Texas A&M International University

ECO 3320

CHAPTER 15

1)The prisoners dilemma is an example of:

1. 1. A sequential game
   2. A non-cooperative game.
   3. A shirking game
   4. A dating game

Use the following to answer question 2- 4.

Consider the following information for a simultaneous move game: If you charge a low price (LP) and your rival charges a LP, you each will earn $5 million in profits. If both charge a high price (HP), each will each earn $10 million in profits. However, if one charge a LP and the other does not, the firm that charges a LP will earn $15 million and the other firm will earn $1 million.

2. If both firms plan to be in business for one-year, the Nash Equilibrium will be
   1. For each firm charge LP
   2. For neither firm to charge LP
   3. For one firm to charge LP and the other HP
   4. None of the above.

3. If both firms plan to be in business for 5 years, then the Nash Equilibrium will be
   1. For each firm charge a LP every year
   2. For neither firm to charge a LP in early years, but to charge a HP in later years.
   3. For each firm to charge a HP every year
   4. For neither firm to charge a HP in early years, but to charge a LP in later years.

4. If the businesses last forever, then the Nash Equilibrium is
   1. for one firm to charge a HP forever
   2. for your firm charge a LP when the other firm does
   3. for each firm to charge HP until the rival does, and then to charge a LP forever.
   4. for each firm to charge LP until the rival does, and then to charge a HP forever.

Use the table below to answer questions 5-7. Assume it’s a simultaneous-move game.

Firm A

5. What’s the dominant strategy for each firm?
   1. Charge a low price
   2. Charge a high price
   3. Firm A charge a low price and firm B charge a high price
   4. Firm A charge a high price and firm B charge a low price

6. What are the Nash equilibrium strategies for Firm A and Firm B respectively?
   1. Low, Low
   2. Low, High
   3. High, Low

1. 4. High, High

7. If the game is played for 10 years, the Nash equilibrium will be
   1. Low, Low
   2. Low, High
   3. High, Low
   4. High, High

8. Nash equilibrium is:
   1. where one player maximizes his payoff and the other doesn’t
   2. where each player maximizes the expected payoff
   3. similar to a dominant strategy
   4. difficult to determine

9. First-mover advantage is a characteristic of
   1. A simultaneous-move game
   2. A dominant strategy
   3. A sequential-move game
   4. A Nash equilibrium

10. Game theory assumes that to compute the likely outcome of games, one needs to assume that players act
    1. Rationally
    2. Optimally
    3. In their own self-interest
    4. All the above

11. Which of the following is a violation of the antitrust laws?
    1. A firm discussing/fixing price with its competitors
    2. Making arrangements to stay out each other’s markets
    3. Merging with the competitor to eliminate competition
    4. All of the above are violations

Use the following to answer question 2- 5.

Consider the following information for a simultaneous move game: Two discount stores (megastore and superstore) are interested in expanding their market share through advertising. The table below depicts the strategic outcomes (profits) of both stores with and without advertising. Payoffs for Megastore are in bold.

Superstore

12. The Nash equilibrium for both stores is
    1. For megastore to advertise and for superstore to advertise
    2. For megastore to advertise and for superstore not to advertise
    3. For megastore not to advertise and for superstore to advertise
    4. For megastore not to advertise and for superstore not to advertise

13. When the game does reach the Nash Equilibrium, the payoffs for both stores will be
    1. Megastore $95 and Superstore $80
    2. Megastore $305 and Superstore $55
    3. Megastore $65 and Superstore $285
    4. Megastore $165 and Superstore $115

14. If collusion was not illegal, than it is more optimal
    1. For megastore to advertise and for superstore to advertise
    2. For megastore to advertise and for superstore not to advertise
    3. For megastore not to advertise and for superstore to advertise
    4. For megastore not to advertise and for superstore not to advertise

15. Based on the answer of question 4, the payoffs for both stores will be
    1. Megastore $95 and Superstore $80
    2. Megastore $305 and Superstore $55
    3. Megastore $65 and Superstore $285
    4. Megastore $165 and Superstore $115

16. Prisoners Dilemma show
    1. Rational choices lead to bad outcomes
    2. Rational choices lead to good outcomes
    3. That there are no ways to learn where the pitfalls lie
    4. None of the above

17. In a two-person repeated game, a tit-for-tat strategy refers to
    1. Where each player pursues his or her own self-interest without any cooperation
    2. Where players start off as non-cooperative and then cooperate when one or both players show interest in colluding
    3. Where players start off by cooperating and then mimic the other player’s last move
    4. Players cooperating throughout with no defection

18. According to Prisoners’’ Dilemma
    1. Both parties do not confess

1. 2. It is difficult to maintain cooperation among prisoners
   3. Both a and b
   4. None of the above

19. In repeated games, all of the below make it easier to get out of bad situations except
    1. Be nice, no strikes first
    2. Respond immediately to rivals
    3. Punish competitors as much as you can
    4. Make sure your competitors can easily interpret your actions

Refer to the following normal form game of price competition for questions 20 - 23.

Firm A

Low Price High Price

20. If this game is played once, then
    1. Firm A will charge a lower price and firm B will charge a lower price
    2. Firm A will charge a higher price and firm B will charge a lower price
    3. Firm A will charge a lower price and firm B will charge a higher price
    4. Firm A will charge a higher price and firm B will charge a higher price

21. What is the payoff for each firm in this one-shot game?
    1. Both firms will earn 0
    2. Firm A will earn 50 and firm B will earn -10
    3. Firm A will earn -10 and firm B will earn 50
    4. Both firms will earn 25

22. Suppose the game is infinitely repeated. What strategies will each firm utilize?
    1. Firm A will charge a lower price and firm B will charge a lower price
    2. Firm A will charge a higher price and firm B will charge a lower price
    3. Firm A will charge a lower price and firm B will charge a higher price
    4. Firm A will charge a higher price and firm B will charge a higher price

23. Suppose that Firm A deviates from a trigger strategy to support a high price. What is A's payoff from cheating?
    1. 0
    2. 50

c) -10