Chapter 12: Game Theory

MULTIPLE CHOICE
1.
a.
b.
c.
d.
e.

Game theory is useful for understanding oligopoly behavior because:

there are so many firms in an oligopoly that
all are price takers.
firms must differentiate their products if
they are to remain in business.
firms recognize that because there are only
a few firms mutual interdependence is
important.
without it firms would not be able to
maintain cartel agreements.
it allows firms to develop greater monopoly
power.

ANS: C
DIF: Moderate
REF: 460
TOP: Making Strategy and Game Theory
2.
a.
b.
c.
d.
e.

MSC: Conceptual

Useful strategies to deter entry include:

increasing advertising.
increasing prices.
decreasing capacity.
increasing capacity.
a and d

ANS: E
DIF: Moderate
REF: 460
TOP: Making Strategy and Game Theory

MSC: Conceptual

3.
Radio City promises if you can find a lower advertised price for anything you
bought at Radio City, anywhere in town within 30 days, it will return the difference plus 20%.
A sophisticated game theoretic analysis suggests Radio City may be:
a.
losing money in the long run.
b.
colluding with other stores.
c.
using a commitment to threaten
competitors.
d.
preempting competitors.
e.
using price leadership.
ANS: B
DIF: Difficult
REF: 460
TOP: Making Strategy and Game Theory

MSC: Conceptual

4.
Potential entrant E threatens to enter incumbent Is market and I threatens to
lower price to P should E enter. It is crucial for E to believe Is threat that:
a.
P > Is average total cost.
b.
P > Is average variable cost.
c.
P is low enough to discourage E.
d.
I could conceivably charge P without Es
threat.
e.
Is profit with P and no entry are better than
expected profits with entry.
ANS: B
DIF: Difficult
REF: 460
TOP: Making Strategy and Game Theory

MSC: Conceptual

5.

A feasible strategy set is:

a.

all actions with a nonzero probability of

occurring.
only actions that have a 50% or greater
probability of occurring.
actions that result in positive profits for the
firm.
actions that a decision maker is willing to
take.
the one outcome that the decision maker
chooses.

b.
c.
d.
e.
ANS: A
MSC: Factual
6.
a.
b.
c.
d.
e.
ANS: B
MSC: Factual
7.
a.
b.
c.
d.
e.
ANS: C
Representation
MSC: Factual

DIF: Easy

REF: 461

TOP: Strategy Basics

A player in a game theoretic model is:

anyone working for a firm that is operating
strategically.
a decision-making entity at a firm involved
in a strategic game.
a firm that is operating as a perfect
competitor.
a monopolist who produces a unique
product with no close substitutes.
a stockholder at a firm involved in a
strategic game.
DIF: Easy

REF: 461

TOP: Strategy Basics

The difference between game trees and decision trees is:

that game trees are not useful in strategic
situations.
that decision trees describe actions that
depend on the behavior of rivals.
that game trees have interactive payoffs.
that decision trees are a function of many
individuals and the state of nature.
none of the above.
DIF: Easy

REF: 463

TOP: Visual

8.
Consider the following decision tree. This tree illustrates hypothetical payoffs
to General Mills (GM) and Quaker Oats (Q) if they engage in a price war.

If GM cuts prices, the greatest potential gain is:

a.
b.
c.
d.
e.

$5 million per year.

$10 million per year.
$2 million per year.
$3 million per year.
none of the above.

a.
b.
c.
d.
e.

$5 million per year.

$10 million per year.
$2 million per year.
$3 million per year.
none of the above.

ANS: A
Representation
MSC: Applied

DIF: Easy

REF: 463

TOP: Visual

9.
Consider the following decision tree. This tree illustrates hypothetical payoffs
to General Mills (GM) and Quaker Oats (Q) if they engage in a price war. If GM cuts prices
and Quaker Oats follows this behavior:

a.
b.
c.
d.
e.

GM loses $10 million.

Quaker Oats loses $10 million.
GM loses $2 million.
Quaker Oats loses $2 million.
both firms gain $3 million.

ANS: C
Representation
MSC: Applied
10.

