Managerial Economics, Allen, Ch 12 Test Bank

Chapter 12: Game Theory MULTIPLE 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

5.

A feasible strategy set is:

a.

all actions with a nonzero probability of occurring. only actions that have a 50% or greater probability of occurring. actions that result in positive profits for the firm. actions that a decision maker is willing to take. the one outcome that the decision maker chooses.

b. c. d. e. ANS: A MSC: Factual 6. a. b. c. d. e. ANS: B MSC: Factual 7. a. b. c. d. e. 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. a decision-making entity at a firm involved in a strategic game. a firm that is operating as a perfect competitor. a monopolist who produces a unique product with no close substitutes. a stockholder at a firm involved in a strategic game. 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. that decision trees describe actions that depend on the behavior of rivals. that game trees have interactive payoffs. that decision trees are a function of many individuals and the state of nature. none of the above. DIF: Easy

REF: 463

TOP: Visual

8. Consider the following decision tree. This tree illustrates hypothetical payoffs to General Mills (GM) and Quaker Oats (Q) if they engage in a price war.

If GM cuts prices, the greatest potential gain is: a. b. c. d. e.

$5 million per year. $10 million per year. $2 million per year. $3 million per year. none of the above.

a. b. c. d. e.

$5 million per year. $10 million per year. $2 million per year. $3 million per year. none of the above.

ANS: A Representation MSC: Applied

DIF: Easy

REF: 463

TOP: Visual

9. Consider the following decision tree. This tree illustrates hypothetical payoffs to General Mills (GM) and Quaker Oats (Q) if they engage in a price war. If GM cuts prices and Quaker Oats follows this behavior:

a. b. c. d. e.

GM loses $10 million. Quaker Oats loses $10 million. GM loses $2 million. Quaker Oats loses $2 million. both firms gain $3 million.

ANS: C Representation MSC: Applied 10.

DIF: Easy

REF: 463

Given the following payoff matrix, what will A’s profits be?

a. b. c. d. e.

1. 2. 3. 4. Unknown until B’s action is observed.

ANS: B Representation MSC: Applied 11.

DIF: Moderate

c. d. e. ANS: A Strategies MSC: Factual 12.

e.

TOP: Visual

beats all others, regardless of the opponent’s choice. beats all others, given the opponent’s choice. is beaten by all others, regardless of the opponent’s choice. is beaten by all others, given the opponent’s choice. beats at least one other, given the opponent’s choice.

b.

c. d.

REF: 463

A dominant strategy is one that:

a.

a. b.

TOP: Visual

DIF: Easy

REF: 468

TOP: Dominant

If player 1 has a dominant strategy, then player 2: must also have a dominant strategy. may or may not have a dominant strategy, but will always lead to a Nash equilibrium. may or may not have a dominant strategy. will not be able to reach an optimal solution to the game. will block this dominant strategy and force player 1 to another strategy.

a. b.

must also have a dominant strategy. may or may not have a dominant strategy, but will always lead to a Nash equilibrium. may or may not have a dominant strategy. will not be able to reach an optimal solution to the game. will block this dominant strategy and force player 1 to another strategy.

c. d. e. ANS: C Strategies MSC: Factual 13.

DIF: Easy

REF: 468

TOP: Dominant

Given the following payoff matrix, who has a dominant strategy?

a. b. c. d. e.

It depends on what the other player does. Both players have it. Neither player has it. A does; B doesn’t. B does; A doesn’t.

ANS: C Strategies MSC: Factual 14. a. b. c. d. e. 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. its optimal strategy is always the same, even if payoffs change. it is determined by the behavior of only one key rival. it receives the same profits regardless of the strategy of rivals. its optimal strategy is independent of the play of rivals. DIF: Easy

REF: 468

TOP: Dominant

15. In a two-player game in which each player has four options, how many outcomes can there be? a. 1. b. 4. c. 8. d. 16. e. 64. ANS: D Strategies MSC: Applied 16. player: a. b. c. d. e.

