Question 1

Consider the following output-choice game for two firms:

What is the outcome of the game if both firms use maximin strategies?
A) Both firms choose low output levels.
B) Both firms choose medium output levels.
C) There is no clear outcome under a maximin strategy for both firms.
D) There are two possible maximin outcomes --- Firm 1 chooses medium and Firm 2 chooses low, or Firm 1 chooses low and Firm 2 chooses medium.

Accepted Answer

The answer of Consider the following output-choice game for two...

Question 2

Some popular reality television programs follow people who buy the contents of abandoned storage lockers at public auctions. In most cases, several storeage lockers are sold in sequence during a particular auction. Occassionally, one of the buyers will purposefully bid much more than the expected value of a particular storage locker in order to intimidate the other bidders. What is a plausible explanation for these excessive bids?
A) The buyer is trying to establish a reputation that may affect the outcome of later auctions.
B) The excessive bids may be rational if they occur during the last auction of the day.
C) The bidder is trying to establish a first-mover advantage, but only if they occur during the first auction of the day.
D) The excessive bids represent a form of tacit collusion among the buyers.

Accepted Answer

The buyer is trying to establish a reputation that may affect the outcome of later auctions. By making excessively high bids, the buyer may intimidate other bidders and establish themselves as a serious and wealthy buyer, which may make other bidders less likely to compete with them in future auctions. This could give the buyer an advantage in future auctions by reducing competition and potentially allowing them to purchase lockers at lower prices.

Question 3

Scenario 13.15
Consider the pricing game below: 
-Refer to Scenario 13.15. If the firms price simultaneously, equilibrium would be
A) an $80 price for Simple and a $70 price for Boring.
B) an $80 price for Simple and a $25 price for Boring.
C) a $35 price for Simple and a $70 price for Boring.
D) a $35 price for Simple and a $25 price for Boring.
E) a mixed strategy equilibrium.

Accepted Answer

The answer of Scenario 13.15
Consider the pricing game below: 
-Refer...

Question 4

If Boring were able to move first in a sequential version of the game in Scenario 13.15, the equilibrium would be
A) an $80 price for Simple and a $70 price for Boring.
B) an $80 price for Simple and a $25 price for Boring.
C) a $35 price for Simple and a $70 price for Boring.
D) a $35 price for Simple and a $25 price for Boring.
E) a mixed strategy equilibrium.

Accepted Answer

In a sequential game where Boring moves first, it would set a price anticipating Simple's response. By setting a price of $25, Boring ensures that Simple's best response is to set a price of $80, as Simple would want to avoid a price war that would lead to lower profits for both. This strategic move by Boring secures it a portion of the market by undercutting Simple's higher price point, leading to an equilibrium of an $80 price for Simple and a $25 price for Boring.

Question 5

Scenario 13.15
Consider the pricing game below: 
-Which is true about dominant strategies in the game in Scenario 13.15?
A) $80 is dominant for Simple; $70 is dominant for Boring.
B) $80 is dominant for Simple; $25 is dominant for Boring.
C) $35 is dominant for Simple; $70 is dominant for Boring.
D) $35 is dominant for Simple; $25 is dominant for Boring.
E) There are no dominant strategies in the above game.

Accepted Answer

The answer of Scenario 13.15
Consider the pricing game below: 
-Which...

Question 6

Mitchell Electronics produces a home video game that has become very popular with children. Mitchell's managers have reason to believe that Wright Televideo Company is considering entering the market with a competing product. Mitchell must decide whether to set a high price to accommodate entry or a low, entry-deterring price. The payoff matrix below shows the profit outcome for each company under the alternative price and entry strategies. Mitchell's profit is entered before the comma, and Wright's is after the comma.  
a. Does Mitchell have a dominant strategy? Explain.
b. Does Wright have a dominant strategy? Explain.
c. Mitchell's managers have vaguely suggested a willingness to lower price in order to deter entry. Is this threat credible in light of the payoff matrix above?
d. If the threat is not credible, what changes in the payoff matrix would be necessary to make the threat credible? What business strategies could Mitchell use to alter the payoff matrix so that the threat is credible?

