Question 1

Student 1
 
-Two students are assigned a group project. Each has the option to work or not work to achieve a high grade. The payoffs are shown in the above table. Student 1 should

Accepted Answer

Without the specific payoff table, the general principle of game theory suggests that if one's best response is to work regardless of the other's action, it indicates a dominant strategy. This implies that working maximizes Student 1's payoff irrespective of Student 2's choice, aligning with the concept of a dominant strategy in game theory.

Question 2

Big W
 
-Refer to the payoffs in the table above. Big W and Kmart must decide whether to lower their prices based on the profits shown in the table. This game has

Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the other player's strategy. Here, if one lowers prices and the other doesn't, the one that lowers prices gets a higher payoff (assuming the other's decision is fixed), leading both to lower prices for their best response.

Question 3

A market structure in which a small number of firms compete is called _______.

Accepted Answer

An oligopoly is a market structure in which a small number of firms have significant market power and compete with each other. This structure is characterized by interdependent decision-making, strategic behavior, and barriers to entry that prevent new firms from entering the market easily.

Question 4

Firm A
 
-Firms A and B can conduct research and development (R&D) or not conduct it. R&D is costly but can increase the quality of the product and increase sales. The payoff matrix is the economic profits of the two firms and is given above, where the numbers are millions of dollars. The Nash equilibrium occurs when

Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the other player's strategy. When both A and B conduct R&D, neither firm can unilaterally change its strategy to increase its payoff, assuming the other firm's strategy remains unchanged. This scenario typically results in both firms conducting R&D to not be at a competitive disadvantage, despite the costs, as the benefits (increased sales due to higher product quality) outweigh the costs, leading to higher economic profits.

Question 5

If firms in a duopoly can successfully collude,

Accepted Answer

When firms in a duopoly collude, they can act as a monopoly, maximizing total industry profits, which allows each firm to earn an economic profit. This situation is known as a cooperative equilibrium, where both firms work together to maximize their combined profits.

Question 6

In a duopoly with a collusive agreement and in a one- time only game, a firm's profit is largest if it
_______ The agreement and if the other firm _______ the agreement.

Accepted Answer

In a one-time game with a collusive agreement, a firm maximizes its profit by cheating on the agreement while the other firm complies. This allows the cheating firm to capture more market share or sell at a better price while the other firm limits its output or keeps prices high as per the agreement.

Question 7

Two duopoly firms form a cartel. They decide to collude and fix the price of their good. Each individual firm will earn the highest profit if

Accepted Answer

When one firm cheats on the cartel agreement by lowering prices or increasing production while the other firm sticks to the agreement, the cheating firm can capture a larger market share and earn higher profits at the expense of the other firm.

Question 8

Consider the prisoner's dilemma model where two criminals have two options (confess or deny), and each criminal must make their decision without speaking to the other criminal first. If they both confess they each get 3 years, if only one confesses then he gets 1 and his partner gets 10, and if neither confesses then they each get 0. They are in fact both guilty. In this game, the Nash equilibrium is where

Accepted Answer

In the prisoner's dilemma, the Nash equilibrium occurs when both prisoners choose to confess because this outcome means neither prisoner can unilaterally reduce their sentence by changing their decision, assuming the other's decision remains unchanged.

Question 9

Price wars can be the result of

Accepted Answer

Price wars often occur when new firms enter an industry, leading to a situation where all firms find themselves in a prisoners' dilemma. In this scenario, each firm might lower prices to capture or maintain market share, resulting in a price war. This is because, in a prisoners' dilemma, although the firms would collectively benefit from maintaining higher prices, each firm has an incentive to lower prices to outcompete the others, leading to lower profits for all.

Question 10

Suppose two firms are trying to decide how much to budget for research and development. Once a new discovery is made, each firm benefits regardless of which firm developed the innovation. In this R&D game of chicken, the Nash equilibrium will be that

Accepted Answer

In a game of chicken, the Nash equilibrium occurs when one player chooses to yield (not conduct R&D) while the other proceeds (conducts R&D), as each firm benefits from the R&D regardless of who conducts it. However, the equilibrium does not specify which firm will take which action, making B the correct choice.

Question 11

Of the following, the BEST example of oligopoly is

Accepted Answer

The cigarette industry is the best example of an oligopoly because it is dominated by a few large firms that have significant control over the market, making it difficult for new competitors to enter.

Question 12

Oscar
 
-Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a cartel. The payoff matrix shows the economic profit that each firm can make. If the game is played repeatedly and Felix and Oscar both use a tit- for- tat strategy, then _______.

Accepted Answer

In a tit-for-tat strategy, each firm starts by cooperating (in this case, sticking to the cartel agreement) and then mimics the other firm's previous action in subsequent rounds. If both firms start by cooperating and continue to do so as long as the other cooperates, they will both maintain the cartel agreement and earn the higher profits associated with cooperation, which is $10 million each in this scenario.

Question 13

Which of the following models is the BEST to explain price wars?

Accepted Answer

A repeated duopoly game best explains price wars because it involves two firms repeatedly interacting over time, allowing for strategies like price undercutting to be used as competitive tactics. This setting captures the dynamic nature of price wars, where firms continuously adjust their prices in response to the competition.

Question 14

Limit pricing is a strategy used by a firm to

Accepted Answer

Limit pricing is a strategy where a firm sets its prices low enough to deter new competitors from entering the market. This is done with the understanding that the cost of entry and competing at that price level would be too high for potential new entrants, thus protecting the firm's market share and long-term profitability.

