Microeconomics: Theory and Applications with Calculus, 4e, Global Edition (Perloff)

Chapter 13 Game Theory

13.1 Static Games

1) Game theory shows that

A) sometimes pursuing profit maximization will not yield the highest joint profit.
B) interdependencies between firms have to be taken into account when few firms dominate the
market.
C) in an oligopolistic market, firms are likely to collude.
D) All of the above.
Answer: D

2) Chess is an example of a
A) game with perfect information.
B) game with imperfect information.
C) game with incomplete information.
D) static game.
Answer: A

3) Which of the following games is NOT analyzed with game theory?

A) State Lottery
B) Poker
C) Car Chases
D) Auctions
Answer: A

4) What aspects of a game are specified by "the rules of the game"?

A) timing of players' moves
B) payoffs
C) information available to each player
D) All of the above
Answer: D

5) The "Normal-Form" of a game is a description including

A) the players.
B) the strategies possible.
C) the payoffs.
D) All of the above
Answer: D

6) For an oligopolistic firm, which of the following can be identified as a strategy?

A) Produce 10,000 units regardless of what the rivals do.
B) Advertise if the rival advertises, do not advertise if the rival does not advertise.
C) Raise the price if the rival raises the price, keep the current price if the rival lowers its price.
D) All of above.
Answer: D
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7) The above figure shows a payoff matrix for two firms, A and B, that must choose between a
high-price strategy and a low-price strategy. For firm B,
A) setting a high price is the dominant strategy.
B) setting a low price is the dominant strategy.
C) there is no dominant strategy.
D) doing the opposite of firm A is always the best strategy.
Answer: B
8) The above figure shows a payoff matrix for two firms, A and B, that must choose between a
high-price strategy and a low-price strategy. For firm A,
A) setting a low price is the dominant strategy.
B) setting a high price is the dominant strategy.
C) setting a high price when firm B sets a high price, and setting a low price when firm B sets a
low price is the dominant strategy.
D) setting a high price when firm B sets a low price, and setting a low price when firm B sets a
high price is the dominant strategy.
Answer: A

9) The above figure shows a payoff matrix for two firms, A and B, that must choose between a
high-price strategy and a low-price strategy. The Nash equilibrium in this game
A) does not exist.
B) occurs when both firms set a low price.
C) occurs when both firms set a high price.
D) occurs when firm A sets a high price and firm B sets a low price.
Answer: B

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10) The above figure shows a payoff matrix for two firms, A and B, that must choose between
selling basic computers or advanced computers. Firm B's dominant strategy
A) is to make basic computers.
B) is to make advanced computers.
C) is to adopt firm A's strategy.
D) does not exist in this game.
Answer: D

11) The above figure shows a payoff matrix for two firms, A and B, that must choose between
selling basic computers or advanced computers. How many Nash equilibria are there?
A) 0
B) 1
C) 2
D) 4
Answer: C

12) In a two-player simultaneous game, if player A has a dominant strategy and player B does
not, player B will
A) employ a mixed strategy.
B) choose his best strategy assuming that player A plays her dominant strategy.
C) not achieve a Nash equilibrium.
D) assume that player A does not choose her dominant strategy.
Answer: B

13) After analyzing his opponent a tennis player decides to serve 10% of his serves to the left,
50% of his serves to the right, and 40% of his serves at the body of his opponent. This illustrates
a
A) deterministic strategy.
B) dominant strategy.
C) mixed strategy.
D) non-game theoretic problem.
Answer: C

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14) A mixed strategy may
A) be part of a Nash equilibrium.
B) be a set of probabilities of selecting each possible action.
C) lead identical firms to choose different actions.
D) All of the above.
Answer: D

15) When neither player has a dominant strategy,

A) game theory will not provide information.
B) no Nash-Equilibrium exists.
C) at least one Nash-Equilibrium exists.
D) the game cannot be analyzed.
Answer: C

16) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If
the two airlines must decide simultaneously, which one of the following statements is TRUE?
A) Firm A does not have a dominant strategy.
B) Firm B does not have a dominant strategy.
C) Neither firm entering is a Nash equilibrium.
D) The outcome of the game is unpredictable.
Answer: B

17) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If
the two airlines must decide simultaneously, which one of the following statements is TRUE?
A) Firm A has a dominant strategy.
B) Firm B has a dominant strategy.
C) Neither firm entering is a Nash equilibrium.
D) The outcome of the game is unpredictable.
Answer: A

18) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If
the two airlines must decide simultaneously, which one of the following statements is TRUE?
A) Only firm A will enter the market.
B) Only firm B will enter the market.
C) Neither firm entering is a Nash equilibrium.
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D) The outcome of the game is unpredictable.
Answer: A

19) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If
the two airlines must decide simultaneously, which one of the following statements is TRUE?
A) Since firm B has no dominant strategy, its decision is unpredictable.
B) Since firm B's decision is unpredictable, firm A's decision is unpredictable.
C) Neither firm entering is a Nash equilibrium.
D) Firm B will not enter because it knows firm A will.
Answer: D

20) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If
the two airlines must decide simultaneously, what will happen if the government offers a $30
subsidy to airlines that serve this route?
A) Both firms will enter profitably.
B) Firm A will decide not to enter since firm B will.
C) Firm B is still better off not entering.
D) Neither firm will have a dominant strategy.
Answer: A

21) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If
the two airlines must decide simultaneously, what will happen if the government offers a $30
subsidy to airlines that serve this route?
A) The Nash equilibrium remains the same.
B) Only firm A will have a dominant strategy.
C) Both firms will choose to enter the market.
D) Joint profits will be maximized.
Answer: C

22) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If
the two airlines must decide simultaneously, how many Nash equilibria are there?
A) 0
B) 1
C) 2
D) It cannot be determined.
Answer: B

23) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If
the two airlines must decide simultaneously, what happens if the government imposes a $20 per
firm tax on firms that service this route?
A) Neither firm has a dominant strategy.
B) Not entering is a dominant strategy for both firms.
C) Neither firm entering is a Nash equilibrium.
D) Only firm A will enter.
Answer: A

24) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If
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the two airlines must decide simultaneously, and the government imposes a $20 per firm tax on
firms that service this route, which of the following maximizes the firms' joint profits?
A) Neither firm services the route.
B) Firm A offers firm B $20 to not enter.
C) Both firms will service this route.
D) Firm B offers firm A $30 to not enter.
Answer: B

25) A single-period duopoly firm can choose output level A or B. The firm decides it will
produce level A regardless of what the other firm produces. This decision may occur because
A) producing the output level A is a dominant strategy.
B) this firm has simply decided to always produce at level A.
C) Both A and B are possible.
D) None of the above.
Answer: C

26) In a non-cooperative, imperfect information, simultaneous-choice, one-period game, a Nash

equilibrium
A) will never exist.
B) will always include dominant strategies.
C) will always result in both players taking the same action.
D) may not maximize the sum of the firms' profits.
Answer: D

27) Collusion is more likely to occur when

A) there is fear of punishment for not colluding.
B) there is a known finite time horizon.
C) there are large gains to be made by cheating on an agreement.
D) the game lasts only one period.
Answer: A

28) The above figure shows the payoff matrix for two firms, A and B, selecting an advertising
budget. The firms must choose between a high advertising budget and a low advertising budget.
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Firm A's dominant strategy
A) does not exist.
B) is to do the opposite of firm B.
C) is to select a high advertising budget.
D) is to select a low advertising budget.
Answer: A

29) The above figure shows the payoff matrix for two firms, A and B, selecting an advertising
budget. The firms must choose between a high advertising budget and a low advertising budget.
Firm B's dominant strategy
A) does not exist.
B) is to copy firm A.
C) is to select a high advertising budget.
D) is to select a low advertising budget.
Answer: C

30) The above figure shows the payoff matrix for two firms, A and B, selecting an advertising
budget. The firms must choose between a high advertising budget and a low advertising budget.
A Nash equilibrium is that
A) firm A selects a high advertising budget and firm B selects a low advertising budget.
B) firm A selects a low advertising budget and firm B selects a high advertising budget.
C) both firms select a high advertising budget.
D) both firms select a low advertising budget.
Answer: C

31) The above figure shows the payoff matrix for two firms, A and B, selecting an advertising
budget. The firms must choose between a high advertising budget and a low advertising budget.
A Nash equilibrium
A) occurs when both firms select a high advertising budget.
B) exists at any of the four possible strategy combinations because there is never an incentive to
change strategy.
C) is for both firms to choose the low advertising budget because this yields the highest joint
profit.
D) does not exist because firm A does not have a dominant strategy.
Answer: A

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32) The above figure shows the payoff matrix for two firms, A and B, choosing to produce a
basic computer or an advanced computer. How many pure-strategy Nash equilibria are in this
game?
A) 0
B) 1
C) 2
D) 3
Answer: C

33) The above figure shows the payoff matrix for two firms, A and B, choosing to produce a
basic computer or an advanced computer. The dominant strategy for firm A is
A) producing an advanced computer.
B) producing a basic computer.
C) copying firm B's action.
D) Firm A does not have a dominant strategy.
Answer: D

34) The above figure shows the payoff matrix for two firms, A and B, choosing to produce a
basic computer or an advanced computer. Which of the following is a Nash equilibrium?
A) Firm A produces an advanced computer, and firm B produces a basic computer.
B) Both firms produce advanced computers.
C) Both firms produce basic computers.
D) None of the above.
Answer: A