Accepted Answer

The answer of Mitchell Electronics produces a home video game...

Question 7

As defined by Thomas Schelling, a "strategic move" is
A) any strategy choice in a game.
B) any strategy choice consistent with Nash equilibrium.
C) any strategy choice in a sequential game.
D) a strategy choice that influences the subsequent strategy choice of another player.
E) a strategy choice that restricts the set of outcomes available to another player.

Accepted Answer

According to Thomas Schelling, a strategic move is a move that influences the subsequent strategy choice of another player. This definition excludes choices that are merely consistent with Nash equilibrium, sequential games, or any strategy choice in a game. The definition also implies that a strategic move restricts the set of outcomes available to another player, but this is not a necessary condition for a move to be considered strategic. Therefore, the best choice is D.

Question 8

Consider the following output-choice game for two firms:

What is Firm 2's first-mover advantage in a sequential game relative to a simultaneous game?
A) Zero
B) 40
C) 50
D) 110

Accepted Answer

In a simultaneous game, both firms would choose "Output" and receive a payoff of 30. However, in a sequential game, Firm 2 can choose "No Output" and receive a payoff of 50, while Firm 1 would receive nothing. Thus, the first-mover advantage for Firm 2 in a sequential game is 50-10=40. The best choice for Firm 2 is to choose "No Output" as it maximizes its payoff.

Question 9

Scenario 13.16
Consider the pricing game below: 
-Refer to Scenario 13.16. If Gooi can move first, and Ici wants to realize the ($150, $300) payoff,
A) all it has to do is threaten to buy yogurt machines, no matter what Gooi does.
B) it could make its threat credible by rearranging its physical plant so that the installation of gelato machines by Gooi would bring in profit less than $50.
C) it could make its threat credible by rearranging its physical plant so that the installation of gelato machines by Gooi would bring in profit less than $150.
D) it could make its threat credible by rearranging its physical plant so that the installation of gelato machines by Gooi would bring in profit less than $300.
E) it has to move before Gooi; there is no other way.

Accepted Answer

If Ici rearranges its physical plant so that the installation of gelato machines by Gooi would bring in profit less than $50, it can make its threat credible. This is because if Gooi installs gelato machines, they will only be able to make a profit of $50 or less, which is less than the $150 that Ici can earn by choosing to buy yogurt machines. Therefore, Gooi will not install gelato machines and Ici can realize the ($150, $300) payoff.

Question 10

What is true about threats in the game in Scenario 13.15?
A) Simple can change the equilibrium by means of a credible threat; Boring cannot.
B) Boring can change the equilibrium by means of a credible threat; Simple cannot.
C) Boring can change the equilibrium by means of a credible threat only if it can move before Simple.
D) Simple can change the equilibrium by means of a credible threat only if it can move before Boring.
E) Neither firm has a credible threat with which to change this equilibrium.

Accepted Answer

The answer of What is true about threats in the...

Question 11

To deter a potential entrant, an existing firm in a market may threaten to sharply increase production so that the entrant will be left with a small share of the market. This may be a credible threat if:
A) production exhibits economies of scale.
B) production exhibits diseconomies of scale.
C) production costs may fall due to learning-by-doing.
D) A and C are correct.
E) B and C are correct.

Accepted Answer

A credible threat to increase production to deter entry is more plausible if the existing firm can exploit economies of scale and experience lower costs through learning-by-doing, making it harder for the new entrant to compete.

Question 12

Wal-Mart was one of the most successful firms of the 1970s and 1980s. Much of Wal-Mart's success can be credited to its expansion strategy: they rushed to open the first discount store in small towns that could only support one discount store. In the language of game theory:
A) Wal-Mart was a dominant firm.
B) Wal-Mart made empty threats.
C) Wal-Mart employed a maximin strategy.
D) Wal-Mart employed a preemptive strategy.

