1. When firms are faced with making strategic choices to maximize profit, economists typically use
a.
the theory of monopoly to model their behavior.
b.
the theory of aggressive competition to model their behavior.
c.
game theory to model their behavior.
d.
cartel theory to model their behavior.
2. When strategic interactions are important to pricing and production decisions, a typical firm will
a.
set the price of its product equal to marginal cost.
b.
consider how competing firms might respond to its actions.
c.
generally operate as if it is a monopolist.
d.
consider exiting the market.
3. Game theory is important for the understanding of
a.
competitive markets.
b.
monopolies.
c.
oligopolies.
d.
all market structures.
4. Game theory is necessary for understanding
a.
all market structures.
b.
competition and oligopoly, but it is not necessary for understanding monopoly.
c.
monopoly and oligopoly, but it is not necessary for understanding competition.
d.
oligopoly, but it is not necessary for understanding monopoly or competition.
5. The prisoners’ dilemma provides insights into the
a.
difficulty of maintaining cooperation.
b.
benefits of avoiding cooperation.
c.
benefits of government ownership of monopoly.
d.
ease with which oligopoly firms maintain high prices.
6. In the prisoners’ dilemma game, self-interest leads
a.
each prisoner to confess.
b.
to a breakdown of any agreement that the prisoners might have made before being questioned.
c.
to an outcome that is not particularly good for either prisoner.
d.
All of the above are correct.
7. The likely outcome of the standard prisoners’ dilemma game is that
a.
neither prisoner confesses.
b.
exactly one prisoner confesses.
c.
both prisoners confess.
d.
Not enough information is given to answer this question.
8. The prisoners’ dilemma is an important game to study because
a.
most games present zero-sum alternatives.
b.
it identifies the fundamental difficulty in maintaining cooperative agreements.
c.
strategic decisions faced by prisoners are identical to those faced by firms engaged in competitive agreements.
d.
all interactions among firms are represented by this game.
9. The prisoners’ dilemma game
a.
provides insight into why cooperation is individually rational.
b.
provides insight into why cooperation is difficult.
c.
is a game in which neither player has a dominant strategy.
d.
is a game in which exactly one of the two players has a dominant strategy.
10. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is one
a.
in which neither Bonnie nor Clyde confesses.
b.
in which both Bonnie and Clyde confess.
c.
that involves neither Bonnie nor Clyde pursuing a dominant strategy.
d.
that is ideal in terms of Bonnie’s self-interest and in terms of Clyde’s self-interest.
11. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is
a.
a very good outcome for both players.
b.
a very good outcome for Bonnie, but a bad outcome for Clyde.
c.
a very good outcome for Clyde, but a bad outcome for Bonnie.
d.
a bad outcome for both players.
12. In a game, a dominant strategy is
a.
the best strategy for a player to follow only if other players are cooperative.
b.
the best strategy for a player to follow, regardless of the strategies followed by other players.
c.
a strategy that must appear in every game.
d.
a strategy that leads to one player’s interests dominating the interests of the other players.
13. A dominant strategy is one that
a.
makes every player better off.
b.
makes at least one player better off without hurting the competitiveness of any other player.
c.
increases the total payoff for the player.
d.
is best for the player, regardless of what strategies other players follow.
Table 17–13
Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market
share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their
customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits of
the two home-improvement stores are shown in the table below.
Lopes
Increase the size of store
and parking lot
Do not increase the size of
store and parking lot
HomeMax
Increase the size
of store and
parking lot
Lopes = $1.0 million
HomeMax = $1.5 million
Lopes = $0.4 million
HomeMax = $3.4 million
Do not increase
the size of store
and parking lot
Lopes = $3.2 million
HomeMax = $0.6 million
Lopes = $2.0 million
HomeMax = $2.5 million
14. Refer to Table 17–13. Pursuing its own best interest, Lopes will
a.
increase the size of its store and parking lot only if HomeMax also increases the size of its store and parking
lot.
b.
increase the size of its store and parking lot only if HomeMax does not increase the size of its store and
parking lot.
c.
increase the size of its store and parking lot regardless of the decision made by HomeMax.
d.
not increase the size of its store and parking lot regardless of the decision made by HomeMax.
