expenses associated with side-effects from its drugs. Each drug manufacturer has evidence that indicates that
taking its prescription drug causes liver failure. State prosecutors do not have access to the same data used by drug
manufacturers and thus will have difficulty recovering full costs without the help of at least one of the drug
manufacturer’s studies. Each firm has been presented with an opportunity to lower its liability in the suit if it cooperates
with attorneys representing the states.
Firm B
Concede that taking the drug
causes liver failure
Argue that there is no evidence
that taking the drug causes liver
failure
Firm A
Concede that taking the drug
causes liver failure
Firm A profit = $–60m
Firm B profit = $–40m
Firm A profit = $–100m
Firm B profit = $–12m
Argue that there is no evidence
that taking the drug causes liver
failure
Firm A profit = $–12m
Firm B profit = $–100m
Firm A profit = $–24m
Firm B profit = $–24m
134. Refer to Table 17–26. Pursuing its own best interests, Firm A will concede that taking their prescription drug causes
liver failure
a.
only if Firm B concedes that taking its drug causes liver failure.
b.
only if Firm B does not concede that taking its drug causes liver failure.
c.
regardless of whether Firm B concedes that taking its drug causes liver failure.
d.
None of the above. In pursuing its own best interests, Firm A will in no case concede that taking its
prescription drug causes liver failure.
135. Refer to Table 17–26. Pursuing its own best interests, Firm B will concede that taking its drug causes liver failure
a.
only if Firm A concedes that taking its drug causes liver failure.
b.
only if Firm A does not concede that taking its drug causes liver failure.
c.
regardless of whether Firm A concedes that taking its drug causes liver failure.
d.
None of the above; in pursuing its own best interests, Firm B will in no case concede that taking its drug
causes liver failure.
136. Refer to Table 17–26. If both firms follow a dominant strategy, Firm A’s profits (losses) will be
a.
$-12m
b.
$-24m
c.
$-60m
d.
$-100m
137. Refer to Table 17–26. If both firms follow a dominant strategy, Firm B’s profits (losses) will be
a.
$-12m
b.
$-24m
c.
$-40m
d.
$-100m
138. Refer to Table 17–26. When this game reaches a Nash equilibrium, profits for Firm A and Firm B will be
a.
$-12 and $-100, respectively.
b.
$-24 and $-24, respectively.
c.
$-60 and $-40, respectively.
d.
$-100 and $-12, respectively.
139. Refer to Table 17–26. Which of the following statements is correct?
a.
Neither firm A nor firm B has a dominant strategy.
b.
Both firm A and firm B have a dominant strategy.
c.
If this game were repeated, these firms would choose different strategies than they choose in a one-period
game.
d.
This game is a typical prisoner’s dilemma in which the firms are worse off by making decisions in their own
self-interest.
Table 17–27
Each year the United States considers renewal of Most Favored Nation (MFN) trading status with Farland (a mythical
nation). Historically, legislators have made threats of not renewing MFN status because of human rights abuses in
Farland. The non-renewal of MFN trading status is likely to involve some retaliatory measures by Farland. The payoff
table below shows the potential economic gains associated with a game in which Farland may impose trade sanctions
against U.S. firms and the United States may not renew MFN status with Farland. The table contains the dollar value of
all trade-flow benefits to the United States and Farland.
Farland
Impose trade sanctions
against U.S. firms
Do not impose trade sanctions
against U.S. firms
United
States
Don’t renew MFN
status with Farland
U.S. trade value = $65 b
Farland trade value = $75 b
U.S. trade value = $140 b
Farland trade value = $5 b
Renew MFN status
with Farland
U.S. trade value = $35 b
Farland trade value = $285 b
U.S. trade value = $130 b
Farland trade value = $275 b
140. Refer to Table 17–27. Pursuing its own best interests, Farland will impose trade sanctions against U.S. firms
a.
only if the U.S. does not renew MFN status with Farland.
b.
only if the U.S. renews MFN status with Farland.
c.
regardless of whether the U.S. renews MFN status with Farland.
d.
