Chapter 12: Game TheoryMULTIPLE CHOICE 1. a. b. c. d. e. Game theory is useful for understanding oligopoly behavior because: there are so many firms in an oligopoly that all are price takers. firms must differentiate their products if they are to remain in business. firms recognize that because there are only a few firms mutual interdependence is important. without it firms would not be able to maintain cartel agreements. it allows firms to develop greater monopoly power. ANS: C DIF: Moderate REF: 460 TOP: Making Strategy and Game Theory 2. a. b. c. d. e. MSC: Conceptual Useful strategies to deter entry include: increasing advertising. increasing prices. decreasing capacity. increasing capacity. a and d ANS: E DIF: Moderate REF: 460 TOP: Making Strategy and Game Theory MSC: Conceptual 3. Radio City promises if you can find a lower advertised price for anything you bought at Radio City, anywhere in town within 30 days, it will return the difference plus 20%. A sophisticated game theoretic analysis suggests Radio City may be: a. losing money in the long run. b. colluding with other stores. c. using a commitment to threaten competitors. d. preempting competitors. e. using price leadership. ANS: B DIF: Difficult REF: 460 TOP: Making Strategy and Game Theory MSC: Conceptual 4. Potential entrant E threatens to enter incumbent I’s market and I threatens to lower price to P should E enter. It is crucial for E to believe I’s threat that: a. P > I’s average total cost. b. P > I’s average variable cost. c. P is low enough to discourage E. d. I could conceivably charge P without E’s threat. e. I’s profit with P and no entry are better than expected profits with entry. ANS: B DIF: Difficult REF: 460 TOP: Making Strategy and Game Theory MSC: Conceptual the greatest potential gain is: a. a stockholder at a firm involved in a strategic game. all actions with a nonzero probability of occurring. $10 million per year. that decision trees are a function of many individuals and the state of nature. a. If GM cuts prices. Consider the following decision tree. d. e. actions that result in positive profits for the firm. that decision trees describe actions that depend on the behavior of rivals. DIF: Easy REF: 463 TOP: Visual 8. b. b. This tree illustrates hypothetical payoffs to General Mills (GM) and Quaker Oats (Q) if they engage in a price war. e. the one outcome that the decision maker chooses. c. that game trees have interactive payoffs. c. ANS: B MSC: Factual 7. b. d. d. a. b. a monopolist who produces a unique product with no close substitutes. actions that a decision maker is willing to take. ANS: A MSC: Factual 6. $5 million per year. $3 million per year. ANS: C Representation MSC: Factual DIF: Easy REF: 461 TOP: Strategy Basics A player in a game theoretic model is: anyone working for a firm that is operating strategically. only actions that have a 50% or greater probability of occurring. e. . none of the above. c. d. none of the above. a firm that is operating as a perfect competitor. e. DIF: Easy REF: 461 TOP: Strategy Basics The difference between game trees and decision trees is: that game trees are not useful in strategic situations. c. A feasible strategy set is: a. a decision-making entity at a firm involved in a strategic game.5. $2 million per year. beats all others. GM loses $2 million. 3. If GM cuts prices and Quaker Oats follows this behavior: a. c. d. what will A’s profits be? a. 1. c. Unknown until B’s action is observed.a. c. TOP: Visual DIF: Easy REF: 468 TOP: Dominant If player 1 has a dominant strategy. but will always lead to a Nash equilibrium. may or may not have a dominant strategy. d. none of the above. ANS: A Representation MSC: Applied DIF: Easy REF: 463 TOP: Visual 9. then player 2: must also have a dominant strategy. b. 4. b. $10 million per year. given the opponent’s choice. is beaten by all others. is beaten by all others. This tree illustrates hypothetical payoffs to General Mills (GM) and Quaker Oats (Q) if they engage in a price war. Quaker Oats loses $2 million. b. d. DIF: Easy REF: 463 Given the following payoff matrix. e. TOP: Visual beats all others. e. e. given the opponent’s choice. will block this dominant strategy and force player 1 to another strategy. both firms gain $3 million. given the opponent’s choice. e. may or may not have a dominant strategy. 2. regardless of the opponent’s choice. Quaker Oats loses $10 million. beats at least one other. e. . Consider the following decision tree. $3 million per year. regardless of the opponent’s choice. a. ANS: C Representation MSC: Applied 10. $5 million per year. DIF: Moderate c. will not be able to reach an optimal solution to the game. ANS: A Strategies MSC: Factual 12. b. GM loses $10 million. b. ANS: B Representation MSC: Applied 11. REF: 463 A dominant strategy is one that: a. c. $2 million per year. d. d. c. ANS: D Strategies MSC: Applied 16. even if payoffs change. .a. 16. its optimal strategy is independent of the play of rivals. b. will block this dominant strategy and force player 1 to another strategy. c. Both players have it. a. d. e. must also have a dominant strategy. b. A doesn’t. b. gets the highest possible payoff. player: a. but will always lead to a Nash equilibrium. will not be able to reach an optimal solution to the game. it receives the same profits regardless of the strategy of rivals. c. d. c. is happy with the outcome. may or may not have a dominant strategy. B does. b. DIF: Easy REF: 468 TOP: Dominant 15. DIF: Easy REF: 468 