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# ECON 202 STUDY GUIDE

Refer to the payoff matrix. Suppose that Speedy Bike and Power Bike are the only two bicycle manufacturing firms serving the market. Both can choose large or small advertising budgets.If this is a repeated game with no cooperation or reciprocity, which cell represents the final outcome we would expectto occur?

__A__. A

B

C

D

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Learning Objective: 14-06 Utilizeadditional game-theory terminology and demonstrate how to find Nash equilibriums in both simultaneous and sequential games.*

*Test Bank: I Topic: Game Theory and Strategic Behavior*

*Type: Figure*

128.

Refer to the payoff matrix. Suppose that Speedy Bike and Power Bike are the only two bicycle manufacturing firms serving the market. Both can choose large or small advertising budgets.If this is a repeated game with no cooperation or reciprocity, cell A

A. is not the expected outcome of this game.

__B__. is the expected outcome of this game, and it is both a Nash equilibrium and a prisoner's dilemma.

is the expectedoutcome of this game, but it is neither a Nash equilibrium nor a prisoner's dilemma.

is the expected outcome of this game, and it is a Nash equilibrium but not a prisoner's dilemma.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Learning Objective: 14-06 Utilizeadditional game-theory terminology and demonstrate how to find Nash equilibriums in both simultaneous and sequential games.*

*Test Bank: I Topic: Game Theory and Strategic Behavior*

*Type: Figure*

129.

Refer to the payoff matrix. Suppose that Speedy Bike and Power Bike are the only two bicycle manufacturing firms serving the market. Both can choose large or small advertising budgets.Is there a Nash equilibrium solution to this game?

There is no possible Nash equilibrium solution.

A Nash equilibrium can occur at either cell B or cell C.

__C__. Cell A represents a Nash equilibrium.

D. Cell D represents a Nash equilibrium.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Learning Objective: 14-06 Utilizeadditional game-theory terminology and demonstrate how to find Nash equilibriums in both simultaneous and sequential games.*

*Test Bank: I Topic: Game Theory and Strategic Behavior*

*Type: Figure*

130.

Refer to the payoff matrix. Suppose that Speedy Bike and Power Bike are the only two bicycle manufacturing firms serving the market. Both can choose large or small advertising budgets.If this is a repeated game and the firms cooperate to maximize profits, which of the following outcomes would we expect to occur?

A. In repeated playing, the outcomes would alternate between cells A and D.

__B__. In repeated playing, the outcomes would alternate betweencells B and C.

The two firms will agree to keep their advertising budgets small over time.

The game will reach a Nash equilibrium at cell A.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: I Topic: Game Theory and Strategic Behavior*

*Type: Figure*

131.

Refer to the payoff matrix. Suppose that Speedy Bike and Power Bike are the only two bicycle manufacturing firms serving the market. Both can choose large or small advertising budgets.If this is a repeated game, it is in the long-term best interestsof both players to

compete, attempting to maximize their own payoffseach time the game is played.

agree to cooperate,but then cheat on the agreement.

__C__. agree to cooperate and then follow through on the agreement.

D. match the advertising behavior of the other player each time the game is played.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

In game theory, a credible threat of coercion by a dominant firm tends to

__A__. preventcheating in collusive agreements.

increase the incentivesto cheat.

reduce discipline among cartel members.

discourage collusiveagreements.

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

A statementof coercion by one firm is

an empty threat if it is believedby the other firm.

a credible threat if it is not believed by the other firm.

always a credible threat whether or not it is believed by the other firm.

__D__. a crediblethreat if it is believed by the other firm.

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

In game theory, a repeated game is one

A. where a pair of players mimic the actions of anotherpair of players.

__B__. that recurs more than once betweentwo players.

where the payoff matrix shows equal payoffsfor two players.

that is replicated in other parts of the market.

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

In some games, one firm may avoid taking advantage of another firm because it knows that the other firm can take advantageof it in subsequent games. This behavior is called

A. the first-mover advantage.

__B__. reciprocity.

price leadership.

preemption of entry.

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

In a repeated game with reciprocity, the two players

__A__. could each earn a higher payoff than if they aggressivelycountered each otherâ€™s single-period strategy.

tend to earn lessthan if theyaggressively countered each otherâ€™s single-period strategy.

will have less incentiveto collude explicitly or tacitly.

often end up in a price war.

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

Which of the following statements is true?

Nash equilibriums exist only in games with dominant strategies.

Dominant strategies do not exist in repeated games.

Collusive agreements will always break down in repeatedgames.