None of the above is correct. In pursuing its own best interests, Farland will in no case impose trade sanctions
against U.S. firms.
141. Refer to Table 17–27. Pursuing its own best interests, the U.S. will renew MFN status with Farland
a.
only if Farland does not impose trade sanctions against U.S. firms.
b.
only if Farland imposes trade sanctions against U.S. firms.
c.
regardless of whether Farland imposes trade sanctions against U.S. firms.
d.
None of the above is correct. In pursuing its own best interests, the United States will in no case renew MFN
status with Farland.
142. Refer to Table 17–27. This particular game
a.
features a dominant strategy for the U.S.
b.
features a dominant strategy for Farland.
c.
is a version of the prisoners’ dilemma game.
d.
All of the above are correct.
143. Refer to Table 17–27. If both countries follow a dominant strategy, the value of trade flow benefits for Farland will
be
a.
$5 b.
b.
$75 b.
c.
$275 b.
d.
$285 b.
144. Refer to Table 17–27. If both countries follow a dominant strategy, the value of trade flow benefits for the United
States will be
a.
$35 b.
b.
$65 b.
c.
$130 b.
d.
$140 b.
145. Refer to Table 17–27. When this game reaches a Nash equilibrium, the value of trade flow benefits will be
a.
United States $35 b and Farland $285 b.
b.
United States $65 b and Farland $75 b.
c.
United States $140 b and Farland $5 b.
d.
United States $130 b and Farland $275 b.
146. Refer to Table 17–27. If trade negotiators are able to communicate effectively about the consequences of various
trade policies (i.e., enter into an agreement about the policy they should adopt), then we would expect the countries to
agree to which outcome?
a.
United States $35 b and Farland $285 b
b.
United States $65 b and Farland $75 b
c.
United States $140 b and Farland $5 b
d.
United States $130 b and Farland $275 b
147. Refer to Table 17–27. Assume that trade negotiators meet to discuss trade policy between the United States and
Farland. If neither party to the negotiation is able to trust the other party, then
a.
each should assume that the other will choose a strategy that optimizes total value of the trade relationship.
b.
the Nash equilibrium will provide the largest possible gains to each party.
c.
Farland negotiators should assume that United States negotiators will implement a policy that is in the mutual
best interest of both countries.
d.
each should follow its dominant strategy.
Figure 17-5. Two companies, ABC and QRS, are sellers in the same market. Each company decides whether to charge a
high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two
companies.
148. Refer to Figure 17-5. Suppose the outcome of the game is one in which ABC’s profit is $4 million and QRS’s profit
is $14 million. The most likely explanation for this outcome is that
a.
each company pursued its dominant strategy.
b.
each company’s objective was to maximize the sum of the two companies’ profits.
c.
the two companies reached an agreement on what price to charge, and ABC subsequently cheated.
d.
the two companies reached an agreement on what price to charge, and QRS subsequently cheated.
149. Refer to Figure 17-5. If the two companies make their pricing decisions independently, then it is likely that ABC
will
a.
charge a high price only if QRS charges a high price.
b.
charge a high price only if QRS charges a low price.
c.
charge a high price regardless of whether QRS charges a high price or a low price.
d.
None of the above are correct.
150. Refer to Figure 17-5. If the two companies make their pricing decisions independently, then it is likely that QRS
will
a.
charge a low price only if ABC charges a low price.
b.
charge a low price only if ABC charges a high price.
c.
charge a low price regardless of whether ABC charges a high price or a low price.
d.
None of the above are correct.
151. Refer to Figure 17-5. If this game is played only once, then the most likely outcome is that
a.
both firms charge a low price.
b.
ABC charges a low price and QRS charges a high price.
c.
ABC charges a high price and QRS charges a low price.
d.
both firms charge a high price.
152. Refer to Figure 17-5. The dominant strategy for ABC is to
a.
charge a high price, and the dominant strategy for QRS is to charge a high price.
b.
charge a high price, and the dominant strategy for QRS is to charge a low price.
c.
charge a low price, and the dominant strategy for QRS is to charge a high price.
d.
charge a low price, and the dominant strategy for QRS is to charge a low price.