TOP: Dominant By definition. gets the highest payoff possible without lowering the opponent’s payoff. e. It depends on what the other player does. 64. ANS: C Strategies MSC: Factual 14. a Nash equilibrium in a duopoly is the situation in which each plays a dominant strategy. A does. its optimal strategy is always the same. 8. may or may not have a dominant strategy. e. b. e. who has a dominant strategy? a. how many outcomes can there be? a. plays the best strategy given the other’s strategies. B doesn’t. Neither player has it. ANS: E Strategies MSC: Factual DIF: Easy REF: 468 TOP: Dominant If a firm has a dominant strategy: its optimal strategy depends on the play of rivals. e. 1. In a two-player game in which each player has four options. DIF: Easy REF: 468 TOP: Dominant Given the following payoff matrix. d. d. d. c. 4. it is determined by the behavior of only one key rival. ANS: C Strategies MSC: Factual 13. W. Which pair of strategies would cooperative cartel members A and B choose given this payoff matrix? a. X. Z. gets the highest payoff possible without lowering the opponent’s payoff. a. b. depending on the game. ANS: D Equilibrium MSC: Factual DIF: Easy REF: 472 TOP: The Nash A Nash equilibrium occurs when: each player has a dominant strategy. e. e. DIF: Easy REF: 472 TOP: The Nash Getting to a Nash equilibrium requires: each knowing the opponent’s payoffs and cooperation. Y. knowing the opponent’s payoffs but not cooperation. is happy with the outcome. Y or W. there is no dominant strategy for any player. DIF: Easy REF: 472 TOP: The Nash 19. a. each player believes it is doing the best it can given the behavior of rivals. X. ANS: C Equilibrium MSC: Factual 18. Either X. gets the highest possible payoff. c. Y. b. c. plays the best strategy given the other’s strategies. plays a dominant strategy. d. W. b. e. payoffs are independent of the actions taken by rivals. DIF: Easy REF: 472 TOP: The Nash Which pair of strategies would competing firms A and B choose given this . neither cooperation nor knowing the opponent’s payoffs. each player receives the same final payoff. c. d. either cooperation or knowing the opponent’s payoffs. e. c.a. ANS: B Equilibrium MSC: Applied 20. b. Z. Z. d. cooperation but not knowing the opponent’s payoffs. d. ANS: B Equilibrium MSC: Factual 17. d. ANS: C Equilibrium MSC: Applied 21. 2. d. DIF: Easy 0. e. b. 3. b. . Company A chooses Strategy 1 and Company B chooses Strategy 2. 1. b. X. c. Y. None of the above. TOP: The Nash How many Nash equilibria are there in this payoff matrix? a. Which of the following is a Nash Company A chooses Strategy 1 and Company B chooses Strategy 1. X. d. a. REF: 472 TOP: The Nash How many Nash equilibria are there in this payoff matrix? a. c. b. Y or W. Z. e. 4. REF: 472 0. Z.payoff matrix? a. d. Either X. equilibrium? c. 1. c. W. W. ANS: C Equilibrium MSC: Applied 22. e. Z. e. Y. 2. DIF: Easy ANS: C Equilibrium MSC: Applied 23. 3. DIF: Easy REF: 472 TOP: The Nash Refer to the accompanying payoff matrix. Company A chooses Strategy 2 and Company B chooses Strategy 1. 4. Company A chooses Strategy 2 and Company B chooses Strategy 2. ANS: A Equilibrium MSC: Applied REF: 472 DIF: Moderate REF: 472 TOP: The Nash Strategic foresight is the ability to make decisions today that are rational complete uncertainty about the future. c. Which of the following is a Nash a. equilibrium? DIF: Moderate c. b. b. equilibrium? DIF: Easy Company A chooses Strategy 1 and Company B chooses Strategy 1. information that we have only about our own behavior in the past. Which of the following is a Nash a. based on: a. e. our best information about what will happen in the future. REF: 472 Refer to the accompanying matrix. incorrect information about the past. e. None of the above. Company A chooses Strategy 2 and Company B chooses Strategy 1. Company A chooses Strategy 2 and Company B chooses Strategy 2. c. Company A chooses Strategy 1 and Company B chooses Strategy 2. ANS: B Equilibrium MSC: Applied TOP: The Nash Refer to the accompanying payoff matrix. what we know only about behavior in the past. d. Company A chooses Strategy 2 and Company B chooses Strategy 1. 26. d.ANS: D Equilibrium MSC: Applied 24. 25. Company A chooses Strategy 2 and Company B chooses Strategy 2. b. Company A chooses Strategy 1 and Company B chooses Strategy 2. d. TOP: The Nash Company A chooses Strategy 1 and Company B chooses Strategy 1. ANS: B DIF: Easy REF: 479 TOP: Strategic Foresight: The Use of Backward Induction MSC: Factual . e. None of the above. This threat is: a. c. credible because the Nash equilibrium occurs where A plays W and B plays Z. e. b. is a threat but not a commitment. is both a threat and a commitment. ANS: C DIF: Moderate REF: 482 TOP: Making Strategy and Game Theory MSC: Conceptual . is neither a threat nor a commitment. e. credible because A’s dominant strategy is to play W. a. d. Suppose that firm A finds itself facing the following payoff matrix in its rivalry with firm B: A threatens to play strategy W. ANS: C DIF: Easy REF: 482 TOP: Strategic Foresight: The Use of Backward Induction 28. c. not credible because A’s dominant strategy is to play X.27. not credible because B will never play strategy Z. d. MSC: Conceptual A most-favored-customer clause: is a commitment but not a threat. b. credible because the joint optimal solution occurs where A plays W and B plays Z. could be either a threat or a commitment depending on the terms.
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