Chapter 10

Consider the following information for a simultaneous move game: If you advertise and your
rival advertises, you each will earn $5 million in profits. If neither of you advertises, you will
each earn $10 million in profits. However, if one of you advertises and the other does not, the
firm that advertises will earn $15 million and the non-advertising firm will earn $1 million. If
you and your rival plan to hand your business down to your children (and this "bequest" goes
on forever), then a Nash equilibrium when the interest rate is zero is:
a) for each firm to not advertise until the rival does, and then to advertise forever.
b) for your firm to never advertise.
c) for your firm to always advertise when your rival does.
d) for each firm to advertise until the rival does not advertise, and then not advertise
forever.

The figure below presents information for a one-shot game.

Firm A Firm B
Low Price High Price
Low Price (2,2) (10,-8)
High Price (-8,10) (6,6)
What are secure strategies for firm A and firm B respectively?
a) (low price, high price)
b) (high price, low price)
c) (high price, high price)
d) (low price, low price)

Refer to the following game.

Firm A Firm B
Low Price High Price
Low Price (9,10) (8,15)
High Price (-7,10) (11,11)
What are the Nash equilibrium strategies for firm A and firm B respectively?
a) (low price, low price)
b) (high price, high price)
c) (low price, high price)
d) (low price, low price) and (high price, high price)

Refer to the game.

Player 2
t1 t2 t3
Player 1 S1 10,0 5,1 4,-200
S2 10,100 5,0 0,-100
Which of the following pairs of strategies constitute a Nash equilibrium of the game?
a) S1, t1
b) S1, t2
 c) S2, t1
d) S1, t2 and S2, t1

Management and a labor union are bargaining over how much of a $50 surplus to give to the
union. The $50 is divisible up to one cent. The players have one shot to reach an agreement.
Management has the ability to announce what it wants first, and then the labor union can
accept or reject the offer. Both players get zero if the total amounts asked for exceed $50. If
you were the labor union, which type of "rules of play" would you prefer to divide the $50
surplus?
a) One-shot, simultaneous-move game
b) One-shot, sequential-move game with management as the first mover
c) One-shot, sequential-move game with labor union as the first mover
d) One-shot, simultaneous-move game and one-shot, sequential-move game with
management as the first mover

Which of the following is the major means to signal good quality of goods by firms?
a) Sales
b) Advertisements
c) Warranties/guarantees
d) Both sales and advertisements

If you advertise and your rival advertises, you each will earn $5 million in profits. If neither
of you advertises, you will each earn $10 million in profits. However, if one of you advertises
and the other does not, the firm that advertises will earn $15 million and the non-advertising
firm will earn $1 million. Suppose this game is repeated for a finite number of times, but the
players do not know the exact date at which the game will end. The players can earn collusive
profits as a Nash equilibrium to the repeated play of the game if the probability the game
terminates in any period is:
a) 1.
b) greater than 1.
c) close to zero.
d) None of the answers is correct.

The following provides information for a one-shot game.

Firm A Firm B
Low Price High Price
Low Price (2,2) (10,-8)
High Price (-8,10) (15,15)
What are secure strategies for firm A and firm B respectively?
a) (low price, low price)
b) (high price, low price)
c) (high price, high price)
d) Neither firm has a secure strategy.

It is easier to sustain tacit collusion in an infinitely repeated game if:

 a) the present value of cheating is lower than collusion.
b) there are many players.
c) the interest rate is higher.
d) the present value of cheating is lower than collusion and the interest rate is higher.

Which of the following conditions correctly describes a Nash equilibrium when two firms are
in the market?
a) π1(s1*, s2*) ≥ π1(s1, s2*) for all s1.
b) π1(s1*, s2*) ≥ π1(s1, s2*) for all s1 and π2(s1*, s2*) ≥ π2(s1*, s2) for all s2.
c) π1(s1*, s2*) ≥ π2(s1, s2*) for all s1 and π2(s1*, s2*) ≥ π1(s1*, s2) for all s2.
d) π1(s1, s2*) ≥ π2(s1*, s2*) for all s1 and π2(s1*, s2) ≥ π1(s1*, s2*) for all s2.

Refer to the normal-form game of bargaining shown below.

Management
$0 $250 $500
$0 ($0, $0) ($0, $250) ($0, $500)
Union $250 ($250, $0) ($250, $250) (-$10, -$10)
$500 ($500, $0) (-$10, -$10) (-$10, -$10)
Suppose that management and the union are bargaining over how much of a $500 surplus to
give to the union. It is assumed that the surplus can only be split into $250 increments.
Furthermore, negotiations are set up such that management and the union must
simultaneously and independently write down the amount of surplus to allocate to the union.
The payoff structure to this one-shot bargaining game is listed in Figure 10-16. The number
of efficient outcomes resulting from the bargaining game is:
a) 3.
b) 5.
c) 6.
d) 8.

A mixed strategy is a strategy that:

a) results in the highest payoff to a player regardless of the opponent's action.
b) guarantees the highest payoff given the worst possible scenario.
c) describes a set of circumstances in which no player can improve her payoff by
unilaterally changing her own strategy, given the other players' strategies.
d) randomizes over two or more available actions in order to keep rivals from being able
to predict a player's action.

