Game Theory

Multiple Choice Questions

After watching the Game Theory video lecture, consider the question(s) below. Then “submit” your response.

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1. Game theory is the study of how:

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B.
C.
D.

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2. A Nash equilibrium describes an outcome in which:

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B.
C.
D.

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3. When players in a game select a dominant strategy, they are:

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B.
C.
D.

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4. The payoff boxes show the strategic options and corresponding profits for two stores with respect to advertising spending (heavy or light). Based on this information, Target’s dominant advertising strategy is to:
image

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B.
C.
D.

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5. In many instances, competitive companies could agree with each other on key strategic items, and produce higher profits than what competition allows. Reasons this is not done include the _____, and the illegality of collusion.

A.
B.
C.
D.

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6. While prisoner’s dilemma outcomes may produce worse results for competing companies than other alternate outcomes, such dilemmas can benefit:

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B.
C.
D.

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7. Some prisoner’s dilemma outcomes can be resolved when the players engage in:

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B.
C.
D.

True/False Questions

After watching the Game Theory video lecture, consider the question(s) below. Then “submit” your response.

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1. Game theory can be applied in business, political science, military planning, and sports.

A.
B.

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2. A Nash equilibrium always yields the best outcome for all participants in a game.

A.
B.

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3. Prisoner’s dilemma outcomes are uncommon.

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B.

Short Answer/Discussion Questions

After watching the Game Theory video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Provide an example of a third party benefiting from a prisoner’s dilemma outcome while the game participants are worse off relative to other possible outcomes. Also, explain the nature of the benefit.

Suggested solution: The customers (the third parties in this instance) of competing companies engaged in a game with a prisoner’s dilemma might benefit from lower prices for both companies’ goods and services as the companies are likely to engage in vigorous price competition. (Answers may vary.)

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2. How can a repeated game help in resolving a prisoner’s dilemma outcome?

Suggested solution: Assume two companies (A and B) are engaged in a repeated game, and both are making decisions that result in the highest collective profit. Company A decides on an action designed to maximize its profit at the expense of company B. The next time the game is played, company B can decide to match company A’s action which results in a prisoner’s dilemma outcome, and denies company A the benefits of its noncooperative strategy, a tit-for-tat strategy. When company B does this, it is signaling to company A that it won’t allow company A to gain at its expense. Hence, company A’s best strategy when the game is played the next time is to cooperate and allow for the maximization of joint profits. (Answers may vary.)

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3. Why is game theory important to economics?

Suggested solution: Game theory is the study of how businesses and individuals interact with one another to achieve their goals. It helps us understand and predict behavior by participants in some economic decisions. Hence, it is an important tool for economists. (Answers may vary.)