Game theory

1. Game theory is most commonly used for analyzing the pricing behavior of firms in which market structure?

• (A) Perfect competition

• (B) Monopolistic competition

• (C) Oligopoly

• (D) Monopoly

• (E) Monopsony

2. Game theory is most useful in describing outcomes in markets where ?

• (A) firms are price takers

• (B) there is only one producer

• (C) there are many small producers

• (D) products are identical for all firms

• (E) there are interdependent firms

3. In a market with two firms, a firm that has a dominant strategy will do which of the following?

• (A) Maintain that strategy independent of the strategies chosen by its competitor.

• (B) Adjust its strategies based on the strategies chosen by its competitor.

• (C) Make the first move, and wait to see whether its competitor responds to the move.

• (D) Keep its competitor guessing about its next move.

4. This table shows the profits associated with the strategies of two oligopolistic firms, Lock and Star, that must choose between a high price and a low price for their products. The first entry in each box is the profits received by Lock, and the second entry is the profits received by Star. If Lock chooses to charge the low price, the best course of action for Star would be to charge the..

• (A) low price and earn a profit of $40

• (B) low price and earn a profit of $50

• (C) high price and earn a profit of $50

• (E) high price and incur a loss of $20

5. The two firms in an industry are deciding whether to advertise. The profit to each firm depends on the other firm’s decision. The first entries in this matrix indicate the profit earned, in millions of dollars, by Firm A; and the second entries indicate the profits earned, in millions of dollars, by Firm B. Based on the payoff matrix, which of the following is correct?

• (A) Firm A always gets a smaller share of the industry profits.

• (B) Firm A’s dominant strategy is to advertise.

• (C) Firm B’s dominant strategy is not to advertise.

• (D) The dominant strategy for both firms is not to advertise.

6. E Soda and R Soda are the only two firms in the soft-drink industry. The companies cannot cooperate. Each firm can follow a high-price strategy or a low-price strategy for pricing its product. In the payoff matrix below, the first entry in each cell shows the profits to E Soda and the second entry shows the profits to R Soda. Given the information in the payoff matrix, it can be concluded that

• (A) neither E Soda nor R Soda has a dominant strategy

• (B) E Soda has a dominant strategy but R Soda does not

• (C) R Soda has a dominant strategy but E Soda does not

• (D) both firms will choose the high-price strategy

• (E) both firms will choose the low-price strategy

7. The two firms in an industry are deciding whether to advertise. The profit to each firm depends on the other firm’s decision. The first entries in this matrix indicate the profit earned, in millions of dollars, by Firm A; and the second entries indicate the profits earned, in millions of dollars, by Firm B. The combination where Firm A advertises and Firm B does not advertise is Nash equilibrium because..

• (A) it is best for each firm given what the other firm has chosen

• (B) the total industry profits are maximized

• (C) Firm A has an incentive to change its strategy and chooses not to advertise

• (D) it is the best outcome for Firm B regardless of what firm A does

8. Evergreen and Nature View are bidding for a landscaping contract. This payoff matrix shows what each firm’s total weekly profits from all its operations will be for each combination of bids. The first entry in each cell shows Evergreen’s profit, and the second entry in each cell shows Nature View’s profit. A Nash equilibrium results under which of the following conditions?

• (A) When Evergreen bids low, no matter what Nature View’s bid is

• (B) When both firms bid high and when both firms bid low

• (C) When Evergreen bids high and Nature View bids low

• (D) When both firms bid low

• (E) When both firms bid high

If the two firms do not cooperate, which of the following represents the payoff North Springs and South Springs receive in the dominant-strategy equilibrium and the Nash equilibrium?

• (A) Dominant Strategy = None ; Nash Equilibrium = ($27, $28)

• (B) Dominant Strategy = ($27, $28) ; Nash Equilibrium = ($15, $45)

• (C) Dominant Strategy = ($30, $26) ; Nash Equilibrium = ($15, $45)

• (D) Dominant Strategy = ($27, $28) ; Nash Equilibrium = ($27, $28)

• (E) Dominant Strategy = ($30, $26) ; Nash Equilibrium = ($27, $28)

10. The payoff matrix above gives the profits associated with the strategic choices of two firms in an oligopolistic industry. The first entry in each cell is the profit to Firm A and the second to Firm B. If the two firms collude, Firm A's and Firm B's profits would be which of the following?

• (A) Firm A’s Profit = $150 ; Firm B’s Profit = $50

• (B) Firm A’s Profit = $100 ; Firm B’s Profit = $100

• (C) Firm A’s Profit = $100 ; Firm B’s Part rofit = $150

• (D) Firm A’s Profit = $50 ; Firm B’s Profit = $100

• (E) Firm A’s Profit = $50 ; Firm B’s Profit = $50