__D__. Games with a known ending date underminereciprocity strategies.

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

In some games, one player or firm moves first and commits to a strategy to which the rival player or firm will subsequently respond.Such games are called

repeated games.

multi-period games.

__C__. sequentialgames.

D. credible games.

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

The so-calledfirst-mover advantage may be observed in

repeated games.

multi-period games.

__C__. sequentialgames

D. credible games.

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

A naturalmonopolyâ€™s preemption of entry by other firms by exploiting its economiesof scale is an example of

__A__. first-mover advantage.

a repeatedgame with reciprocity.

Nash equilibrium in a single-period game.

collusion in game theory.

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

297.

Answer the question based on the payoff matrix for a duopoly, in which the numbers indicatethe profit from following either an international strategy or a nationalstrategy. If firm A chooses an international strategy while firm B chooses a national strategy, then the payoffs will be

$3M for both firms.

$17M for both firms.

__C__. $15 for firm A and$5 for firm B.

D. $5 for firm A and$15 for firm B.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

298.

Answer the question based on the payoff matrix for a duopoly,in which the numbers indicatethe profit from following either an international strategy or a nationalstrategy. Which of the following is true?

A. The international strategy is the dominant strategy for both firms.

__B__. The nationalstrategy is the dominant strategy for both firms.

The international strategy is the dominantstrategy for firm A, and the nationalstrategy is the dominant strategy for firm B.

The national strategy is the dominantstrategy for firm A, and the international strategy is the dominant strategy for firm B.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

299.

Answer the question based on the payoff matrix for a duopoly, in which the numbers indicatethe profit from following either an international strategy or a national strategy. When this game reachesa Nash equilibrium, the payoffs will be

A. $3M for both firms.

__B__. $17M for both firms.

$15 for firm A and $5 for firm B.

$5 for firm A and $15 for firm B.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

300.

Answer the question based on the payoff matrix for a duopoly, in which the numbers indicatethe profit from following either an international strategy or a nationalstrategy. If firm A choosesits dominant strategy and firm B chooses a strategy that is not dominant,then the payoffs will be

$3M for both firms.

$17M for both firms.

$15 for firm A and $5 for firm B.

__D__. $5 for firm A and$15 for firm B.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

301.

Answer the question based on the payoff matrices for a repeatedgame involving two firms that are considering introducing new productsto the market. The numbers indicate the profit from following either a strategytointroduce a new productor a strategy to not introduce a new product.

First game.

Second game.

In the first game,

__A__. introducing a new product is the dominantstrategy for both firms.

not introducing a new product is the dominant strategy for both firms.

introducing a new product is the dominantstrategy for firm A, while not introducing a new product is the dominant strategy for firm B.

not introducing a new productis the dominantstrategy for firm A, while introducing a new product is the dominant strategy for firm B.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

302.

Answer the question based on the payoff matrices for a repeatedgame involving two firms that are considering introducing new productsto the market. The numbers indicate the profit from following either a strategytointroduce a new productor a strategy to not introduce a new product.

First game.

Second game.

In the second game,

__A__. introducing a new product is the dominantstrategy for both firms.

not introducing a new product is the dominant strategy for both firms.

introducing a new product is the dominantstrategy for firm A, while not introducing a new product is the dominant strategy for firm B.

not introducing a new productis the dominantstrategy for firm A, while introducing a new product is the dominant strategy for firm B.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

303.

Answer the question based on the payoff matrices for a repeatedgame involving two firms that are considering introducing new productsto the market. The numbers indicate the profit from following either a strategytointroduce a new productor a strategy to not introduce a new product.

First game.

Second game.

In the first game, if firm B doesn't introducea new product and firm A does, then firm A would be better off if

A. both firms introducenew products in game 2.

__B__. neitherfirm introduces new productsin game 2.

firm B reciprocates in game 2.

game 2 reaches a Nash equilibrium.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

304.

Answer the question based on the payoff matrix for a duopoly in which the numbers indicate the profit from either opening acoffee shop in a small town or not opening the coffee shop. If bothfirms choose their strategies simultaneously, then

__A__. there is no Nash equilibrium for this game.

firm A's dominantstrategy is to open a coffee shop.

firm B's dominantstrategy is to not open a coffee shop.

both firms have a dominant strategy to not open a coffee shop.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

305.

Answer the question based on the payoff matrix for a duopoly in which the numbers indicate the profit from either opening acoffee shop in a small town or not opening the coffee shop. If the firms are playing asequential game, then

there is a dominant strategy for this game.

there is only one Nash equilibrium for this game.

