Question 1

Which of the following best describes a dominant strategy in game theory?

Accepted Answer

A strategy that yields a higher payoff no matter what the other player does.

Question 2

In the classic Prisoner's Dilemma, what is the outcome when both players choose their dominant strategy?

Accepted Answer

Both players receive a lower payoff than if they had cooperated.

Question 3

Suppose two firms, A and B, are deciding whether to increase advertising. The payoff matrix is symmetric and both have a dominant strategy to increase spending. What is the likely Nash equilibrium?

Accepted Answer

Both firms increase advertising.

Question 4

A Nash equilibrium is best described as:

Accepted Answer

A situation where each player’s strategy is their best choice, given the other player’s strategies.

Question 5

In the context of cartels, why are cartel agreements often unstable?

Accepted Answer

Because firms have an incentive to cheat by lowering prices to increase their own profits.

Question 6

If a gamble has a 0.8 probability of winning $$10 and a 0.2 probability of losing 10$$, what is the expected value of the gamble?

Accepted Answer

$6

Question 7

A risk-averse person will:

Accepted Answer

Refuse any fair gamble.

Question 8

In the 'market for lemons' model, what is the main consequence of asymmetric information?

Accepted Answer

The average quality of goods for sale decreases.

Question 9

Suppose you are searching for an apartment in San Francisco. 80% rent for $$400, 20% for 360. $$Each visit costs $$6. If you find a 400 $$apartment first, should you keep searching if you are risk-neutral? (Expected value calculation required)

Accepted Answer

Yes, because the expected value is positive.

Question 10

Which of the following is an example of a costly-to-fake signal?

Accepted Answer

A seller offering a free warranty on a used car.

Question 11

Statistical discrimination occurs when:

Accepted Answer

Group characteristics are used to infer individual characteristics.

Question 12

Adverse selection in insurance markets refers to:

Accepted Answer

The tendency for high-risk individuals to buy more insurance.

Question 13

Moral hazard is best illustrated by which of the following scenarios?

Accepted Answer

A person drives more recklessly after purchasing car insurance.

Question 14

Suppose a software company can’t distinguish between home and commercial users. Home users will pay $$175 for a full version, 150 $$for a disabled version; commercial users will pay $$230 for full, 200 $$for disabled. There are 500 of each. What is the maximum revenue if only the full version is sold?

Accepted Answer

$$202,500 + 115$$,000 = $317,500

Question 15

Which of the following best describes a credible threat in game theory?

Accepted Answer

A threat that is in the threatener's best interest to carry out.

Question 16

In a sequential game, what method is used to determine the optimal strategy for the first mover?

Accepted Answer

Backward induction

Question 17

If buyers are risk-neutral and 90% of used cars are good ($$10,000 value) and 10% are lemons (6$$,000 value), what is the expected value a buyer would offer?

Accepted Answer

$9,600

Question 18

Why might a homeowner buy house insurance even if the expected value is negative?

Accepted Answer

Because they are risk-averse and want to avoid large losses.

Question 19

Which of the following is NOT a feature of the Prisoner's Dilemma?

Accepted Answer

The Nash equilibrium is Pareto optimal.

Question 20

In the context of information economics, what is the main function of a middleman?

Accepted Answer

To supply information to buyers and reduce search costs.

Game Theory, Cartels, and Information Economics: Study Notes for Microeconomics

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