15. Refer to Table 17–13. Pursuing its own best interest, HomeMax will
a.
increase the size of its store and parking lot only if Lopes also increases the size of its store and parking lot.
b.
increase the size of its store and parking lot only if Lopes does not increase the size of its store and parking lot.
c.
increase the size of its store and parking lot regardless of the decision made by Lopes.
d.
not increase the size of its store and parking lot regardless of the decision made by Lopes.
16. Refer to Table 17–13. Increasing the size of its store and parking lot is a dominant strategy for
a.
Lopes, but not for HomeMax.
b.
HomeMax, but not for Lopes.
c.
both stores.
d.
neither store.
17. Refer to Table 17–13. If both stores follow a dominant strategy, HomeMax’s annual profit will grow by
a.
$0.6 million.
b.
$1.5 million.
c.
$2.5 million.
d.
$3.4 million.
18. Refer to Table 17–13. If both stores follow a dominant strategy, Lopes’s annual profit will grow by
a.
$0.4 million.
b.
$1.0 million.
c.
$2.0 million.
d.
$3.2 million.
19. Refer to Table 17–13. When this game reaches a Nash equilibrium, annual profit will grow by
a.
$1.5 million for HomeMax and by $1.0 million for Lopes.
b.
$3.4 million for HomeMax and by $0.4 million for Lopes.
c.
$0.6 million for HomeMax and by $3.2 million for Lopes.
d.
$2.5 million for HomeMax and by $2.0 million for Lopes.
20. Refer to Table 17–13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one afternoon
and happen to discuss a strategy to optimize growth related profit. They should both agree to
a.
increase their store and parking lot sizes.
b.
refrain from increasing their store and parking lot sizes.
c.
be more competitive in capturing market share.
d.
share the context of their conversation with the Federal Trade Commission.
21. Refer to Table 17–13. Suppose the owners of Lopes and HomeMax meet for a friendly game of golf one afternoon
and happen to discuss a strategy to optimize growth related profit. If they both agree to cooperate on a strategy that
maximizes their joint profits, annual profit will grow by
a.
$1.0 million for Lopes and by $1.5 million for HomeMax.
b.
$0.4 million for Lopes and by $3.4 million for HomeMax.
c.
$3.2 million for Lopes and by $0.6 million for HomeMax.
d.
$2.0 million for Lopes and by $2.5 million for HomeMax.
Figure 17-2. Two companies, Acme and Pinnacle, each decide whether to produce a good quality product or a poor
quality product. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.
22. Refer to Figure 17-2. The dominant strategy for Acme is to
a.
produce a good quality product, and the dominant strategy for Pinnacle is to produce a good quality product.
b.
produce a good quality product, and the dominant strategy for Pinnacle is to produce a poor quality product.
c.
produce a poor quality product, and the dominant strategy for Pinnacle is to produce a good quality product.
d.
produce a poor quality product, and the dominant strategy for Pinnacle is to produce a poor quality product.
23. Refer to Figure 17-2. Which of the following statements is correct?
a.
Acme can potentially earn its highest possible profit if it produces a good quality product, and for that reason it
is a dominant strategy for Acme to produce a good quality product.
b.
The highest possible combined profit for the two firms occurs when both produce a poor quality product, and
for that reason producing a poor quality product is a dominant strategy for both firms.
c.
Regardless of the strategy pursued by Acme, Pinnacle’s best strategy is to produce a good quality product, and
for that reason producing a good quality product is a dominant strategy for Pinnacle.
d.
Our knowledge of game theory suggests that the most likely outcome of the game, if it is played only once, is
for one firm to produce a poor quality product and for the other firm to produce a good quality product.
24. Refer to Figure 17-2. If this game is played only once, then the most likely outcome is that
a.
both firms produce a poor quality product.
b.
Acme produces a poor quality product and Pinnacle produces a good quality product.
c.
Acme produces a good quality product and Pinnacle produces a poor quality product.
d.
both firms produce a good quality product.
25. Refer to Figure 17-2. Acme and Pinnacle agree to cooperate so as to maximize total profit. If this game is played
repeatedly and Acme uses a tit-for-tat strategy, it will choose a
a.
good quality product in the first round and in subsequent rounds it will choose whatever Pinnacle chose in the
previous round.
b.
poor quality product in the first round and in subsequent rounds it will choose whatever Pinnacle chose in the
previous round.
c.
good quality product in all rounds, regardless of the choice made by Pinnacle.
d.
poor quality product in all rounds, regardless of the choice made by Pinnacle.
