Chapter 13 Game Theory and Competitive Strategy

1) Which of the following conditions, if present, is sufficient to make a game cooperative?

A) Individual payoffs are greater if all players choose the same strategy.
B) Players can communicate with each other.
C) Players can negotiate binding contracts committing them to particular strategies.
D) Players must agree unanimously on any set of strategies.
E) The payoff that is highest for all individuals together is also highest for each individual
player.
4) In the spring of 1994, Northwest Airlines took the independent action of reducing fares on
its
flights. Other competing airlines quickly matched the fare cuts. These actions might be
interpreted as:
A) a noncooperative game. B) a cooperative game.
C) a constant sum game. D) a competitive game.
11) A dominant strategy can best be described as
A) a strategy taken by a dominant firm.
B) the strategy taken by a firm in order to dominate its rivals.
C) a strategy that is optimal for a player no matter what an opponent does.
D) a strategy that leaves every player in a game better off.
E) all of the above

13) A strategy A is dominant for a player X if

A) strategy A contains among its outcomes the highest possible payoff in the game.
B) irrespective of any of the possible strategies chosen by the other players, strategy A
generates a higher payoff than any other strategy available to player X.
C) strategy A is the best response to every strategy of the other player.
D) strategy A is the best response to the best strategy of the other player.
E) every outcome under strategy A generates positive payoffs.
Scenario 13.2:

14) Which of the following is true about the game in Scenario 13.2?
A) ABCs dominant strategy is to offer a rebate.
B) ABCs dominant strategy is not offer a rebate.
C) XYZs dominant strategy is to offer a rebate.
D) XYZs dominant strategy is not offer a rebate.
E) Both ABC and XYZ have offer a rebate as a dominant strategy.
15) In the game in Scenario 13.2, the equilibrium strategies

A) are for both firms to offer rebates.

B) is for ABC to offer a rebate, and XYZ not to offer a rebate.
C) is for XYZ to offer a rebate, and ABC not to offer a rebate.
D) are for both firms to offer no rebate.
E) does not exist in pure strategies.
Scenario 13.4
Consider the following game:

18) Which of the following is TRUE for the game in Scenario 13.4?
A) NRGs dominant strategy is to sponsor the marathon.
B) NRGs dominant strategy is to sponsor the TV show.
C) Vitas dominant strategy is to sponsor the marathon.
D) Vitas dominant strategy is to sponsor the TV show.
E) Neither company has a dominant strategy.
19) In the game in Scenario 13.4, the equilibrium outcome:
A) is for both NRG and Vita to sponsor the marathon.
B) is for both NRG and Vita to sponsor the TV show.
C) is for NRG to sponsor the marathon and Vita to sponsor the TV show.
D) is for NRG to sponsor the TV show and Vita to sponsor the marathon.
E) does not exist in pure strategies.
Scenario 13.5
Consider the following game:

20) Which of the following is true regarding the game in Scenario 13.5?
A) Only Bull Meat has a dominant strategy.
B) Only Deer Meat has a dominant strategy.
C) Both companies have a dominant strategy: expand West.
D) Both companies have a dominant strategy: expand South.
E) Neither company has a dominant strategy.
21) In the game in Scenario 13.5,
A) there is one equilibrium: for both to expand West.
B) there is one equilibrium: for both to expand South.

C) there are two equilibria: either can expand in the West, and the other expands in the
South.
D) there is only a mixed strategies equilibrium.
E) all four outcomes are equilibria.
25) A Nash equilibrium occurs when
A) each firm is doing the best it can given its opponents actions.
B) each firm chooses the strategy that maximizes its minimum gain.
C) a player can choose a strategy that is optimal regardless of its rivals actions.
D) there is no dominant firm in a market.
26) A maximin strategy
A) maximizes the minimum gain that can be earned.
B) maximizes the gain of one player, but minimizes the gain of the opponent.
C) minimizes the maximum gain that can be earned.
D) involves a random choice between two strategies, one which maximizes potential gain
and one which minimizes potential loss.
29) In a Nash equilibrium,
A) each player has a dominant strategy.
B) no players have a dominant strategy.
C) at least one player has a dominant strategy.
D) players may or may not have dominant strategies.
E) the player with the dominant strategy will win.
30) Nash equilibria are stable because
A) they involve dominant strategies.
B) they involve constant-sum games.
C) they occur in noncooperative games.
D) once the strategies are chosen, no players have an incentive to negotiate jointly to
change
them.
E) once the strategies are chosen, no player has an incentive to deviate unilaterally from
them.
31) The relationship between a pure-strategy Nash equilibrium and a dominant-strategy
equilibrium is that
A) a dominant-strategy equilibrium is a special case of a pure-strategy Nash equilibrium.
B) a pure-strategy Nash equilibrium is a special case of a dominant-strategy equilibrium.
C) they are the same.
D) there may not be a dominant-strategy equilibrium, but there always is a pure-strategy
Nash equilibrium.
E) they are mutually exclusive and exhaustive, in that a dominant-strategy equilibrium is
the same thing as a mixed-strategy Nash equilibrium.
Scenario 13.6

