Question 1

In the context of game theory, what is a dominant strategy?

Accepted Answer

A strategy that is optimal regardless of what the other player does.

Question 2

Which of the following best describes a Nash equilibrium?

Accepted Answer

A situation where each player chooses their best strategy given the strategies chosen by others.

Question 3

Suppose two firms are deciding whether to set a high price or a low price. If both set a high price, they each earn $$100. If both set a low price, they each earn 50. If $$one sets a high price and the other sets a low price, the low-price firm earns $$150 and the high-price firm earns 0. $$What is the Nash equilibrium in this scenario?

Accepted Answer

Both firms set a low price.

Question 4

Which of the following statements about collusion is correct?

Accepted Answer

Collusion is an agreement between firms about their decisions, such as price or quantity.

Question 5

A cartel is best described as:

Accepted Answer

A group of colluding firms that act together to influence market outcomes.

Question 6

Why do members of a cartel have an incentive to cheat?

Accepted Answer

Cheating allows a firm to increase its profits by undercutting the agreed price or producing more than the agreed quantity.

Question 7

Which of the following is an example of price leadership?

Accepted Answer

One firm announces a price change and other firms in the industry follow.

Question 8

Consider the following payoff matrix for two competing firms, A and B. Each can choose to Advertise or Not Advertise. If both Advertise, each earns $$30. If neither Advertises, each earns 50. If $$one Advertises and the other does not, the Advertiser earns $$70 and the other earns 10. $$What is the dominant strategy for each firm?

Accepted Answer

Both firms should Advertise.

Question 9

Which of the following is NOT necessarily true about a Nash equilibrium?

Accepted Answer

It is the best possible outcome for all players.

Question 10

Suppose two firms form a cartel and agree to restrict output to raise prices. If one firm secretly increases its output, what is the likely short-term effect?

Accepted Answer

The cheating firm will earn higher profits at the expense of the other firm.

Question 11

If a game does not have a dominant strategy for either player, what does this imply?

Accepted Answer

Players must consider the likely choices of their opponents to make the best decision.

Question 12

Which of the following best explains why collusion is difficult to sustain in the long run?

Accepted Answer

Firms have an incentive to cheat to increase their individual profits.

Question 13

In a duopoly, if both firms choose their best response to the other’s strategy, what outcome is reached?

Accepted Answer

Nash equilibrium.

Question 14

Which of the following is a key difference between a cartel and price leadership?

Accepted Answer

A cartel involves formal agreements, while price leadership involves informal following of a leading firm's price changes.

Question 15

Suppose two firms are in a repeated game and can choose to cooperate or cheat each period. What strategy might help sustain cooperation over time?

Accepted Answer

A tit-for-tat strategy, where each firm mimics the other’s previous action.

Question 16

If a firm in a cartel increases its output while others stick to the agreement, what happens to the market price and the cheating firm's profit?

Accepted Answer

Market price falls, and the cheating firm's profit may rise in the short run.

Question 17

Which of the following equations represents the condition for a Nash equilibrium in a two-player game?

Accepted Answer

$$ U_A(s_A^*, s_B^*) \geq U_A(s_A, s_B^*) 	ext{ for all } s_A $$

Question 18

A real-world example of a cartel is:

Accepted Answer

OPEC, where oil-producing countries coordinate output to influence prices.

Question 19

Which of the following is most likely to occur if all firms in an industry follow a price leader?

Accepted Answer

Prices in the industry become more stable.

Question 20

If two firms are caught in a prisoner's dilemma, what is the likely outcome if they cannot communicate or enforce agreements?

Accepted Answer

Both firms choose the strategy that is best for themselves individually, leading to a worse outcome for both.

Game Theory, Nash Equilibrium, and Collusion in Microeconomics

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