26. Refer to Figure 17-2. The more frequently this game is played, the more likely it is that
a.
both firms will produce a good quality product.
b.
both firms will produce a poor quality product.
c.
both firms experience a reduction in profits compared to the Nash equilibrium outcome.
d.
one firm will experience an increase in profits and the other will experience a decrease in profits.
27. Much of the research on game theory in recent decades was driven by attempts to analyze actions of players during
a.
the Great Depression of the 1930s.
b.
World War II.
c.
the Cold War between the United States and the Soviet Union.
d.
the ascendancy of the conservative movement in the United States in the 1970s and 1980s.
28. Consider a game of the “Jack and Jill” type in which a market is a duopoly and each firm decides to produce either a
“high” quantity of output or a “low” quantity of output. If the two firms successfully reach and maintain the cooperative
outcome of the game, then
a.
both the combined profit of the firms and total surplus are maximized.
b.
the combined profit of the firms is maximized but total surplus is not maximized.
c.
the combined profit of the firms is not maximized but total surplus is maximized.
d.
neither the combined profit of the firms nor total surplus is maximized.
29. Games that are played more than once generally
a.
lead to outcomes dominated purely by self-interest.
b.
lead to outcomes that do not reflect joint rationality.
c.
encourage cheating on cartel production quotas.
d.
make collusive arrangements easier to enforce.
30. Very often, the reason that players can solve the prisoners’ dilemma and reach the most profitable outcome is that
a.
each player tries to capture a large portion of the market share.
b.
the players play the game not once but many times.
c.
the game becomes more competitive.
d.
self interest results in the Nash equilibrium which is the best outcome for the players.
31. In a two-person repeated game, a tit-for-tat strategy starts with
a.
cooperation and then each player mimics the other player’s last move.
b.
cooperation and then each player is unresponsive to the strategic moves of the other player.
c.
noncooperation and then each player pursues his or her own self-interest.
d.
noncooperation and then each player cooperates when the other player demonstrates a desire for the
cooperative solution.
32. A tit-for-tat strategy starts out
a.
conciliatory and then encourages an optimal social outcome among the other players.
b.
unfriendly and then encourages friendly strategies among players.
c.
friendly, then penalizes unfriendly players, and forgives them if warranted.
d.
aggressive, then compensates losing players, and eventually forgives unfriendly players.
33. Individual profit earned by Dave, the oligopolist, depends on which of the following?
(i)
The quantity of output that Dave produces
(ii)
The quantities of output that the other firms in the market produce
(iii)
The extent of collusion between Dave and the other firms in the market
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(iii) only
d.
(i), (ii), and (iii)
34. Which of the following statements is (are) true of the prisoners’ dilemma?
(i)
Rational self-interest leads neither party to confess.
(ii)
Cooperation between the prisoners is difficult to maintain.
(iii)
Cooperation between the prisoners is individually rational.
a.
(ii) only
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
35. When the prisoners’ dilemma game is generalized to describe situations other than those that literally involve two
prisoners, we see that cooperation between the players of the game
a.
can be difficult to maintain, but only when cooperation would make at least one of the players of the game
worse off.
b.
can be difficult to maintain, even when cooperation would make both players of the game better off.
c.
always works to the benefit of society as a whole.
d.
always works to the detriment of society as a whole.
36. Refer to Scenario 17-2. If BQ and Exxoff are able to successfully cooperate to maximize their joint profits, BQ will
a.
drill one well and Exxoff will drill one well.
b.
drill one well and Exxoff will drill two wells.
c.
drill two wells and Exxoff will drill one well.
d.
drill two wells and Exxoff will drill two wells.
37. Refer to Scenario 17-2. If BQ and Exxoff are able to successfully cooperate to maximize their joint profits, BQ will
earn
a.
$43 million and Exxoff will earn $86 million.
b.
$62 million and Exxoff will earn $62 million.
c.
$67 million and Exxoff will earn $67 million.
d.
$86 million and Exxoff will earn $43 million.
38. Refer to Scenario 17-2. If BQ were to drill a second well, what would its profit be if Exxoff did not drill a second
well?
a.
$43 million
b.
$67 million
c.
$86 million
d.
$129 million
39. Refer to Scenario 17-2. If BQ were to drill a second well and Exxoff also drilled a second well, what would BQ’s
profit be?
a.
$31 million
b.
$62 million
c.
$67 million
d.