DIF: Easy

REF: 468

TOP: Dominant

By definition, a Nash equilibrium in a duopoly is the situation in which each plays a dominant strategy. plays the best strategy given the other’s strategies. gets the highest possible payoff. gets the highest payoff possible without lowering the opponent’s payoff. is happy with the outcome.

a. b.

plays a dominant strategy. plays the best strategy given the other’s strategies. gets the highest possible payoff. gets the highest payoff possible without lowering the opponent’s payoff. is happy with the outcome.

c. d. e. ANS: B Equilibrium MSC: Factual 17. a. b. c. d. e. ANS: C Equilibrium MSC: Factual 18. a. b. c. d. e. ANS: D Equilibrium MSC: Factual

DIF: Easy

REF: 472

TOP: The Nash

A Nash equilibrium occurs when: each player has a dominant strategy. each player receives the same final payoff. each player believes it is doing the best it can given the behavior of rivals. there is no dominant strategy for any player. payoffs are independent of the actions taken by rivals. DIF: Easy

REF: 472

TOP: The Nash

Getting to a Nash equilibrium requires: each knowing the opponent’s payoffs and cooperation. knowing the opponent’s payoffs but not cooperation. cooperation but not knowing the opponent’s payoffs. neither cooperation nor knowing the opponent’s payoffs. either cooperation or knowing the opponent’s payoffs, depending on the game. DIF: Easy

REF: 472

TOP: The Nash

19. Which pair of strategies would cooperative cartel members A and B choose given this payoff matrix?

a. b. c. d. e.

W, Y. W, Z. X, Y. X, Z. Either X, Y or W, Z.

ANS: B Equilibrium MSC: Applied 20.

DIF: Easy

REF: 472

TOP: The Nash

Which pair of strategies would competing firms A and B choose given this

payoff matrix?

a. b. c. d. e.

W, Y. W, Z. X, Y. X, Z. Either X, Y or W, Z.

ANS: C Equilibrium MSC: Applied 21.

DIF: Easy

0. 1. 2. 3. 4.

ANS: C Equilibrium MSC: Applied 22.

DIF: Easy

ANS: C Equilibrium MSC: Applied 23. equilibrium?

c. d. e.

REF: 472

TOP: The Nash

How many Nash equilibria are there in this payoff matrix?

a. b. c. d. e.

b.

TOP: The Nash

How many Nash equilibria are there in this payoff matrix?

a. b. c. d. e.

a.

REF: 472

0. 1. 2. 3. 4. DIF: Easy

REF: 472

TOP: The Nash

Refer to the accompanying payoff matrix. Which of the following is a Nash

Company A chooses Strategy 1 and Company B chooses Strategy 1. Company A chooses Strategy 1 and Company B chooses Strategy 2. Company A chooses Strategy 2 and Company B chooses Strategy 2. Company A chooses Strategy 2 and Company B chooses Strategy 1. None of the above.

ANS: D Equilibrium MSC: Applied 24. equilibrium?

DIF: Easy

Company A chooses Strategy 1 and Company B chooses Strategy 1. Company A chooses Strategy 1 and Company B chooses Strategy 2. Company A chooses Strategy 2 and Company B chooses Strategy 2. Company A chooses Strategy 2 and Company B chooses Strategy 1. None of the above.

b. c. d. e.

25. equilibrium?

DIF: Moderate

c. d. e.

c. d. e.

TOP: The Nash

Company A chooses Strategy 1 and Company B chooses Strategy 1. Company A chooses Strategy 1 and Company B chooses Strategy 2. Company A chooses Strategy 2 and Company B chooses Strategy 2. Company A chooses Strategy 2 and Company B chooses Strategy 1. None of the above.

b.

26. based on: a. b.

REF: 472

Refer to the accompanying matrix. Which of the following is a Nash

a.

ANS: B Equilibrium MSC: Applied

TOP: The Nash

Refer to the accompanying payoff matrix. Which of the following is a Nash

a.

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. our best information about what will happen in the future. what we know only about behavior in the past. information that we have only about our own behavior in the past. incorrect information about the past.

ANS: B DIF: Easy REF: 479 TOP: Strategic Foresight: The Use of Backward Induction

MSC: Factual

27. Suppose that firm A finds itself facing the following payoff matrix in its rivalry with firm B:

A threatens to play strategy W. This threat is: a.

credible because the Nash equilibrium occurs where A plays W and B plays Z. credible because the joint optimal solution occurs where A plays W and B plays Z. not credible because A’s dominant strategy is to play X. credible because A’s dominant strategy is to play W. not credible because B will never play strategy Z.

b. c. d. e.

ANS: C DIF: Easy REF: 482 TOP: Strategic Foresight: The Use of Backward Induction 28. a. b. c. d. e.

MSC: Conceptual

A most-favored-customer clause: is a commitment but not a threat. is a threat but not a commitment. is both a threat and a commitment. is neither a threat nor a commitment. could be either a threat or a commitment depending on the terms.

ANS: C DIF: Moderate REF: 482 TOP: Making Strategy and Game Theory

MSC: Conceptual