Consider the following game: Payoffs are in millions of dollars.

32) In the game in Scenario 13.6,

A) Poison Pill is a dominant strategy for Lawrence LLP.
B) Dump is a dominant strategy for Lawrence LLP.
C) TurboTech is a dominant strategy for ERS Co.
D) ZamboniTech is a dominant strategy for ERS Co.
E) No firm has a dominant strategy
.
33) In the game in Scenario 13.6, what is the Nash equilibrium?
A) The strategy pair associated with -$100, -$1.
B) The strategy pair associated with $2, -$0.5.
C) The strategy pair associated with $1, -$1.
D) The strategy pair associated with -$0.5, -$0.5.
E) There is no Nash equilibrium in pure strategies.
34) Refer to the game in Scenario 13.6. What will occur if ERS Co. plays a maximin strategy?
A) -$100, -$1
B) $2, -$0.5
C) $1, -$1
D) -$0.5, -$0.5
E) There is a 0.25 chance of each outcome in that case.
Scenario 13.7:
Consider the game below about funding and construction of a dam to protect a 1,000
-person town.
Contributions to the Dam Fund, once made, cannot be recovered, and all citizens must
contribute $1,000 to
the dam in order for it to be built. The dam, if built, is worth $70,000 to each citizen.

35) In the game in Scenario 13.7, the strategy pair that pays
A) $69,000 to each player is the only equilibrium.
B) ($0, -$1000) is the only equilibrium.
C) (-$1000, $0) is the only equilibrium.
D) $0 to each player is the only equilibrium.
E) $69,000 to each player and the strategy pair that pays $0 to each player are equilibria.
36) Refer to the game in Scenario 13.7. If each player chose a maximin strategy, the
outcome
would be
A) $69,000, $69,000.
B) $0, -$1000.
C) -$1000, $0.
D) $0, $0.
E) a mixed strategy equilibrium.
Scenario 13.9
Consider the following game:

Two firms are situated next to a lake, and it costs each firm $1,500 per period to use filters
that avoid
polluting the lake. However, each firm must use the lake s water in production, so it is also
costly to have a
polluted lake. The cost to each firm of dealing with water from a polluted lake is $1,000
times the number of
polluting firms.
41) What is true about dominant strategies in the game in Scenario 13.9?
A) Pollute is a dominant strategy for both firms.
B) Pollute is a dominant strategy for Lago only.
C) Dont Pollute is a dominant strategy for both firms.
D) Dont Pollute is a dominant strategy for Lago only.
E) There are no dominant strategies.
43) Refer to Scenario 13.9. The equilibrium of this game, if played only once, is that
A) both firms pollute.
B) only Lago pollutes.
C) only Nessie pollutes.
D) neither firm pollutes.
E) the firms choose a mixed strategy.
44) Refer to Scenario 13.9. If this game is repeated over an infinite or uncertain horizon, the
most
likely observed behavior will be that
A) both firms pollute.
B) only Lago pollutes.
C) only Nessie pollutes.
D) neither firm pollutes.
E) the firms alternate polluting in different periods.
45) A mixed strategy equilibrium means that
A) the strategies chosen by the players represent different behaviors.
B) one player has a dominant strategy, and one does not.
C) one player has a pure strategy, and one does not.
D) the equilibrium strategy is an assignment of probabilities to pure strategies.
E) the equilibrium strategy involves alternating between a dominant strategy and a Nash
strategy.
58) It can be rational to play tit-for-tat in a repeated Prisoners Dilemma game
A) only if the game is played an infinite number of times.
B) if the game is played an infinite number of times, or if it is uncertain how many times it
will be played.
C) only if the game is played a finite number of times, and that number is known by all the
players in advance.
D) for n-1 of the n periods it will be played, if n is known in advance.
E) at no time; tit-for-tat is an irrational strategy in this situation.
65) A sequential game is
A) another term for a repeated game.
B) another term for a cooperative game.
C) the term for a game in which individuals receive their payoffs at different times.
D) the term for a game in which individuals do not commit to strategy choices at the same
time.
E) the term for a game in which each outcome occurs, one after the other, as the game is
repeated over time.

