Test bank for managerial economics and business strategy chapter 10 PDF

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Chapter 10Game Theory: Inside OligopolyMultiple Choice Questions 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...

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Chapter 10 - Game Theory: Inside Oligopoly

Chapter 10 Game Theory: Inside Oligopoly Multiple Choice Questions 1. 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 be in business for only one year, the Nash equilibrium is: A. for each firm to advertise. B. for neither firm to advertise. C. for your firm to advertise and the other not to advertise. D. None of the preceding answers is correct. Answer: A Learning Objective: 10-02 Topic: Simultaneous-Move, One-Shot Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

2. 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 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. Answer: A Learning Objective: 10-03 Topic: Finitely Repeated Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

3. 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: 10-1 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

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. Answer: A Learning Objective: 10-03 Topic: Infinitely Repeated Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

4. 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 only one year, the Nash equilibrium is: A. for each firm to advertise. B. for neither firm to advertise. C. for your firm to advertise and the other not to advertise. D. None of the preceding answers is correct. Answer: B Learning Objective: 10-02 Topic: Simultaneous-Move, One-Shot Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

5. 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. Answer: C Learning Objective: 10-03 Topic: Finitely Repeated Games Blooms: Analyze AACSB: Analytical Thinking Difficulty: 02 Medium

10-2 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

6. 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 hand your business down to your children (and this "bequest" goes on forever), then a Nash equilibrium is for each firm to: A. not advertise until the rival does, and then to advertise forever. B. never advertise. C. always advertise. D. advertise until the rival does not advertise, and then not advertise forever. Answer: B Learning Objective: 10-03 Topic: Infinitely Repeated Games Blooms: Analyze AACSB: Analytical Thinking Difficulty: 02 Medium

7. In the game shown below, firms 1 and 2 must independently decide whether to charge high or low prices. Firm Two Firm One High Price

Low Price

High Price

(10, 10)

(5, −5)

Low Price

(5, −5)

(0, 0)

10-3 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

Which of the following are Nash equilibrium payoffs in the one-shot game? A. (0, 0) B. (5, -5) C. (-5, 5) D. (10, 10) Answer: D Learning Objective: 10-02 Topic: Simultaneous-Move, One-Shot Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

8. In the game shown below, firms 1 and 2 must independently decide whether to charge high or low prices.

Firm Two Firm One High Price

Low Price

High Price

(10, 10)

(5, −5)

Low Price

(5, −5)

(0, 0)

10-4 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

Which of the following are the Nash equilibrium payoffs (each period) if the game is repeated 10 times? A. (0, 0) B. (5, -5) C. (-5, 5) D. (10, 10) Answer: D Learning Objective: 10-02 Topic: Finitely Repeated Games Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

9. In the game shown below, firms 1 and 2 must independently decide whether to charge high or low prices.

Firm Two Firm One High Price

Low Price

High Price

(10, 10)

(5, −5)

Low Price

(5, −5)

(0, 0)

10-5 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

Suppose the game is infinitely repeated. Then the "best" the firms could do in a Nash equilibrium is to earn ___ per period. A. (0, 0) B. (5, -5) C. (-5, 5) D. (10, 10) Answer: D Learning Objective: 10-02 Topic: Infinitely Repeated Games Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

10. 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 $1 million, but firm B only makes $1 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 $5 million. If firm A stays out, it earns zero while firm B earns $10 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) Answer: C Learning Objective: 10-02 Topic: Multistage Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

11. 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 $1 million, but firm B only makes $1 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 $5 million. If firm A stays out, it earns zero while firm B earns $10 million. Which of the following are perfect equilibrium strategies? A. (enter, soft) B. (not enter, soft) C. (enter, hard) D. (not enter, hard) 10-6 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly Answer: A Learning Objective: 10-02 Topic: Multistage Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

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

Firm B Firm A Low Price

High Price

Low Price

(2, 2)

(10, −8)

High Price

(−8, 10)

(6, 6)

10-7 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

What are dominant 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) Answer: D Learning Objective: 10-02 Topic: Simultaneous-Move, One-Shot Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

