Case Study

Firm A and Firm B are in a duopoly game, so they can either comply with a cartel argument or cheat on the

agreement. The cartel agreement calls for each firm to boost its price and restrict the amount it produces.

Strategies A's Strategies

Cheat Comply

B's

strategies

Cheat (0,0) (3,-1)

Comply (-1,3) (2,2)

Question 1

"If firm A cheats on the cartel and firm B complies with the agreement, Firm A's profit is "

$ 3 million

(-) $ 1 million

$ 2 million

Zero

Question 2

"If firm A cheats on the cartel and firm B complies with the agreement, firm

B's profit is "

Zero

$ 3 million

$ 2 million

(-) $ 1 million

Question 3

"If this game is played only once, "

both firms A and B will cheat

neither Firm A nor Firm B will cheat

Firm A will not cheat and Firm B will cheat

Firm A will cheat and Firm B will not cheat

Question 4

The equilibrium in the previous question is called

Nash Equilibrium

Cooperative equilibrium

Duopoly Equilibrium

Credible strategy equilibrium

Question 5

If this game is played repeatedly and both firms adopt trigger strategies so that the cooperative equilibrium emerges

both firms A and B will cheat

neither Firm A nor Firm B will cheat

Firm A will not cheat and Firm B will cheat

Firm A will cheat and Firm B will not cheat

Question 6

Which one of the following is a part of every game theory model?

Strategies

Players

Payoffs

Probabilities

Question 7

"In game theory, a choice that is optimal for a firm no matter what its competitors do is referred to as"

dominant strategy

a gonzo selection

game-winning choice

Super optimal

Question 8

A prisoners' dilemma is a game with all of the following characteristics except one. Which one is present in a prisoners' dilemma?

Both players have a dominant strategy.

Both players would be better off if neither chose their dominant strategy.

The payoff from a strategy depends on the choice made by the other player.

Players cooperate in arriving at their strategies.

Question 9

"Which of the following legal restrictions, if enforced effectively, would be likely to solve a prisoners' dilemma type of problem for the firms involved?"

All of the above would be likely to solve a prisoners' dilemma for the firms.

A law that prohibits firms in an industry from advertising their services.

A law that makes it illegal for oligopolists to engage in collusion.

A law that prevents a cartel from enforcing rules against cheating.

Question 10

"Until recently, medical doctors and lawyers have been prohibited from engaging in competitive advertising. If the prisoners' dilemma applies to this situation, then the presence of this restriction would be likely to"

have no effect on the profits earned by individuals in these professions.

increase profits earned by individuals in these professions.

reduce profits earned by individuals in these professions.

increase the profits of some and reduce the profits of other individuals in these professions.