Multiple Choice
In the context of game theory and oligopoly profit, what is the term for a player's best choice, if it exists, regardless of their opponent's strategy?
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14. Oligopoly
Game Theory and Oligopoly Profit
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Which of the following best describes how game theory is used in economics to analyze oligopoly profit strategies?
A
It models the strategic interactions between firms, allowing prediction of outcomes like collusion or competition.
B
It focuses solely on consumer preferences without considering firm behavior.
C
It determines the exact market price for goods in perfectly competitive markets.
D
It is used to calculate the marginal cost of production for individual firms.
Verified step by step guidance1
Understand that game theory in economics is a tool used to analyze situations where the outcome for each participant depends on the actions of others, especially in markets with a few firms (oligopolies).
Recognize that in an oligopoly, firms are interdependent, meaning each firm's profit strategy depends on the expected reactions of rival firms.
Identify that game theory models these strategic interactions by representing firms as players in a game, each with possible strategies and payoffs.
Use game theory concepts like Nash equilibrium to predict stable outcomes where no firm can improve its profit by unilaterally changing its strategy.
Conclude that this approach helps economists understand potential outcomes such as collusion (cooperation) or competition among firms, rather than focusing on consumer preferences, exact prices in perfect competition, or marginal costs.
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