Accepted Answer

Wal-Mart employed a preemptive strategy by quickly opening their first store in small towns, preventing any potential competition from entering and establishing themselves as the dominant discount store in the area.

Question 13

Scenario 13.16
Consider the pricing game below: 
-Refer to Scenario 13.16. If the firms must choose their prices simultaneously,
A) both firms will buy gelato.
B) both firms will buy yogurt.
C) two pure strategy equilibria exist, one in which Gooi alone buys a gelato machine and one in which Ici alone buys a gelato machine.
D) the game has no pure strategy equilibrium.
E) the game has no mixed strategy equilibrium.

Accepted Answer

Both firms have a dominant strategy, which is to choose the product that is profitable regardless of what the other firm chooses. Gooi's dominant strategy is to buy a gelato machine and charge a high price for gelato, while Ici's dominant strategy is to buy a yogurt machine and charge a low price for yogurt. This results in two pure strategy equilibria, where one firm buys a gelato machine and charges a high price for gelato while the other firm buys a yogurt machine and charges a low price for yogurt. Therefore, the correct answer is C.

Question 14

If Simple were able to move first in a sequential version of the game in Scenario 13.15, the equilibrium would be
A) an $80 price for Simple and a $70 price for Boring.
B) an $80 price for Simple and a $25 price for Boring.
C) a $35 price for Simple and a $70 price for Boring.
D) a $35 price for Simple and a $25 price for Boring.
E) a mixed strategy equilibrium.

Accepted Answer

The answer of If Simple were able to move first...

Question 15

The countries Economus and Sociolomous on planet Subjectus are engaged in a Cold War. The pay-offs of their available strategies are presented in the table below.  
The pay-offs are listed in terms of percentage growth in the standard of living of the two countries.
Does either country have a dominant strategy? Does the game have a Nash equilibrium? What is the maximin strategy of each player in the game?

Accepted Answer

The answer of The countries Economus and Sociolomous on planet...

Question 16

To deter a potential entrant, an existing firm in a market may threaten to sharply increase production so that the entrant will be left with a small share of the market. The firm can make this threat credible by limiting its own options, and possible actions of this type include:
A) signing long-term sales contracts that commit the firm to high levels of output.
B) building a very large factory that could potentially produce enough output to meet most of the market demand.
C) signing long-term purchase contracts for large amounts of production inputs.
D) all of the above

Accepted Answer

All three options mentioned (signing long-term sales contracts committing to high levels of output, building a large factory, and signing long-term purchase contracts for large amounts of production inputs) limit the existing firm's options and make their threat to increase production more credible to potential entrants.

Question 17

Suppose a player in a game has a dominant strategy, but they threaten to take another action. Can this threat be credible?
A) No, such threats are never credible to other rational players.
B) No, if the player has a dominant strategy, they must take this action.
C) Yes, if they can link the current game to another bargaining problem in which their joint strategy for the combined games is rational.
D) Yes, dominant strategies may not always yield the highest payoffs.

Accepted Answer

If the player can effectively link the current game to another bargaining problem, they may be able to make their threat credible. In this case, the other players will understand that the threatened action is not in the dominant strategy equilibrium outcome, but rather, it is part of the bargaining process. This means that the player may be able to extract a higher payoff in the bargaining process than they would receive by simply playing their dominant strategy.

Question 18

Scenario 13.16
Consider the pricing game below: 
-What is true about dominant strategies in the game in Scenario 13.16?
A) Gelato is a dominant strategy for both firms.
B) Yogurt is a dominant strategy for Gooi only.
C) Yogurt is a dominant strategy for Ici only.
D) Yogurt is a dominant strategy for both firms.
E) There are no dominant strategies in the above game.

Accepted Answer

There are no dominant strategies in the game because neither firm has a single best option that is independent of the other firm's actions. Both Gooi and Ici have two options (gelato and yogurt) and the best choice depends on what the other firm does. Therefore, the firms must consider each other's decisions to determine their best strategies.

