Question 1

Which of the following best describes a Nash Equilibrium in game theory?

Accepted Answer

A situation where no player can improve their payoff by unilaterally changing their strategy, given the strategies of the other players.

Question 2

In the classic Prisoners’ Dilemma, what is the dominant strategy for each player?

Accepted Answer

To confess, because it minimizes the individual’s sentence regardless of the other’s choice.

Question 3

Which of the following is a key difference between static and dynamic games?

Accepted Answer

Static games involve simultaneous moves without knowledge of others’ actions, while dynamic games involve sequential or repeated moves with knowledge of previous actions.

Question 4

In the Stackelberg model, which firm moves first and what advantage does this provide?

Accepted Answer

The leader moves first, allowing it to commit to an output level and influence the follower’s decision.

Question 5

Which of the following best describes a dominant strategy?

Accepted Answer

A strategy that is optimal no matter what the opponent does.

Question 6

Consider the following payoff matrix for two firms, A and B, deciding whether to advertise:

Firm B
Advertise | Don't Advertise
Firm A
Advertise: (10, 5) | (15, 0)
Don't Advertise: (8, 6) | (2, 10)

What is the Nash Equilibrium for this game?

Accepted Answer

Both firms choose to advertise.

Question 7

Which of the following is true about cooperative games?

Accepted Answer

Players can negotiate binding contracts and plan joint strategies.

Question 8

In a repeated prisoners’ dilemma game, why might firms be able to sustain collusion?

Accepted Answer

Because repeated interaction allows for punishment strategies if one firm cheats.

Question 9

What is backward induction in the context of dynamic games?

Accepted Answer

A process of solving a game by first analyzing the last move and then working backward to the first move.

Question 10

Suppose two firms are playing a repeated game with an unknown ending period. What is the likely outcome regarding collusion?

Accepted Answer

Collusion is more likely because the threat of future punishment can sustain cooperation.

Question 11

Which of the following is an example of a mixed strategy?

Accepted Answer

A worker randomizes between working and shirking to keep the manager guessing.

Question 12

In the Stackelberg model, how does the leader determine its optimal output?

Accepted Answer

By anticipating the follower’s best-response function and choosing output to maximize its own profit.

Question 13

Which of the following statements about subgame perfect Nash equilibrium is correct?

Accepted Answer

It is a set of strategies that forms a Nash equilibrium in every subgame of the original game.

Question 14

If a game has a known and finite number of periods, what is the likely outcome in the final period?

Accepted Answer

Players will cheat, as there is no future punishment possible.

Question 15

Which of the following best describes common knowledge in a game?

Accepted Answer

Information about the rules and payoffs that all players know and know that the others know.

Question 16

In a noncooperative game, what is the main challenge for players?

Accepted Answer

Predicting and responding to the strategies of other players without the ability to enforce agreements.

Question 17

Which of the following is NOT a characteristic of a static game?

Accepted Answer

Players move sequentially, observing previous moves.

Question 18

Suppose an incumbent firm can pay a fee $$b to $$prevent entry by a potential competitor. If the monopoly profit minus $$b is $$greater than or equal to the duopoly profit, what will the incumbent do?

Accepted Answer

Pay the fee $$b to $$secure exclusive rights and prevent entry.

Question 19

Which of the following real-world scenarios is best modeled as a dynamic game?

Accepted Answer

A firm entering a market after observing the incumbent’s actions.

Game Theory in Microeconomics: Strategic Decision-Making, Static and Dynamic Games

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