Question 1

Which of the following best describes a strategic interaction in game theory?

Accepted Answer

A situation where your best choice depends on what others choose, and their best choice depends on what you choose.

Question 2

In the context of the Prisoner's Dilemma, what is the Nash Equilibrium?

Accepted Answer

Both players defect, as each is playing their best response to the other's choice.

Question 3

Which of the following is a dominant strategy?

Accepted Answer

A strategy that is the best response to every choice of your rival.

Question 4

Consider the following payoff matrix for two firms deciding whether to advertise or not. If both firms advertise, each earns $$1 billion. If neither advertises, each earns 2 $$billion. If one advertises and the other does not, the advertiser earns $$3 billion and the other earns 0. $$What is the Nash Equilibrium?

Accepted Answer

Both firms advertise.

Question 5

Which of the following is NOT a step in making good strategic decisions according to game theory?

Accepted Answer

Ignore your rival's possible choices.

Question 6

In a coordination game, what is a common problem that can arise?

Accepted Answer

Players may fail to coordinate, resulting in a worse outcome for both.

Question 7

Which concept explains why firms in an oligopoly may continue to compete rather than collude, even though collusion would be jointly optimal?

Accepted Answer

Nash equilibrium, where each firm’s best response is to compete.

Question 8

Suppose two banks face a potential bank run. If both keep enough cash on hand, no run occurs. If one does not, and people believe others will withdraw, a run occurs. What type of game is this?

Accepted Answer

Coordination game.

Question 9

Which of the following is true about Nash Equilibrium?

Accepted Answer

No player can do better by changing their own choice alone.

Question 10

In a sequential game, what is the recommended method for finding the equilibrium?

Accepted Answer

Look forward and reason backward (backward induction).

Question 11

Which of the following real-world scenarios is best modeled as a Prisoner's Dilemma?

Accepted Answer

Two firms deciding whether to fix prices or compete.

Question 12

If a player’s best response changes depending on the other player’s action, what does this imply?

Accepted Answer

The player’s strategy is contingent on the rival’s choice.

Question 13

Which equation represents the condition for Nash Equilibrium in a two-player game?

Accepted Answer

$$U_1$$($$s_1$$^*, $$s_2$$^*) \geq $$U_1$$($$s_1$$, $$s_2$$^*)$$ for all s_1$ and U_2$(s_1$^*, s_2$^*) \geq U_2$(s_1$^*, s_2$)$$ for all $$s_2$$

Question 14

In the context of game theory, what is a payoff matrix?

Accepted Answer

A table showing the payoffs for each combination of strategies chosen by the players.

Question 15

Which of the following is a solution to the Prisoner's Dilemma that firms have used in real life?

Accepted Answer

Price match guarantees.

Question 16

What is the main difference between simultaneous and sequential games?

Accepted Answer

Simultaneous games involve players making choices at the same time without knowing others' choices, while sequential games involve players making choices in a specific order.

Question 17

In a game with multiple Nash equilibria, what type of game is this most likely to be?

Accepted Answer

Coordination game.

Question 18

Which of the following statements about collusion in oligopoly markets is correct?

Accepted Answer

Collusion is unstable because each firm has an incentive to cheat and undercut.

Question 19

Which of the following is an example of a second-mover advantage?

Accepted Answer

A firm waits to see its rival’s pricing before setting its own price.

Question 20

Which of the following is a real-world example of a coordination game?

Accepted Answer

Choosing which side of the road to drive on.

Chapter 18: Game Theory and Oligopoly: Strategic Interactions in Macroeconomics

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