Pepperdine University

FINC 655

Chapter 15

Multiple Choice Questions

1)The prisoners’ dilemma is an example of:

1. 1. a sequential game [players in a prisoners’ dilemma do not observe the decisions of their rivals prior to acting.]
   2. a simultaneous game. [; players do not observe their rival’s decision before making their own.]
   3. a shirking game [a shirking game does not have a pure strategy equilibrium, but the prisoners’ dilemma does.]
   4. a dating game [the dating game also has the tension between conflict and cooperation that the prisoners’ dilemma has, but the two games are different.]

2. Nash equilibrium is:
   1. is where one player maximizes his payoff and the other doesn’t. [it is possible for both players to be maximizing their payoffs or for neither to be, as in the prisoners’ dilemma.]
   2. is where each player maximizes his own payoff given the action of the other player. [; this is the definition of an equilibrium; each player is playing a best response to the other player.]
   3. is where both players are maximizing their total payoff. [games like the prisoners’ dilemma show that players need not be maximizing their total payoff in equilibrium.]
   4. Is a unique prediction of the likely outcome of a game. [some games, like the game of chicken, have more than one equilibrium.]

Use the following to answer question 3- 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 profits of both stores with and without advertising. Payoffs for Megastore are in bold. Superstore

Advertise                                                             Don’t Advertise

Megastore                  Advertise                     $95, $80                                                   $305, $55 Don’t Advertise                                                         $65, $285                                                 $165, $115

3. The Nash equilibrium is
   1. For Megastore to advertise and for Superstore to advertise. [; advertise is a dominant strategy for each player.]

2

1. 2. For Megastore to advertise and for Superstore not to advertise. [If Megastore advertises, Superstore’s best response is to advertise.]
   3. For Megastore not to advertise and for Superstore to advertise. [If Superstore advertises, Megastore’s best response is to advertise.]
   4. For Megastore not to advertise and for Superstore not to advertise. [If either store does not advertise, the best response for the other store is to advertise.]

4. When the stores reach the Nash Equilibrium, their profits will be
   1. Megastore $95 and Superstore $80. [; the equilibrium is for both stores to advertise.]
   2. Megastore $305 and Superstore $55. [Superstore is not best responding to Megastore.]
   3. Megastore $65 and Superstore $285. [Megastore is not best responding to Superstore.]
   4. Megastore $165 and Superstore $115. [Neither store is best responding to its rival’s strategy].

5. If collusion were not illegal, then it would be optimal
   1. for Megastore to advertise and for Superstore to advertise. [This does not maximize firms’ profits individually or jointly.]
   2. for Megastore to advertise and for Superstore not to advertise. [This does not maximize joint profit.]
   3. for Megastore not to advertise and for Superstore to advertise. [This does not maximize joint profit.]
   4. for Megastore not to advertise and for Superstore not to advertise. [; This maximizes joint profit.]

6. In a Nash equilibrium,
   1. players are always maximizing their joint profit. [many games, such as the prisoners’ dilemma, reflect a tension between cooperation and conflict.]
   2. one player is always earning a higher profit than the other. [Nash equilibria do not say anything about the relative profits of the two players.]
   3. players must be playing the game sequentially. [simultaneous games also have Nash equilibria.]
   4. None of the above [; none of the above answers is .]

7. In repeated games, all of the below make it easier to get out of bad situations except
   1. be nice, no first strikes. [you should cooperate as long as the other player does.]
   2. respond immediately to rivals. [you should be easily provoked and respond immediately to defection.]
   3. punish uncooperative players as much as you can. [; this is bad advice. Instead, you should be forgiving and punish just enough to deter uncooperative behavior.]
   4. make sure your competitors can easily interpret your actions. [being clear means that your actions are understood by other players.]

Refer to the following strategic form game of price competition for questions 8 and 9. 3 Firm B

8. If this game is played once, then
   1. firm A will charge a low price, and firm B will charge a low price. [; this is the equilibrium of the game.]
   2. firm A will charge a high price, and firm B will charge a low price. [in this case, firm A is not playing a best response and would prefer to charge a low price.]
   3. firm A will charge a low price, and firm B will charge a high price. [in this case, firm B is not playing a best response and would prefer to charge a low price.]
   4. firm A will charge a high price, and firm B will charge a high price. [this is not an equilibrium of the game as neither firm is playing a best response.]

9. Suppose the game is infinitely repeated. What strategies will each firm utilize?
   1. firm A will charge a low price, and firm B will charge a low price. [the firms can earn higher profits by cooperating on a better outcome and using trigger strategies to support it.]
   2. firm A will charge a high price, and firm B will charge a low price. [firm A has no reason to lose money in each period as this is not a best response to firm B charging a low price.]