153. Refer to Figure 17-5. Suppose we observe that the outcome of the game is one in which each company earns a profit
of $10 million. This outcome
a.
is the result of each company pursuing its dominant strategy.
b.
is the result of cooperation between the two companies, and we know that a cooperative outcome is easy in a
game such as this one.
c.
is the result of cooperation between the two companies, and we know that a cooperative outcome is difficult in
a game such as this one.
d.
is the most likely outcome of the game, regardless of whether the two companies cooperate.
154. Refer to Figure 17-5. The situation faced by ABC and QRS is
a.
one in which the players, pursuing their own interests, are likely to reach an outcome that is not particularly
good for either player.
b.
one in which an agreement between the players to behave in a certain way is not likely to hold up.
c.
similar to the situation faced by Bonnie and Clyde in the prisoners’ dilemma game.
d.
All of the above are correct.
155. Refer to Figure 17-5. In what sense is the game involving ABC and QRS similar to the prisoners’ dilemma game
involving Bonnie and Clyde?
a.
In both games, if the players pursue their own interests, then the outcome is the best possible outcome for each
player.
b.
In both games, a dominant strategy can be identified for each player.
c.
In both games, cooperation between the players is easy to maintain.
d.
All of the above are correct.
156. A cooperative agreement among oligopolists is more likely to be maintained,
a.
the greater the number of oligopolists.
b.
the larger the number of buyers of the oligopolists’ product.
c.
the smaller the number of buyers of the oligopolists’ product.
d.
the more likely it is that the game among the oligopolists will be played over and over again.
157. A cooperative agreement among oligopolists is less likely to be maintained,
a.
the greater the number of oligopolists.
b.
the larger the number of buyers of the oligopolists’ product.
c.
the smaller the number of buyers of the oligopolists’ product.
d.
the more likely it is that the game among the oligopolists will be played over and over again.
Table 17–28
Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising
budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that
advertising works by increasing the demand for the firm’s product, but each firm also believes that if neither firm
advertises, the cost savings will outweigh the lost sales. The table below lists each firm’s individual profits:
Firm A
Breaks agreement Maintains agreement
and advertises and does not advertise
Firm B
Breaks agreement
and advertises
Firm A’s profit = $16,000
Firm B’s profit = $6,000
Firm A’s profit = $14,000
Firm B’s profit = $10,000
Maintains agreement
and does not advertise
Firm A’s profit = $24,000
Firm B’s profit = $5,000
Firm A’s profit = $22,000
Firm B’s profit = $9,000
158. Refer to Table 17-28. Does either Firm A or Firm B have a dominant strategy?
a.
Firm A has a dominant strategy, but Firm B does not.
b.
Firm A does not have a dominant strategy, but Firm B does.
c.
Neither Firm A nor Firm B has a dominant strategy.
d.
Both Firm A and Firm B have a dominant strategy.
159. Refer to Table 17-28. What is the outcome of this game?
a.
Firm A will advertise but Firm B will not.
b.
Firm A will not advertise but Firm B will.
c.
Neither Firm A nor Firm B will advertise.
d.
Both Firm A and Firm B will advertise.
160. Refer to Table 17-28. Which of the following statement(s) correctly characterizes the outcome of this game?
a.
Both Firm A and Firm B have a dominant strategy to advertise.
b.
There is a Nash equilibrium when both firms advertise.
c.
Although both firms collectively would earn higher profits by maintaining the agreement not to advertise, self-
interest will cause each firm to break the agreement.
d.
All of the above are correct.
161. Refer to Table 17-28. Which of the following statements does not correctly characterize the outcome of this game?
a.
There is a Nash equilibrium.
b.
Both firms collectively would earn the highest joint profits by maintaining the agreement not to advertise.
c.
Only one firm has a dominant strategy.
d.
The game is an example of the Prisoners’ Dilemma.