$86 million
40. Refer to Scenario 17-2. Exxoff’s dominant strategy would lead to what sort of well-drilling behavior?
a.
Exxoff will never drill a second well.
b.
Exxoff will always drill a second well.
c.
Exxoff will drill a second well only if BQ drills a well.
d.
Exxoff will drill a second well only if BQ does not drill a well.
41. Refer to Scenario 17-2. If each firm is permitted to drill two wells at most, the firms are in a Nash equilibrium when
a.
BQ drills one well and Exxoff drills two wells.
b.
BQ drills two wells and Exxoff drills one well.
c.
both firms drill one well.
d.
both firms drill two wells.
42. Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil worth $60 million. For
each well that is drilled, the company that drills the well incurs a cost of $4 million. Each company can drill up to two
wells. What is the likely outcome of this game if each company pursues its own self-interest?
a.
Each company drills one well and experiences a profit of $26 million.
b.
Each company drills one well and experiences a profit of $22 million.
c.
Each company drills two wells and experiences a profit of $22 million.
d.
One company drills two wells and experiences a profit of $32 million; the other company drills one well and
experiences a profit of $16 million.
43. We know that people tend to overuse common resources. This problem can be viewed as an example of
a.
b.
c.
d.
44. The paradoxical nature of oligopoly can be demonstrated by the fact that, even though the monopoly outcome is best
for the oligopolists,
a.
they collude to set the output level equal to the Nash equilibrium level of output.
b.
they have incentives to increase production above the monopoly outcome.
c.
they do not behave as profit maximizers.
d.
self-interest juxtaposes the profits earned at the Nash equilibrium.
45. Hot dog vendors on the beach fail to cooperate with one another on the quantity of hot dogs they should sell to earn
monopoly profits. A consequence of their failure is that, relative to the outcome the vendors would like,
(i)
the quantity of hot dogs supplied is closer to the socially optimal level.
(ii)
the price of hot dogs is closer to marginal cost.
(iii)
the hot dog market at the beach is less competitive.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(iii) only
46. Why would lack of cooperation between criminal suspects be desirable for society as a whole?
a.
The suspects are able to choose optimal outcomes for themselves by acting in their own self interest.
b.
The prisoners’ dilemma safeguards the criminals’ constitutional rights.
c.
More criminals will be convicted.
d.
None of the above is correct.
47. What happens when the prisoners’ dilemma game is repeated numerous times in an oligopoly market?
(i)
The firms may well reach the monopoly outcome.
(ii)
The firms may well reach the competitive outcome.
(iii)
Buyers of the oligopolists’ product will likely be worse off as a result.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
48. In game theory, a Nash equilibrium is
a.
an outcome in which each player is doing his best given the strategies chosen by the other players.
b.
an outcome in which no player wishes to change her chosen strategy given the strategies chosen by the other
players.
c.
the outcome that occurs when all players have a dominant strategy.
d.
All of the above are correct.
Scenario 17–3.
Consider two countries, Kinglandia and Rovinastan, that are engaged in an arms race. Each country must decide whether
to build new weapons or to disarm existing weapons. Each country prefers to have more arms than the other because a
large arsenal gives it more influence in world affairs. But each country also prefers to live in a world safe from the other
country’s weapons. The following table shows the possible outcomes for each decision combination. The numbers in each
cell represent the country’s ranking of the outcome (10 = best outcome, 1 = worst outcome).
Rovinastan
Build new weapons
Disarm existing weapons
Kinglandia
Build new
weapons
Kinglandia: 4
Rovinastan: 4
Kinglandia: 10
Rovinastan: 1
Disarm existing
weapons
Kinglandia: 1
Rovinastan: 10
Kinglandia: 8
Rovinastan: 8
49. Refer to Scenario 17-3. If each country only makes a choice of whether to build or disarm one time and Rovinastan
chooses to build new weapons, then Kinglandia will
a.
disarm to signal its willingness to cooperate.
b.
disarm to promote world peace.
c.
build new weapons to prevent the loss of influence in world affairs.
d.
None of the above are correct.
50. Refer to Scenario 17-3. If Rovinastan chooses to disarm its existing weapons, then Kinglandia will
a.
disarm to increase its influence in world affairs.
b.
disarm to promote world peace.
c.
build new weapons to promote world peace.
d.
build new weapons to increase its influence in world affairs.