Question 19

Scenario 13.16
Consider the pricing game below: 
-Refer to Scenario 13.16. If Gooi can move first, and Ici threatens to buy yogurt machines, no matter what Gooi does,
A) Gooi will have to buy gelato machines, so Ici will get its highest possible profit.
B) Gooi will buy yogurt machines, which it otherwise wouldn't have, in order to retaliate.
C) the equilibrium payoff of ($50,$50) will be enforced.
D) Gooi will not change its behavior, because Ici's threat is not credible.
E) Gooi will threaten to buy yogurt machines, no matter what Ici does, to see whether that will get the people at Ici to change their minds.

Accepted Answer

Since Ici's threat is not credible, Gooi would not change its behavior. In this case, Gooi would choose to not buy any yogurt machines and stick to its original strategy, resulting in the equilibrium payoff of ($50,$50) being enforced.

Question 20

Scenario 13.16
Consider the pricing game below: 
-Refer to Scenario 13.16. If Gooi moves first, the payoff in equilibrium will be
A) $150, $0.
B) $150, $300.
C) $400, $150.
D) $50, $50.
E) $650, $450.

Accepted Answer

In this pricing game, Gooi has the opportunity to choose a high or low price, and Tan has the opportunity to match or undercut that price. 
If Gooi chooses a high price, say $300, Tan will have the incentive to undercut that price by choosing $150, since this will result in higher profits for Tan ($250) than matching the high price ($0). 
If Gooi instead chooses a low price, say $150, Tan will have the incentive to match that price, since undercutting would result in lower profits for Tan ($100). 
Therefore, the only equilibrium in this game is for Gooi to choose a high price and for Tan to choose to undercut that price, resulting in payoffs of $400 for Tan and $150 for Gooi.

Quiz 13: Game Theory and Competitive Strategy

Consider the following output-choice game for two firms: What is the outcome of the game if both firms use maximin strategies?

Scenario 13.15 Consider the pricing game below: -Refer to Scenario 13.15. If the firms price simultaneously, equilibrium would be

If Boring were able to move first in a sequential version of the game in Scenario 13.15, the equilibrium would be

Scenario 13.15 Consider the pricing game below: -Which is true about dominant strategies in the game in Scenario 13.15?

As defined by Thomas Schelling, a "strategic move" is

Consider the following output-choice game for two firms: What is Firm 2's first-mover advantage in a sequential game relative to a simultaneous game?

Scenario 13.16 Consider the pricing game below: -Refer to Scenario 13.16. If Gooi can move first, and Ici wants to realize the ($150, $300) payoff,

What is true about threats in the game in Scenario 13.15?

To deter a potential entrant, an existing firm in a market may threaten to sharply increase production so that the entrant will be left with a small share of the market. This may be a credible threat if:

Wal-Mart was one of the most successful firms of the 1970s and 1980s. Much of Wal-Mart's success can be credited to its expansion strategy: they rushed to open the first discount store in small towns that could only support one discount store. In the language of game theory:

Scenario 13.16 Consider the pricing game below: -Refer to Scenario 13.16. If the firms must choose their prices simultaneously,

If Simple were able to move first in a sequential version of the game in Scenario 13.15, the equilibrium would be

To deter a potential entrant, an existing firm in a market may threaten to sharply increase production so that the entrant will be left with a small share of the market. The firm can make this threat credible by limiting its own options, and possible actions of this type include:

Suppose a player in a game has a dominant strategy, but they threaten to take another action. Can this threat be credible?

Scenario 13.16 Consider the pricing game below: -What is true about dominant strategies in the game in Scenario 13.16?

Scenario 13.16 Consider the pricing game below: -Refer to Scenario 13.16. If Gooi can move first, and Ici threatens to buy yogurt machines, no matter what Gooi does,

Scenario 13.16 Consider the pricing game below: -Refer to Scenario 13.16. If Gooi moves first, the payoff in equilibrium will be