Table 17–29
Suppose that two firms, Wild Willy’s Wonderdrink (Firm W) and Hyper Hank’s Hydration (Firm H), comprise the market
for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their
advertising budgets. But for the plan to work, each firm must agree to refrain from advertising. Each firm believes that
advertising works by increasing the demand for the firm’s energy drinks, but each firm also believes that if neither firm
advertises, the cost savings will outweigh the lost sales. The table below lists each firm’s individual profits:
Firm W
Breaks agreement Maintains agreement
and advertises and does not advertise
Firm H
Breaks agreement
and advertises
Firm W’s profit = $16,500
Firm H’s profit = $5,000
Firm W’s profit = $14,000
Firm H’s profit = $11,000
Maintains agreement
and does not advertise
Firm W’s profit = $24,000
Firm H’s profit = $4,000
Firm W’s profit = $22,500
Firm H’s profit = $10,000
162. Refer to Table 17–29 Does either Firm W or Firm H have a dominant strategy?
a.
Both Firm W and Firm H have a dominant strategy.
b.
Neither Firm W nor Firm H has a dominant strategy.
c.
Firm W has a dominant strategy, but Firm H does not.
d.
Firm W does not have a dominant strategy, but Firm H does.
163. Refer to Table 17-29. What is the outcome of this game?
a.
Neither Firm W nor Firm H will advertise.
b.
Both Firm W and Firm H will advertise.
c.
Firm W will advertise but Firm H will not.
d.
Firm W will not advertise but Firm H will.
164. Refer to Table 17-29. Which of the following statement(s) correctly characterizes the outcome of this game?
a.
There is a Nash equilibrium when both firms advertise.
b.
Both Firm W and Firm H have a dominant strategy to advertise.
c.
Although both firms collectively would earn higher profits by maintaining the agreement not to advertise, self-
interest will cause each firm to break the agreement.
d.
All of the above are correct.
165. Refer to Table 17-29. Which of the following statements does not correctly characterize the outcome of this game?
a.
There is a Nash equilibrium.
b.
Only one firm has a dominant strategy.
c.
The game is an example of the Prisoners’ Dilemma.
d.
Both firms collectively would earn the highest joint profits by maintaining the agreement not to advertise.
Table 17–37
Two restaurants with a focus on Mexican dining operate in Texama. Both Mitch’s Mexican and Tim’s Tacos need to
decide whether to add Zesty Queso or Fresh Guacamole to their menus. The circumstances are that each firm wants to add
only one of the two choices on their menu. Below you will find the profits for the stores, shown as: (1) the payoff to
Mitch; (2) the payoff to Tim.
Tim’s Tacos
Zesty Queso
Fresh Guacamole
Mitch’s Mexican
Zesty Queso
5, 5
9, 3
Fresh Guacamole
3, 8
7, 7
166. Refer to Table 17-37. If Mitch’s Mexican chooses Zesty Queso then Tim’s Tacos will select its best strategy and
choose ____ ; if Mitch’s Mexican chooses Fresh Guacamole then Tim’s Tacos will select its best strategy and choose
_____.
a.
Zesty Queso, Zesty Queso
b.
Zesty Queso, Fresh Guacamole
c.
Fresh Guacamole, Zesty Queso
d.
Fresh Guacamole, Fresh Guacamole
167. Refer to Table 17-37. Based upon the information from the table, what is the Nash Equilibrium?
a.
Zesty Queso, Zesty Queso
b.
Zesty Queso, Fresh Guacamole
c.
Fresh Guacamole, Zesty Queso
d.
Fresh Guacamole, Fresh Guacamole
168. Refer to Table 17-37. Based upon the information from the table, which firm has a dominant strategy?
a.
Mitch’s Mexican
b.
Tim’s Tacos
c.
Neither firm
d.
Both firms
169. Refer to Table 17-37. Based upon the information from the table, if the two firms could coordinate the decisions
about product introductions, how much profit would each firm make?
a.
Each firm would earn 8.
b.
Each firm would earn 3.
c.
Each firm would earn 5.
d.
Each firm would earn 7.
170. Refer to Table 17-37. Based upon the information from the table, you can conclude that this game is an example of
a.
a prisoner’s dilemma.
b.
price discrimination.
c.
the game of chicken.
d.
a natural monopoly.