DIF: Easy

REF: 463

Given the following payoff matrix, what will As profits be?

a.
b.
c.
d.
e.

1.
2.
3.
4.
Unknown until Bs action is observed.

ANS: B
Representation
MSC: Applied
11.

DIF: Moderate

c.
d.
e.
ANS: A
Strategies
MSC: Factual
12.

e.

TOP: Visual

beats all others, regardless of the opponents

choice.
beats all others, given the opponents
choice.
is beaten by all others, regardless of the
opponents choice.
is beaten by all others, given the opponents
choice.
beats at least one other, given the
opponents choice.

b.

c.
d.

REF: 463

A dominant strategy is one that:

a.

a.
b.

TOP: Visual

DIF: Easy

REF: 468

TOP: Dominant

If player 1 has a dominant strategy, then player 2:

must also have a dominant strategy.
may or may not have a dominant strategy,
but will always lead to a Nash equilibrium.
may or may not have a dominant strategy.
will not be able to reach an optimal solution
to the game.
will block this dominant strategy and force
player 1 to another strategy.

a.
b.

must also have a dominant strategy.

may or may not have a dominant strategy,
but will always lead to a Nash equilibrium.
may or may not have a dominant strategy.
will not be able to reach an optimal solution
to the game.
will block this dominant strategy and force
player 1 to another strategy.

c.
d.
e.
ANS: C
Strategies
MSC: Factual
13.

DIF: Easy

REF: 468

TOP: Dominant

Given the following payoff matrix, who has a dominant strategy?

a.
b.
c.
d.
e.

It depends on what the other player does.

Both players have it.
Neither player has it.
A does; B doesnt.
B does; A doesnt.

ANS: C
Strategies
MSC: Factual
14.
a.
b.
c.
d.
e.
ANS: E
Strategies
MSC: Factual

DIF: Easy

REF: 468

TOP: Dominant

If a firm has a dominant strategy:

its optimal strategy depends on the play of
rivals.
its optimal strategy is always the same, even
if payoffs change.
it is determined by the behavior of only one
key rival.
it receives the same profits regardless of the
strategy of rivals.
its optimal strategy is independent of the
play of rivals.
DIF: Easy

REF: 468

TOP: Dominant

15.
In a two-player game in which each player has four options, how many
outcomes can there be?
a.
1.
b.
4.
c.
8.
d.
16.
e.
64.
ANS: D
Strategies
MSC: Applied
16.
player:
a.
b.
c.
d.
e.

DIF: Easy

REF: 468

TOP: Dominant

By definition, a Nash equilibrium in a duopoly is the situation in which each

plays a dominant strategy.
plays the best strategy given the others
strategies.
gets the highest possible payoff.
gets the highest payoff possible without
lowering the opponents payoff.
is happy with the outcome.

a.
b.

plays a dominant strategy.

plays the best strategy given the others
strategies.
gets the highest possible payoff.
gets the highest payoff possible without
lowering the opponents payoff.
is happy with the outcome.

c.
d.
e.
ANS: B
Equilibrium
MSC: Factual
17.
a.
b.
c.
d.
e.
ANS: C
Equilibrium
MSC: Factual
18.
a.
b.
c.
d.
e.
ANS: D
Equilibrium
MSC: Factual

DIF: Easy

REF: 472

TOP: The Nash

A Nash equilibrium occurs when:

each player has a dominant strategy.
each player receives the same final payoff.
each player believes it is doing the best it
can given the behavior of rivals.
there is no dominant strategy for any player.
payoffs are independent of the actions taken
by rivals.
DIF: Easy

REF: 472

TOP: The Nash

Getting to a Nash equilibrium requires:

each knowing the opponents payoffs and
cooperation.
knowing the opponents payoffs but not
cooperation.
cooperation but not knowing the opponents
payoffs.
neither cooperation nor knowing the
opponents payoffs.
either cooperation or knowing the
opponents payoffs, depending on the game.
DIF: Easy

REF: 472

TOP: The Nash

19.
Which pair of strategies would cooperative cartel members A and B choose
given this payoff matrix?

a.
b.
c.
d.
e.