35) The above figure shows the payoff matrix for two firms, A and B, choosing to produce a
basic computer or an advanced computer. The mixed-strategy Nash equilibrium is
A) Firm A produces an advanced computer with 80% chance, firm B produces an advanced
computer with 20% chance.
B) Both firms produce advanced computers with 50% chance.
C) Firm A produces an advanced computer with 60% chance, firm B produces an advanced
computer with 40% chance.
D) Both firms produce advanced computer with 80% chance.
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Answer: D

36) The above figure shows the payoff matrix for two firms, A and B, choosing to produce a
basic computer or an advanced computer. The joint profits
A) will be maximized at a Nash equilibrium.
B) will be maximized when both firms take different actions.
C) will be maximized when both firms take the same actions.
D) Both A and B.
Answer: D

37) The above figure shows the payoff matrix for two firms, A and B, choosing to produce a
basic computer or an advanced computer. Now the payoff of the firm who produces a basic
computer falls to 10 if the other firm chooses to produce an advanced computer. Then the joint
profits
A) will be maximized at a Nash equilibrium.
B) will be maximized when both firms take different actions.
C) will be maximized when both firms choose to produce advanced computers.
D) will be maximized when both firms choose to produce basic computers.
Answer: B

38) The above figure shows the payoff matrix for two firms, A and B, choosing to produce a
basic computer or an advanced computer. Now the payoff of the firm who produces a basic
computer falls to 10 if the other firm chooses to produce an advanced computer. Then
A) both firms will have dominant strategies.
B) Nash equilibria will not change.
C) joint profits will be maximized at the Nash equilibrium.
D) Firm A and firm B will choose different actions.
Answer: A

13.2 Dynamic Games

1) The above figure shows the payoff to two gasoline stations, A and B, deciding to operate in an
isolated town. If firm A chooses its strategy first, then
A) firm A will not enter.
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B) firm B's entry is blockaded.
C) both firms will enter.
D) firm A will enter and firm B will not.
Answer: C

2) The above figure shows the payoff to two gasoline stations, A and B, deciding to operate in an
isolated town. Suppose a $60 fee is required to enter the market. If firm A chooses its strategy
first, then
A) firm A will not enter.
B) neither firm will enter.
C) both firms will enter.
D) firm A will enter and firm B will not.
Answer: D

3) The above figure shows the payoff to two gasoline stations, A and B, deciding to operate in an
isolated town. Suppose a $30 fee is required to enter the market. If firm A chooses its strategy
first, then
A) firm A will not enter.
B) neither firm will enter.
C) both firms will enter.
D) firm A will enter and firm B will not.
Answer: C

4) If only one firm operates in a market, and a potential entrant is blockaded from entering the
market, then the incumbent firm must
A) have acted to prevent entry.
B) be pricing where price equals marginal cost.
C) be a natural monopoly.
D) be the Stackelberg leader.
Answer: C

5) An incumbent's threat to retaliate after a potential competitor enters the market will be taken
seriously by potential competitors if
A) the incumbent can still earn a profit after carrying out the threat.
B) the incumbent earns greater profit carrying out the threat than by accommodating entry.
C) the potential entrant cannot earn a profit if the threat is carried out.
D) the potential entrant's profit exceeds the incumbent's if the threat is carried out.
Answer: B

6) With regard to preventing entry, if identical firms act simultaneously,

A) they cannot credibly threaten each other.
B) they will all incur losses.
C) only one firm will enter the market.
D) none of them will enter the market.
Answer: A

7) An incumbent announces it will significantly increase output in the next period, but only has
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contracts for the amount produced this period. The announcement is a
A) credible threat.
B) non-credible threat.
C) commitment.
D) mixed strategy.
Answer: B

8) The above figure shows the payoff matrix facing an incumbent firm and a potential entrant.
The potential entrant cannot earn a profit if the incumbent
A) chooses the Cournot level of output.
B) chooses the Stackelberg leader level of output.
C) shuts down.
D) deters entry.
Answer: D

9) The above figure shows the payoff matrix facing an incumbent firm and a potential entrant.
Assuming a fixed cost of entry, the incumbent will deter entry because
A) it is more profitable than accommodating entry.
B) it increases consumer surplus.
C) the potential entrant winds up with zero profit.
D) the incumbent would earn zero profit if it accommodated entry.
Answer: A

10) The above figure shows the payoff matrix facing an incumbent firm and a potential entrant.
Assuming a fixed cost of entry, the outcome will be that the incumbent
A) deters entry.
B) chooses the Stackelberg leader level of output but the potential entrant does not enter anyway.
C) chooses the Stackelberg leader level of output and the potential entrant enters.
D) deters entry and earns zero profit.
Answer: A

11) The above figure shows the payoff matrix facing an incumbent firm and a potential entrant. If
the fixed cost of entry were to increase, which of the following would occur?
A) The incumbent chooses the Cournot level of output.
B) The incumbent shuts down.
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C) The entry-deterring level of output rises.
D) The entry-deterring level of output falls.
Answer: D

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