67) An oligopolistic situation involving the possible creation of barriers to entry would
probably
best be modeled by a
A) cooperative game.
B) Prisoners Dilemma game.
C) Battle of the Sexes game.
D) repeated game.
E) sequential game.
Scenario 13.12
Consider the game below:

69) Playing the game in Scenario 13.12 sequentially would

A) not change the equilibrium.
B) change the equilibrium to (R1,C1).
C) change the equilibrium to (R2,C1) if R moved first.
D) change the equilibrium to (R2,C1) if C moved first.
E) change the equilibrium to (R2,C2).
Answer: A
70) Playing the game in Scenario 13.12 by using a maximin strategy would
A) not change the equilibrium from the equilibrium of the original game.
B) change the equilibrium to (R1,C2).
C) change the equilibrium to (R2,C1) if R moved first.
D) change the equilibrium to (R2,C1) if C moved first.
E) change the equilibrium to (R2,C2).
88) Wal-Mart was one of the most successful firms of the 1970s and 1980s. Much of Wal
-Marts
success can be credited to its expansion strategy: they rushed to open the first discount
store in
small towns that could only support one discount store. In the language of game theory:
A) Wal-Mart was a dominant firm.
B) Wal-Mart made empty threats.
C) Wal-Mart employed a maximin strategy.
D) Wal-Mart employed a preemptive strategy.
Scenario 13.15
Consider the pricing game below:

90) Which is true about dominant strategies in the game in Scenario 13.15?
A) $80 is dominant for Simple; $70 is dominant for Boring.
B) $80 is dominant for Simple; $25 is dominant for Boring.

C) $35 is dominant for Simple; $70 is dominant for Boring.

D) $35 is dominant for Simple; $25 is dominant for Boring.
E) There are no dominant strategies in the above game.
91) Refer to Scenario 13.15. If the firms price simultaneously, equilibrium would be
A) an $80 price for Simple and a $70 price for Boring.
B) an $80 price for Simple and a $25 price for Boring.
C) a $35 price for Simple and a $70 price for Boring.
D) a $35 price for Simple and a $25 price for Boring.
E) a mixed strategy equilibrium.
92) If Simple were able to move first in a sequential version of the game in Scenario 13.15,
the
equilibrium would be
A) an $80 price for Simple and a $70 price for Boring.
B) an $80 price for Simple and a $25 price for Boring.
C) a $35 price for Simple and a $70 price for Boring.
D) a $35 price for Simple and a $25 price for Boring.
E) a mixed strategy equilibrium.
93) If Boring were able to move first in a sequential version of the game in Scenario 13.15,
the
equilibrium would be
A) an $80 price for Simple and a $70 price for Boring.
B) an $80 price for Simple and a $25 price for Boring.
C) a $35 price for Simple and a $70 price for Boring.
D) a $35 price for Simple and a $25 price for Boring.
E) a mixed strategy equilibrium.
Answer: B
94) What is true about threats in the game in Scenario 13.15?
A) Simple can change the equilibrium by means of a credible threat; Boring cannot.
B) Boring can change the equilibrium by means of a credible threat; Simple cannot.
C) Boring can change the equilibrium by means of a credible threat only if it can move
before Simple.
D) Simple can change the equilibrium by means of a credible threat only if it can move
before Boring.
E) Neither firm has a credible threat with which to change this equilibrium.
Scenario 13.17
Consider the entry-deterrence game below. The potential entrant would have to spend some
amount in
sunk costs to enter the market.

103) In the game in Scenario 13.17, who moves first?

A) Potential Entrant
B) Incumbent Monopoly
C) Its a sequential game; firms alternate moving first.
D) Both players move simultaneously.

E) Who moves first is decided by the equilibrium.

104) In the game in Scenario 13.17, Incumbent Monopoly has
A) an incentive to threaten accommodation, which would be credible.
B) an incentive to threaten war, which would be credible.
C) an incentive to threaten accommodation, which wouldnt be credible.
D) an incentive to threaten war, which wouldnt be credible.
E) no incentive to make a threat.