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

Firm B Firm A Low Price

High Price

Low Price

(2, 2)

(10, −8)

High Price

(−8, 10)

(6, 6)

10-8 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

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) Answer: D Learning Objective: 10-02 Topic: Simultaneous-Move, One-Shot Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

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

Firm B Firm A Low Price

High Price

Low Price

(2, 2)

(10, −8)

High Price

(−8, 10)

(6, 6)

10-9 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

What are the Nash equilibrium strategies for firm A and B respectively? A. (low price, high price) B. (high price, low price) C. (high price, high price) D. (low price, low price) Answer: D Learning Objective: 10-02 Topic: Simultaneous-Move, One-Shot Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

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

Firm B Firm A Low Price

High Price

Low Price

(2, 2)

(10, −8)

High Price

(−8, 10)

(6, 6)

10-10 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

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) Answer: A Learning Objective: 10-02 Topic: Finitely Repeated Games Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

16. Which of the following are important determinants of collusion in pricing games? A. The number of firms B. Firm size C. History D. All of the statements associated with this question are correct. Answer: D Learning Objective: 10-01 Topic: Infinitely Repeated Games Blooms: Remember AACSB: Knowledge Application Difficulty: 01 Easy

17. Refer to the following game.

Firm B Firm A Low Price

High Price

Low Price

(10, 9)

(15, 8)

High Price

(−10, 7)

(11, 11)

10-11 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

What are the 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) Answer: A Learning Objective: 10-02 Topic: Simultaneous-Move, One-Shot Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

18. Refer to the following game.

Firm B Firm A Low Price

High Price

Low Price

(10, 9)

(15, 8)

High Price

(−10, 7)

(11, 11)

10-12 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

Which of the following is true? A. A dominant strategy for firm A is "high price." B. There does not exist a dominant strategy for firm A. C. A dominant strategy for firm B is "low price." D. None of the preceding answers is correct. Answer: D Learning Objective: 10-02 Topic: Simultaneous-Move, One-Shot Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 03 Hard

19. Refer to the following game.

Firm B Firm A Low Price

High Price

Low Price

(10, 9)

(15, 8)

High Price

(−10, 7)

(11, 11)

What are the Nash equilibrium strategies for firm A and firm B, respectively, in a one-shot game? 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) Answer: A Learning Objective: 10-02 Topic: Simultaneous-Move, One-Shot Games Blooms: Apply

10-13 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly AACSB: Analytical Thinking Difficulty: 02 Medium

20. Refer to the following game.

Firm B Firm A Low Price

High Price

Low Price

(10, 9)

(15, 8)

High Price

(−10, 7)

(11, 11)

10-14 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

If this one-shot game is repeated three times, the Nash equilibrium payoffs for firms A and B will be ______ each period. A. (10, 9) B. (11, 11) C. (−10, 7) D. (15, 8) Answer: A Learning Objective: 10-02 Topic: Finitely Repeated Games Blooms: Apply AACSB: Analytical Thinking Difficulty: 02 Medium

21. Which of the following is true? A. In a one-shot game, a collusive strategy always represents a Nash equilibrium. B. A perfect equilibrium occurs when each player is doing the best he can regardless of what the other player is doing. C. Each Nash equilibrium is a perfect equilibrium. D. Every perfect equilibrium is a Nash equilibrium. Answer: D Learning Objective: 10-02 Topic: Multistage Games Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

22. Refer to the following game. Firm B Firm A Low Price

High Price

Low Price

(9, 10)

(8, 15)

High Price

(7, −10)

(11, 11)

10-15 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 10 - Game Theory: Inside Oligopoly

Which of the following is true? A. A dominant strategy for firm A is "high price." B. There does not exist a dominant strategy for firm A. C. A dominant strategy for firm B is "low price." D. None of the preceding answers is correct. Answer: B Learning Objective: 10-02 Topic: Simultaneous-Move, One-Shot Games Blooms: Understand AACSB: Knowledge Application Difficulty: 02 Medium

23. Refer to the following game. Firm B Firm A Low Price

High Price

Low Price

(9, 10)

(8, 15)