__C__. there are two potentialNash equilibriums for this game.

D. both firms will choose not to open a coffee shop.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

306.

Answer the question based on the payoff matrix for a duopoly in which the numbers indicate the profit from either opening acoffee shop in a small town or not opening the coffee shop. If the firms are playing asequential game, then

there is first-mover advantage.

the firm with the first move will choose not to open a coffee shop.

__C__. the firm with the first move will choose to open a coffee shop.

D. both firms will choose not to open a coffee shop, regardless of which firm chooses first.

*AACSB: Knowledge Application*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

In game theory, sequential games can be displayed or summarizedin two forms,

A. collusive form and strategic form.

__B__. strategicform and extensive form.

payoff matrix form and strategic form.

extensive form and game-tree form.

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

A Stackelberg duopoly (or leader-follower) game mayoccur in a

repeated game with reciprocity.

repeated game without reciprocity.

sequential game with preemption of entry.

__D__. sequentialgame without preemption of entry.

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Apply Difficulty: 03 Hard*

*Test Bank: II Topic: Game Theory and Strategic Behavior*

True / False Questions

Monopolistic competitionandoligopoly are more common in the real world thanpurecompetition and monopoly.

__TRUE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-01 Describethe characteristics of oligopoly.*

*Test Bank: II Topic: Oligopoly*

Mutual interdependence refers to the situation when entry by new firms into an industry will tend to shrink the profitsof existing firms.

__FA LSE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-01 Describethe characteristics of oligopoly.*

*Test Bank: II Topic: Oligopoly*

Two important characteristics of oligopolists are that they have significant control over price and that there is mutual interdependence among them.

__TRUE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-01 Describethe characteristics of oligopoly.*

*Test Bank: II Topic: Oligopoly*

A homogeneous oligopoly means that the few firms in the industry have identical cost and demand curves.

__FA LSE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-01 Describethe characteristics of oligopoly.*

*Test Bank: II Topic: Oligopoly*

Patents and copyrights were established by the government to reduce oligopoly and monopoly power.

__FA LSE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-01 Describethe characteristics of oligopoly.*

*Test Bank: II Topic: Oligopoly*

Game-theory models analyze the interdependence of oligopolists' strategies.

__TRUE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.*

*Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview*

Game-theory analyzes oligopoly behavior by using concepts derivedfrom the study of games-of-chance such as dice games, solitaire, and roulette.

__FA LSE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.*

*Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview*

When oligopolists collude, they collectively tend to achievesimilar results as a monopolist.

__TRUE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.*

*Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview*

One common factor that often weakens collusionamong cartel members is the incentive to cheat.

__TRUE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-02 Discusshow game theoryrelates to oligopoly.*

*Test Bank: II Topic: Oligopoly Behavior: A Game-Theory Overview*

Prices in oligopolistic industries are predicted to fluctuate widely and frequentlycompared to other market structures.

__FA LSE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-03 Explainthe three main models of oligopoly pricing and output: kinked-demand theory, collusive pricing, and price leadership.*

*Test Bank: II Topic: Three Oligopoly Models*

If an oligopolist's competitors follow its price cuts but ignore its price increases, the oligopolist would end up holdingits price constanteven if its marginal cost changes.

__TRUE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-03 Explainthe three main models of oligopoly pricing and output: kinked-demand theory, collusive pricing, and price leadership.*

*Test Bank: II Topic: Three Oligopoly Models*

A cartel of four firms that controls 100 percentof the sales in a market, and faces the same cost schedulesof a monopolist, will set a price somewhat lower than the monopoly price for its product.

__FA LSE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Learning Objective: 14-03 Explainthe three main models of oligopoly pricing and output: kinked-demand theory, collusive pricing, and price leadership.*

*Test Bank: II Topic: Three Oligopoly Models*

OPEC functions as a classic exampleof a kinked demand curve oligopoly.

__FA LSE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Test Bank: II Topic: Three Oligopoly Models*

The kinked-demand curve model appliesto a noncollusive oligopoly situation.

__TRUE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Test Bank: II Topic: Three Oligopoly Models*

The kinked-demand curve model shows that oligopolistic firms tend to change their prices frequently.

__FA LSE__

*AACSB: Knowledge Application Accessibility: Keyboard Navigation*

*Blooms: Understand Difficulty:02Medium*

*Test Bank: II Topic: Three Oligopoly Models*

A firm in a cartel typically cheats on its collusiveagreement by raising its price and restricting output more than it agreed to with other cartel members.