There are two existing firms in the market for computer chips. Firm A knows how to reduce
the production costs for the chip and is considering whether to adopt the innovation or not.
Innovation incurs a fixed setup cost of C, while increasing the revenue. However, once the
new technology is adopted, another firm, B, can adopt it with a smaller setup cost of C/3. If A
innovates and B does not, A earns $30 in revenue while B earns $10. If A innovates and B
does likewise, both firms earn $20 in revenue. If neither firm innovates, both earn $10. If C =
12, which is the perfect equilibrium of the game?
a) A innovates, B does not.
b) A innovates, B innovates.
 c) Neither firm innovates.
d) None of the answers is correct.

If you advertise and your rival advertises, you each will earn $4 million in profits. If neither
of you advertises, you will each earn $10 million in profits. However, if one of you advertises
and the other does not, the firm that advertises will earn $1 million and the non-advertising
firm will earn $5 million. If you and your rival plan to be in business for 10 years, then the
Nash equilibrium is:
a) for each firm to advertise every year.
b) for neither firm to advertise in early years, but to advertise in later years.
c) for each firm to not advertise in any year.
d) for each firm to advertise in early years, but not advertise in later years.

The figure below presents information for a one-shot game.

Firm A Firm B
Low Price High Price
Low Price (2,2) (10,-8)
High Price (-8,10) (6,6)
If this one-shot game is repeated 100 times, the Nash equilibrium payoffs of the players will
be ________________ each period.
a) (2, 2)
b) (10, −8)
c) (−8, 10)
d) (6, 6)

Which of the following is true?

a) For a finitely repeated game, the game is played enough times to effectively punish
cheaters, and therefore collusion is likely.
b) In an infinitely repeated game with a low interest rate, collusion is unlikely because
the game unravels so that effective punishment cannot be used during any time
period.
c) A secure strategy is the optimal strategy for a player no matter what the opponent
does.
d) None of the answers is correct.

Which of the following enhances the ability of waste companies to collude?

a) Decals on waste receptacles
b) High interest rates
c) Differentiated nature of products
d) Large number of firms

Which of the following is true for a Nash equilibrium of a two-player game?

a) The joint payoffs of the two players are highest compared to other strategy pairs.
b) Given another player's strategy stipulated in that Nash equilibrium, a player cannot
improve his welfare by changing his strategy.
c) A Nash equilibrium is always unique in real-world problems.
 d) Given another player's strategy stipulated in that Nash equilibrium, a player cannot
improve his welfare by changing his strategy, and a Nash equilibrium is always
unique in real-world problems.

Refer to the normal-form game of price competition in the payoff matrix below.

Firm B
Low Price High Price
Low Price 0,0 50,-10
Firm A
High Price -10,50 20,20
Suppose the game is infinitely repeated, and the interest rate is 10 percent. Both firms agree
to charge a high price, provided no player has charged a low price in the past. If both firms
stick to this agreement, then the present value of firm A's payoffs are:
a) 220.
b) 110.
c) 330.
d) 550.

A Nash equilibrium with a noncredible threat as a component is:

a) a perfect equilibrium.
b) not a perfect equilibrium.
c) a sequential equilibrium.
d) a somewhat perfect equilibrium.

If you advertise and your rival advertises, you each will earn $4 million in profits. If neither
of you advertises, you will each earn $10 million in profits. However, if one of you advertises
and the other does not, the firm that advertises will earn $1 million and the non-advertising
firm will earn $5 million. Which of the following is true?
a) A secure strategy for firm A is to not advertise.
b) A secure strategy for firm B is to advertise.
c) Firm A does not have a secure strategy.
d) None of the answers is correct.

If you advertise and your rival advertises, you each will earn $3 million in profits. If neither
of you advertises, you will each earn $7 million in profits. However, if one of you advertises
and the other does not, the firm that advertises will earn $10 million and the non-advertising
firm will earn $1 million. If you and your rival plan to be in business for only one year, the
Nash equilibrium is for your firm:
a) and your rival to advertise.
b) and your rival not to advertise.
c) to advertise and your rival not to advertise.
d) not to advertise and your rival to advertise.

A coordination problem usually occurs in situations where there is:

a) no Nash equilibrium in a game.
b) a unique, but undesirable Nash equilibrium.
c) a unique, secure strategy for both players.
d) more than one Nash equilibrium.
Refer to the normal-form game of price competition shown below.

Firm B
C D
A 50,50 500-x,200
Firm A
B 100,500-x 50,50
For what values of x is strategy B strictly dominant for firm A?
a) All x > 450
b) All x < 450
c) x = 450
d) x < 50

Refer to the normal-form game of advertising shown below.

Firm B
Advertise Do Not Advertise
Advertise $0,$0 $175,$10
Firm A
Do Not Advertise $10,$175 $125,$125
Suppose there is a 10 percent chance that the advertising game depicted in Figure 10-17 will
end next period. What is the present value to firm A of agreeing to the strategy {do not
advertise, do not advertise}?
a) $125
b) $237.50
c) $1,250
d) None of the answers is correct.

Consider the following entry game: Here, firm B is an existing firm in the market, and firm A
is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay
out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide
whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard," firm B
ensures that firm A makes a loss of $2 million, but firm B only makes $2 million in profits.
On the other hand, if firm B plays "soft," the new entrant takes half of the market, and each
firm earns profits of $4 million. If firm A stays out, it earns zero while firm B earns $8
million. Which of the following are Nash equilibrium strategies?
a) (enter, hard) and (not enter, hard)
b) (enter, soft) and (not enter, soft)
c) (not enter, hard) and (enter, soft)
d) (enter, hard) and (not enter, soft)