W, Y.
W, Z.
X, Y.
X, Z.
Either X, Y or W, Z.

ANS: B
Equilibrium
MSC: Applied
20.

DIF: Easy

REF: 472

TOP: The Nash

Which pair of strategies would competing firms A and B choose given this

payoff matrix?

a.
b.
c.
d.
e.

W, Y.
W, Z.
X, Y.
X, Z.
Either X, Y or W, Z.

ANS: C
Equilibrium
MSC: Applied
21.

DIF: Easy

0.
1.
2.
3.
4.

ANS: C
Equilibrium
MSC: Applied
22.

DIF: Easy

ANS: C
Equilibrium
MSC: Applied
23.
equilibrium?

c.
d.
e.

REF: 472

TOP: The Nash

How many Nash equilibria are there in this payoff matrix?

a.
b.
c.
d.
e.

b.

TOP: The Nash

How many Nash equilibria are there in this payoff matrix?

a.
b.
c.
d.
e.

a.

REF: 472

0.
1.
2.
3.
4.
DIF: Easy

REF: 472

TOP: The Nash

Refer to the accompanying payoff matrix. Which of the following is a Nash

Company A chooses Strategy 1 and

Company B chooses Strategy 1.
Company A chooses Strategy 1 and
Company B chooses Strategy 2.
Company A chooses Strategy 2 and
Company B chooses Strategy 2.
Company A chooses Strategy 2 and
Company B chooses Strategy 1.
None of the above.

ANS: D
Equilibrium
MSC: Applied
24.
equilibrium?

DIF: Easy

Company A chooses Strategy 1 and

Company B chooses Strategy 1.
Company A chooses Strategy 1 and
Company B chooses Strategy 2.
Company A chooses Strategy 2 and
Company B chooses Strategy 2.
Company A chooses Strategy 2 and
Company B chooses Strategy 1.
None of the above.

b.
c.
d.
e.

25.
equilibrium?

DIF: Moderate

c.
d.
e.

c.
d.
e.

TOP: The Nash

Company A chooses Strategy 1 and

Company B chooses Strategy 1.
Company A chooses Strategy 1 and
Company B chooses Strategy 2.
Company A chooses Strategy 2 and
Company B chooses Strategy 2.
Company A chooses Strategy 2 and
Company B chooses Strategy 1.
None of the above.

b.

26.
based on:
a.
b.

REF: 472

Refer to the accompanying matrix. Which of the following is a Nash

a.

ANS: B
Equilibrium
MSC: Applied

TOP: The Nash

Refer to the accompanying payoff matrix. Which of the following is a Nash

a.

ANS: A
Equilibrium
MSC: Applied

REF: 472

DIF: Moderate

REF: 472

TOP: The Nash

Strategic foresight is the ability to make decisions today that are rational
complete uncertainty about the future.
our best information about what will happen
in the future.
what we know only about behavior in the
past.
information that we have only about our
own behavior in the past.
incorrect information about the past.

ANS: B
DIF: Easy
REF: 479
TOP: Strategic Foresight: The Use of Backward Induction

MSC: Factual

27.
Suppose that firm A finds itself facing the following payoff matrix in its
rivalry with firm B:

A threatens to play strategy W. This threat is:

a.

credible because the Nash equilibrium

occurs where A plays W and B plays Z.
credible because the joint optimal solution
occurs where A plays W and B plays Z.
not credible because As dominant strategy
is to play X.
credible because As dominant strategy is to
play W.
not credible because B will never play
strategy Z.

b.
c.
d.
e.

ANS: C
DIF: Easy
REF: 482
TOP: Strategic Foresight: The Use of Backward Induction
28.
a.
b.
c.
d.
e.

MSC: Conceptual

A most-favored-customer clause:
is a commitment but not a threat.
is a threat but not a commitment.
is both a threat and a commitment.
is neither a threat nor a commitment.
could be either a threat or a commitment
depending on the terms.

ANS: C
DIF: Moderate
REF: 482
TOP: Making Strategy and Game Theory

MSC: Conceptual