51. Refer to Scenario 17-3. Which of these statements is correct?
(i)
Kinglandia is better off building new weapons if Rovinastan builds new weapons.
(ii)
Kinglandia is better off building new weapons if Rovinastan disarms existing weapons.
(iii)
Rovinastan is only better off building new weapons if Kinglandia builds new weapons.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
52. Refer to Scenario 17-3. Building new weapons is a dominant strategy for
a.
Kinglandia, but not for Rovinastan.
b.
Rovinastan, but not for Kinglandia.
c.
both Kinglandia and Rovinastan.
d.
neither Kinglandia nor Rovinastan.
53. Refer to Scenario 17-3. Suppose the two countries agreed to disarm existing weapons. In reality these two countries
may have a hard time keeping this agreement due to which of the following reasons?
(i)
Even though Kinglandia has no incentive to cheat on the agreement, Rovinastan has an
incentive to cheat on the agreement.
(ii)
Much like the prisoners’ dilemma, both countries are better off reneging on the
agreement and building new weapons.
(iii)
Both countries want to increase their world power by building new weapons.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
Scenario 17–4.
Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the
market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million
since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that
advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the
company that does not advertise earns only $30 million.
54. Refer to Scenario 17-4. What will these two companies do if they behave as individual profit maximizers?
a.
Neither company will advertise.
b.
Both companies will advertise.
c.
One company will advertise, the other will not.
d.
There is no way of knowing without knowing how many customers are stolen through advertising.
55. Refer to Scenario 17-4. The likely outcome of this game is that PM Inc. earns
a.
$30 million and Brown Inc. earns $60 million.
b.
$40 million and Brown Inc. earns $40 million.
c.
$50 million and Brown Inc. earns $50 million.
d.
$60 million and Brown Inc. earns $30 million.
56. Refer to Scenario 17-4. If these two companies collude and agree upon the best joint strategy,
a.
neither company will advertise.
b.
both companies will advertise.
c.
PM Inc. will advertise but Brown Inc. will not.
d.
Brown Inc. will advertise but PM Inc. will not.
57. Refer to Scenario 17-4. PM Inc.’s dominant strategy is to
a.
refrain from advertising regardless of whether Brown Inc. advertises.
b.
advertise only if Brown Inc. advertises.
c.
advertise only if Brown Inc. does not advertise.
d.
advertise regardless of whether Brown Inc. advertises.
58. Refer to Scenario 17-4. In 1971, Congress passed a law that banned cigarette advertising on television. If cigarette
companies are profit maximizers, it is likely that
a.
neither company opposed the ban on advertising.
b.
Brown Inc. sued the federal government on grounds that the ban constitutes a civil rights violation.
c.
both companies sued the federal government on grounds that the ban constitutes a civil rights violation.
d.
both companies retaliated with black-market operations.
59. Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and finds a
small bag of marijuana and arrests the two. During the interrogation, each is separately offered the following: “If you
confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will
get 10 years in prison. If you both confess, you will each get 5 years.” If neither confesses, there is no evidence of drug
dealing, and the most they could get is one year each for possession of marijuana. If each suspected drug dealer follows a
dominant strategy, what should he/she do?
a.
Confess regardless of the partner’s decision
b.
Confess only if the partner confesses
c.
Don’t confess regardless of the partner’s decision
d.
Don’t confess only if the partner doesn’t confess
60. A lack of cooperation by oligopolists trying to maintain monopoly profits
a.
is desirable for society as a whole.
b.
is not desirable for society as a whole.
c.
may or may not be desirable for society as a whole.
d.
is not a concern due to antitrust laws.
61. Oligopolists may well be able to reach their preferred, cooperative outcome if
a.
the number of oligopolists is large.
b.
they learn that a Nash equilibrium is in their best long-term interests.
c.
a sufficient number of firms can be persuaded to lower their prices.
d.
the game they play is repeated a sufficient number of times.
62. Chrissy and Marvin are competitors in a local market and each is trying to decide if it is worthwhile to advertise. If
both of them advertise, each will earn a profit of $10,000. If neither of them advertise, each will earn a profit of $20,000.
If one advertises and the other doesn’t, then the one who advertises will earn a profit of $30,000 and the other will earn
$14,000. To earn the highest profit, Chrissy
a.
should advertise, and she will earn $10,000.
b.
should advertise, and she will earn $30,000.
c.
should not advertise, and she will earn 20,000.
d.
has no dominant strategy.