Question 1

Consider the following payoff matrix for two firms, A and B, choosing output levels of 60 or 30 units. The payoffs are (A, B):

$$\begin{array}{c|cc}
 & 60 & 30 \
\hline
60 & (3,3) & (4,8) \
30 & (8,4) & (6,6) \
\end{array}

If $$both firms choose simultaneously, what is the Nash equilibrium?

Accepted Answer

A chooses 60, B chooses 30: $$(8,4)$$

Question 2

In the extensive form (game tree) of the output game above, if Player A is the leader and chooses first, what output will A choose and what will be the resulting equilibrium?

Accepted Answer

A chooses 60, B chooses 30; payoffs $$(8,4)$$

Question 3

Which of the following best describes a dominant strategy?

Accepted Answer

A strategy that is best for a player regardless of the strategies chosen by the other players.

Question 4

In the prisoners’ dilemma, why is cooperation difficult to maintain even when it is mutually beneficial?

Accepted Answer

Because each player has an incentive to cheat to increase their own payoff, making defection a dominant strategy.

Question 5

Which of the following is an example of the prisoners’ dilemma in real life?

Accepted Answer

Two countries engaging in an arms race, each increasing armaments despite preferring safety.

Question 6

Suppose two firms are considering entering a new market. If one firm must incur a large sunk cost to enter, what does this imply about the credibility of its threat to enter?

Accepted Answer

The threat is credible because sunk costs cannot be recovered, signaling commitment.

Question 7

In a repeated prisoners’ dilemma, which strategy is most likely to sustain cooperation?

Accepted Answer

Tit-for-tat: cooperate first, then mimic the other player’s previous action.

Question 8

Consider the following payoff matrix for two firms, Toyota and GM, deciding whether to enter a new market. If the U.S. government offers GM a $50 million subsidy for entering, how does this affect the Nash equilibrium?

Accepted Answer

Both firms will enter the market.

Question 9

In the game tree involving a thug (T) and a safe owner (S), what is the subgame perfect Nash equilibrium?

Accepted Answer

S does not open the safe, T does not kill.

Question 10

Why is the thug’s threat to kill not credible in the safe owner game?

Accepted Answer

Because the thug receives a higher payoff by not killing, regardless of the safe owner's action.

Question 11

Which of the following best describes a Nash equilibrium?

Accepted Answer

A situation where each player chooses the best strategy given the strategies chosen by the other players.

Question 12

If two firms can collude, what outcome is most likely in the output game matrix provided?

Accepted Answer

Both produce 30 units.

Question 13

Which of the following statements about static and dynamic games is correct?

Accepted Answer

Dynamic games involve players moving sequentially and can be represented by game trees.

Question 14

In an auction market, which of the following is NOT a strategic consideration for bidders?

Accepted Answer

Bidding above your own valuation to signal strength.

Question 15

If a firm develops word processing software with a very different command structure than the market leader, what is a likely disadvantage?

Accepted Answer

Users will face high switching costs, making it harder to attract customers from established competitors.

Question 16

Which of the following is true about common resources and the prisoners’ dilemma?

Accepted Answer

The dominant strategy is to overuse the resource, leading to lower joint profits.

Question 17

In a simultaneous-move game, what is the main challenge for players?

Accepted Answer

They must anticipate the other player’s move without knowing it in advance.

Question 18

Which of the following best explains why lack of cooperation among oligopolists can be good for society?

Accepted Answer

It increases competition, leading to lower prices and greater output.

Question 19

Suppose Firm 1 has a dominant strategy but Firm 2 does not. If both firms can see the entire payoff matrix before playing, how does this affect Firm 2’s decision?

Accepted Answer

Firm 2 will choose its best response to Firm 1’s dominant strategy.

Game Theory in Microeconomics: Strategic Decision Making, Nash Equilibrium, and Applications

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