Question 15

In the prisoners' dilemma game, when each player takes the best possible action given the action of the other player, _______.

Accepted Answer

In the prisoners' dilemma game, when each player takes the best possible action given the action of the other player, a Nash equilibrium is reached. This is because each player's strategy is optimal, given the strategy of the other player, and no player has anything to gain by changing only their own strategy unilaterally.

Question 16

Suppose two firms, FastNet and SmartCast are the only fast Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other's. The industry is a natural duopoly. Suppose that FastNet and SmartCast collude and agree to share the market equally. In this scenario, in Nash equilibrium,

Accepted Answer

In a Nash equilibrium, each firm, knowing the strategy of the other, has no incentive to change its own strategy. In this scenario, both firms have an incentive to cheat on the collusion agreement by producing more than the agreed amount to capture a larger market share, assuming the other firm sticks to the agreement. This leads to both firms cheating to produce more, as it maximizes their individual payoffs given the strategy of the other.

Question 17

A natural oligopoly can form

Accepted Answer

A natural oligopoly can form when there are significant economies of scale, as only a few firms can efficiently satisfy market demand due to the high costs of entry and operation.

Question 18

For a Nash equilibrium to be possible, all players must _______.

Accepted Answer

For a Nash equilibrium to be possible, it is essential that all players can predict the outcomes associated with all possible actions of the other players. This understanding allows each player to choose their best response strategy, assuming the strategies of the others. Communication or collusion is not a requirement for a Nash equilibrium.

Question 19

A strategy in which a player cooperates in the current period if the other player cooperated in the previous period, but the player cheats in the current period if the other player cheated in the previous period is called a

Accepted Answer

This strategy is known as the tit-for-tat strategy. It is a cooperative strategy in game theory where a player replicates the opponent's previous action, cooperating if the opponent cooperated and retaliating if the opponent cheated.

Question 20

The price in a contestable market is similar to that in a perfectly competitive market because

Accepted Answer

In a contestable market, the absence of barriers to entry means that potential competitors can easily enter the market if they see an opportunity for profit, similar to a perfectly competitive market. This threat of potential entry forces existing firms to price their products competitively, often leading to prices that reflect the cost of production, similar to outcomes in perfectly competitive markets.

Quiz 16: Oligopoly Games and Strategy

Student 1 -Two students are assigned a group project. Each has the option to work or not work to achieve a high grade. The payoffs are shown in the above table. Student 1 should

Big W -Refer to the payoffs in the table above. Big W and Kmart must decide whether to lower their prices based on the profits shown in the table. This game has

A market structure in which a small number of firms compete is called _______.

If firms in a duopoly can successfully collude,

In a duopoly with a collusive agreement and in a one- time only game, a firm's profit is largest if it _ The agreement and if the other firm _ the agreement.

Two duopoly firms form a cartel. They decide to collude and fix the price of their good. Each individual firm will earn the highest profit if

Price wars can be the result of

Suppose two firms are trying to decide how much to budget for research and development. Once a new discovery is made, each firm benefits regardless of which firm developed the innovation. In this R&D game of chicken, the Nash equilibrium will be that

Of the following, the BEST example of oligopoly is

Oscar -Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a cartel. The payoff matrix shows the economic profit that each firm can make. If the game is played repeatedly and Felix and Oscar both use a tit- for- tat strategy, then _______.

Which of the following models is the BEST to explain price wars?

Limit pricing is a strategy used by a firm to

In the prisoners' dilemma game, when each player takes the best possible action given the action of the other player, _______.

A natural oligopoly can form

For a Nash equilibrium to be possible, all players must _______.

A strategy in which a player cooperates in the current period if the other player cooperated in the previous period, but the player cheats in the current period if the other player cheated in the previous period is called a

The price in a contestable market is similar to that in a perfectly competitive market because

Quiz 16: Oligopoly Games and Strategy

Student 1 -Two students are assigned a group project. Each has the option to work or not work to achieve a high grade. The payoffs are shown in the above table. Student 1 should

Big W -Refer to the payoffs in the table above. Big W and Kmart must decide whether to lower their prices based on the profits shown in the table. This game has

A market structure in which a small number of firms compete is called _______.

If firms in a duopoly can successfully collude,

In a duopoly with a collusive agreement and in a one- time only game, a firm's profit is largest if it _______ The agreement and if the other firm _______ the agreement.

Two duopoly firms form a cartel. They decide to collude and fix the price of their good. Each individual firm will earn the highest profit if

Price wars can be the result of

Suppose two firms are trying to decide how much to budget for research and development. Once a new discovery is made, each firm benefits regardless of which firm developed the innovation. In this R&D game of chicken, the Nash equilibrium will be that

Of the following, the BEST example of oligopoly is

Oscar -Oscar and Felix are the only firms that clean offices in a large city. They agree to operate as a cartel. The payoff matrix shows the economic profit that each firm can make. If the game is played repeatedly and Felix and Oscar both use a tit- for- tat strategy, then _______.

Which of the following models is the BEST to explain price wars?

Limit pricing is a strategy used by a firm to

In the prisoners' dilemma game, when each player takes the best possible action given the action of the other player, _______.

A natural oligopoly can form

For a Nash equilibrium to be possible, all players must _______.

A strategy in which a player cooperates in the current period if the other player cooperated in the previous period, but the player cheats in the current period if the other player cheated in the previous period is called a

The price in a contestable market is similar to that in a perfectly competitive market because

In a duopoly with a collusive agreement and in a one- time only game, a firm's profit is largest if it _ The agreement and if the other firm _ the agreement.