Ch 14 Game Theory Quiz Review

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Use the payoff matrix on the right to answer the following questions.
What is the mixed-strategy Nash equilibrium?
Firm 1 will set a low price with probability ?

Part 3
Firm 2 will set a low price with probability ?

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9. A game with a finite number of players and a finite number of actions:

A.will not have a mixed strategy if it has a pure-strategy Nash equilibrium.
B.has at least one Nash equilibrium, which may involve mixed strategies.
C.may not have a Nash equilibrium at all.
D.has at least one Nash equilibrium in pure strategies, and possibly one in mixed strategies.
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Suppose Firm 1, Firm 2, and Firm 3 are the only three firms interested in a lot at the corner of First Street
and Glendon Way. The lot is being auctioned by a second-price sealed-bid auction. Suppose Firm 1's
value of the lot is $20,000, Firm 2’s value is $11500 and Firm 3’s is $12000.Each bidder’s surplus is
CS = V1 – p

if it wins the auction and 0 if it loses. The values are private. What is each bidder's optimal bid? Who wins
the auction, and what price does that firm pay?
Firm 1's optimal bid is $ _________ , Firm 2's optimal bid is $ ________ , and Firm 3's is $ ________ .
(Enter your responses as whole numbers.)
Part 3
The auction winner will be_____, who will pay $ ______ .

18. _______ auction is a descending bid auction that ends dramatically with the first bid.

In a sealed-bid auction the price the winner pays depends on whether it is a first-price auction or _______
auction.

In ________ auction, the auctioneer starts the bidding at the lowest price that is acceptable to the seller
and then repeatedly encourages potential buyers to bid more than the previous highest bidder. The
auction ends when no one is willing to bid more than the current highest bid.

19. What is the optimal strategy in a second-price sealed bid auction?

A.Bid slightly less than your maximum value, because it will increase your consumer surplus if you win.
B.Bid slightly higher than your maximum value. Because it increases the probability of winning
the auction, it weakly dominates all other strategies.
C.You should always bid your maximum value.
D.Bid slightly higher than your maximum value. Although it does not affect the probability of winning
the auction, it does weakly dominate all other strategies.
20. The figure at right 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
Part 2
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.

21. The figure at right shows a payoff matrix for two firms,
A and B, that must choose between a high−price
strategy and a low−price strategy. Both firms setting a
high price is not a Nash equilibrium because
Part 2
A.both firms can improve their payoff by setting a low price given that the other firm is setting a high price.
B.neither firm can improve its payoff by setting a low price given that the other firm is setting a high price.
C.there is no dominant strategy for either firm.
D.setting a high price is the dominant strategy for each firm.

22. The figure at right 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
Part 2
A.is to make advanced computers.
B.is to make basic computers.
C.does not exist in this game.
D.is to adopt firm A's strategy.

23. The figure at right 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?

24. The figure at right shows a payoff matrix for two firms, A
and B, that must choose between selling basic computers or advanced computers. Which of the following
is a Nash equilibrium?
Part 2
A.Firm A makes basic computers and firm B makes advanced computers.
B.Both firms make basic computers.
C.Both firms make advanced computers.
D.There are no Nash equilibria.

25. The term prisoners' dilemma refers to a game in which

A.there are no Nash equilibria.
B.there are no dominant strategies.
C.the payoff from playing the dominant strategy is not the highest payoff possible.
D.the payoff from playing the dominant strategy is the same for each player.

26. A Nash equilibrium occurs when

A.players choose their best strategy given the strategies chosen by others
B.oligopolists cooperate with each other.
C.the efficient allocation of resources is achieved by setting marginal revenue equal to marginal cost.
D.a monopolist is forced to produce the efficient level of output

27. A strategy is dominant if

A.it yields a greater payoff than any other player receives.
B.it yields a payoff at least as large as that from any other strategy, regardless of the actions of other
players.
C.the player cannot gain by changing strategy, assuming that no other player changes strategy.
D.it is part of a Nash equilibrium.

28. Mutually Assured Destruction was a standing policy during the Cold War, in which the United States
and the U.S.S.R. maintained and expanded nuclear arsenals beyond practical levels. What could explain
such a phenomenon?
Part 2
A. A Leader −follower type game
B.A prisoner's dilemma
C.Insane public officials who were bent on world domination
D.Tacit collusion

29. The figure to the right shows the payoff to two airlines, A
and B, of serving a particular route. What is Firm A's best
response if Firm B decides to enter?

A.Firm A does not have a best response strategy.

B.Firm A chooses do not enter.
C.Firm A chooses to enter.
D.Both enter and do not enter are best responses for firm A.

30. The figure to the right shows the payoff to two firms, A
and B, of releasing two versions of a new product. What is
Firm A's best response if Firm B decides to release the high
price version?

A.Firm A does not have a best response strategy.

B.Firm A chooses the high price version.
C.Firm A chooses the low price version.
D.Both low price and high price versions are best responses
for firm A.

31. One interesting feature of a prisoner's dilemma game is

that
A.nonminus−cooperative behavior leads to lower payoffs than cooperative behavior.
B.there is never a dominated strategy.
C.individuals behave irrationally when they behave nonminus−cooperatively.
D.cooperative behavior leads to lower payoffs than nonminus−cooperative behavior.

32. The figure at right 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 B's entry is blockaded.
B.both firms will enter.
C.firm A will not enter.
D.firm A will enter and firm B will not.

33. The figure at right 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 enter and firm B will not.

B.firm A will not enter.
C.both firms will enter.
D.neither firm will enter.

34. The figure at right 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
Part 2
A. neither firm will enter.
B .firm A will enter and firm B will not.
C. firm A will not enter.
D. both firms will enter.

35. A subminus−game perfect Nash equilibrium is defined as

A.a set of strategies that are a Nash equilibrium in every subgame of a dynamic game.
B.a set of strategies that are a Nash equilibrium in a single subgame of a dynamic game.
C.a set of strategies that are a Nash equilibrium in every subgame of a static game.
D.the game within the game.

36. The figure to the right shows the payoff to two

computer manufacturers, A and B, deciding the type of computer
to be released in a foreign country. If firm A chooses its
strategy first, then
A.firm A will release the basic model, and firm B will release the
advanced model.
B.firm A will release the advanced model, and firm B will release
the basic model.
C.both firms will release the basic model.
D.both firms will release the advanced model.

37. The figure at right 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 B does not have a dominant strategy.
B.Neither firm entering is a Nash equilibrium.
C.The outcome of the game is unpredictable.
D.Firm A does not have a dominant strategy.

38.The figure at right 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 B has a dominant strategy.
B.Firm A has a dominant strategy.
C.Neither firm entering is a Nash equilibrium.
D.The outcome of the game is unpredictable.

39. The figure at right 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.The outcome of the game is unpredictable.

B.Only firm A will enter the market.
C.Only firm B will enter the market.
D.Neither firm entering is a Nash equilibrium.