Which of the following best describes how game theory is used in economics to analyze oligopoly profit strategies?

• A. It is used exclusively to analyze labor market negotiations.
• B. It calculates consumer surplus in monopoly markets.
• C. It determines the exact market price for goods in perfectly competitive markets.
• D. It models the strategic interactions between firms, allowing prediction of outcomes like collusion or competition.

Answer: (D)

Verified step by step guidance

1. Understand that game theory in economics is a tool used to analyze strategic interactions where the outcome for each participant depends on the actions of others.
2. Recognize that in an oligopoly, a few firms dominate the market, and each firm's profit strategy depends on anticipating the reactions of rival firms.
3. Identify that game theory models these interactions by representing firms as players in a game, each with possible strategies and payoffs.
4. Use game theory concepts such as Nash equilibrium to predict stable outcomes where no firm can improve its profit by unilaterally changing its strategy.
5. Conclude that game theory helps explain behaviors like collusion (cooperation) or competition among oligopolistic firms, rather than focusing on labor markets, monopoly consumer surplus, or perfectly competitive pricing.