BR10C: Bridge: Oligopoly and Game Theory
Question 1
Carlise and Mary are the only two editors of mystery novels in the city of Readville. If Carlise and Mary collude to earn more profits, they would:
A. each increase the number of books published and raise prices.
B. each increase the number of books published and lower prices.
C. each reduce the number of books published and raise prices.
D. each reduce the number of books published and lower prices.
Hint
Firms in imperfectly competitive markets face a downward sloping demand curve. For each additional unit that is produced in a market with imperfect competition, the market price for all units declines, resulting in the marginal revenue for each unit falling beneath the market price for all units after the first.Answer
C. each reduce the number of books published and raise prices. By reducing the quantity of books edited, Carlise and Mary drive up the prevailing market price of editing a book until MR = MC, thus corresponding with a lower level of output than if they were to produce at the socially optimal level of output.Question 2
Strategies for players to overcome a prisoner’s dilemma include:
A. avoiding collusion, which hurts all players involved.
B. playing the strategies that lead to a Nash equilibrium.
C. competing more rigorously to achieve a better outcome.
D. playing the game repeatedly over time to promote cooperation.
Hint
The prisoner's dilemma is a noncooperative two-player game characterized by a suboptimal outcomes for both players.Answer
D. playing the game repeatedly over time to promote cooperation. The prisoner’s dilemma is a two-player game in which (1) players cannot collude, and (2) each player has an incentive to “defect,” i.e., select an action that benefits oneself at the expense of the other. As a result, both players defect, leading to a suboptimal outcome.One way of overcoming a prisoner's dilemma is through repeated play. This alters the incentives of the game by enabling players to reward or punish one another in the next round, encouraging cooperation, rather than defection, in the current round.
Question 3
Which of the following is not an essential component of game theory?
A. Payoffs
B. Money
C. Players
D. Strategies
Hint
Game theory is the study of decision-making in situations where outcomes depend on interactions between players.Answer
B. Money Game theory is the study of decision-making in situations where outcomes depend on interactions between players. Because game theory applies to many situations, money is not an essential feature of game theory. What is required are players (strategic decision-makers), payoffs or outcomes, and strategies that players can choose from in pursuing their objectives.Question 4
Which of the following statements must be true in a game theory situation that results in a prisoners’ dilemma?
i. Neither player has a dominant strategy in the game.
ii. Neither player has an incentive to deviate unilaterally from the prisoners’ dilemma outcome.
iii. Both players could achieve a better outcome if they successfully collude.
A. Only i is true.
B. Only iii is true.
C. Only ii and iii are true.
D. All three statements are true.
Hint
A dominant strategy is one that yields a player the best outcome, regardless of what action the other player takes. A Nash equilibrium is a situation in which no player has an incentive to unilaterally change one's strategy, assuming the other player does not change his or her strategy.Answer
C. Only ii and iii are true. In the prisoner's dilemma, players cannot collude, and each player has an incentive to "defect," i.e., select an action that benefits oneself at the expense of the other. As a result, each player's dominant strategy is to defect rather than cooperate. This leads to a Nash equlibrium—a situation in which neither player can benefit by unilaterally changing one's strategy if the other player's strategy does not change—that is suboptimal.Question 5
Suppose that Rich and Sheri each own the two largest helicopter tour companies at the Grand Canyon. If each uses a pricing strategy that leads to a prisoner’s dilemma, what would be the result?
A. Tourists would end up receiving great deals on helicopter tours.
B. Both Rich and Sheri would earn higher profits.
C. Tourists would end up paying a lot more for helicopter tours.
D. Rich and Sheri would be better off by not cooperating with each other.