Package: Test Bank

Title: Microeconomics: Theory and Application, 13e

Chapter Number: 14

Question Type: Multiple Choice

1. Game theory is a method of analyzing:

a. the costs and benefits of a transaction.

b. the situations in which there are interdependent outcomes.

c. the factors that affect an individual’s budget set.

d. the relation between returns and productivity of factors.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

2. The three most common elements in game theory models are:

a. players, strategies, and payoffs.

b. labor, capital, and returns.

c. price, output, and profit.

d. firms, inputs, and output.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

3. A representation of how each combination of choices affects the profits of each player is known as a:

a. strategic interaction matrix.

b. Nash equilibrium.

c. payoff matrix.

d. dominant strategy equilibrium.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

4. If a firm is better off with a particular strategy regardless of what the other firm does, then it is called the firm's:

a. dominated strategy.

b. dominant strategy.

c. weakly dominated strategy.

d. winning strategy.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

5. The table given below shows the payoffs to Firm A and Firm B if they choose to produce either high output or low output. In each cell, the figure on the left indicates Firm A’s payoffs and the figure on the right indicates Firm B’s payoffs.

Firm B

Firm A

Low Output

High Output

Low Output

High Output

100

120

75

135

125

60

80

80

With reference to the payoff matrix, which firm has a dominant strategy?

a. Firm A only

b. Firm B only

c. Both Firm A and Firm B

d. Neither firm has a dominant strategy

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

6. The table given below shows the payoffs to Firm A and Firm B if they choose to produce either high output or low output. In each cell, the figure on the left indicates Firm A’s payoffs and the figure on the right indicates Firm B’s payoffs.

Firm B

Firm A

Low Output

High Output

Low Output

High Output

100

120

75

135

125

60

80

80

Which of the following describes the dominant-strategy equilibrium in this game?

a. Both firms produce low output

b. Both firms produce high output

c. Firm A produces low output and Firm B produces high output

d. Firm A produces high output and Firm B produces low output

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

7. The table given below represents the payoff matrix of firms A and B, when they choose to produce low or high output. In each cell, the figure on the left indicates Firm B’s payoffs and the figure on the right indicates Firm A’s payoffs.

Firm A

Firm B

Low Output

High Output

Low Output

High Output

60

20

30

40

50

10

40

30

Which firm has a dominant strategy?

a. Firm A

b. Firm B

c. Both Firm A and Firm B

d. Neither Firm A nor Firm B

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

8. The table given below represents the payoff matrix of firms A and B, when they choose to produce low or high output. In each cell, the figure on the left indicates Firm B’s payoffs and the figure on the right indicates Firm A’s payoffs.

Firm A

Firm B

Low Output

High Output

Low Output

High Output

60

20

30

40

50

10

40

30

Which of the following statements about the two firms must be true?

a. If Firm B produces low output, Firm A will also produce low output.

b. If Firm B produces high output, Firm A will produce low output.

c. If Firm A produces high output, Firm B will also produce high output.

d. If Firm A produces low output, Firm B will produce high output.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

9. The table given below represents the payoff matrix of firms A and B, when they choose to produce low or high output. In each cell, the figure on the left indicates Firm B’s payoffs and the figure on the right indicates Firm A’s payoffs.

Firm A

Firm B

Low Output

High Output

Low Output

High Output

60

20

30

40

50

10

40

30

Which of the following can be concluded about the strategies of the two firms?

a. Firm A’s dominant strategy is to produce high output, while Firm B’s dominant strategy is to produce low output.

b. Firm A’s dominant strategy is to produce low output, while Firm B’s dominant strategy is to produce high output.

c. Firm A’s dominant strategy is to produce low output, while Firm B does not have a dominant strategy.

d. Firm A’s dominant strategy is to produce high output, while Firm B does not have a dominant strategy.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

10. The table given below represents the payoff matrix of firms A and B, when they choose to produce either high output or low output. In each cell, the figure on the left indicates Firm B’s payoffs and the figure on the right indicates Firm A’s payoffs.

Firm A

Firm B

Low Output

High Output

Low Output

High Output

25

25

40

5

15

X

30

Y

If X = 10 and Y = 15, which firm has a dominant strategy?

a. Firm A

b. Firm B

c. Both Firm A and Firm B

d. Neither Firm A nor Firm B

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

11. The table given below represents the payoff matrix of firms A and B, when they choose to produce either high output or low output. In each cell, the figure on the left indicates Firm B’s payoffs and the figure on the right indicates Firm A’s payoffs.

Firm A

Firm B

Low Output

High Output

Low Output

High Output

25

25

40

5

15

X

30

Y

If X = 15 and Y = 10, which firm has a dominant strategy?

a. Firm A

b. Firm B

c. Both Firm A and Firm B

d. Neither Firm A nor Firm B

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

12. The table given below represents the payoff matrix of firms A and B, when they choose to produce either high output or low output. In each cell, the figure on the left indicates Firm B’s payoffs and the figure on the right indicates Firm A’s payoffs.

Firm A

Firm B

Low Output

High Output

Low Output

High Output

25

25

40

5

15

X

30

Y

If X = 15 and Y = 10, then the information in the table implies that:

a. the dominant strategy for Firm A would be to produce low output.

b. the dominant strategy for Firm B would be to produce high output.

c. the dominant strategy for both Firm A and Firm B would be to produce high output.

d. neither Firm A nor Firm B has any dominant strategy.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

13. The table given below describes the payoffs to Jack and Jill when each chooses to produce rock, scissors, or paper. The payoff matrix indicates the dollar payments from the loser to the winner.

Identify the Nash equilibrium, if any.

a. (Rock, Rock)

b. (Rock, Paper)

c. (Paper, Paper)

d. There is no Nash equilibrium.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

14. The table given below describes the payoffs to Jack and Jill when each chooses to produce rock, scissors, or paper. The payoff matrix indicates the dollar payments from the loser to the winner.

Which of the following can be concluded from the information given in the table?

a. Jill has a dominant strategy but Jack does not.

b. Jack has a dominant strategy but Jill does not.

c. Neither Jack nor Jill has any dominant strategy.

d. Each outcome or strategic choice benefits the two players equally.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

15. The table given below describes the payoffs to Jack and Jill when each chooses to produce rock, scissors, or paper. The payoff matrix indicates the dollar payments from the loser to the winner.

Assume for this question that “paper” is not allowed as a choice and identify the Nash equilibrium, if any.

a. (Rock, Rock)

b. (Scissors, Scissors)

c. (Rock, Scissors)

d. There is no Nash equilibrium.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

16. The table given below represents the payoff matrix of firms A and B, when they choose to produce low or high output. In each cell, the figure on the left indicates Firm B’s payoffs and the figure on the right indicates Firm A’s payoffs.

Firm A

Firm B

Low Output

High Output

Low Output

High Output

60

20

30

40

50

10

40

30

The information in the table implies that the game has:

a. a Nash equilibrium and a dominant-strategy equilibrium.

b. a Nash equilibrium but not a dominant-strategy equilibrium.

c. no Nash equilibrium but has a dominant-strategy equilibrium.

d. neither a Nash equilibrium nor a dominant-strategy equilibrium.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

17. The table given below shows the payoffs to Firm A and Firm B if they choose to produce either high output or low output. In each cell, the figure on the left indicates Firm A’s payoffs and the figure on the right indicates Firm B’s payoffs.

Firm B

Firm A

Low Output

High Output

Low Output

High Output

100

120

75

135

125

60

80

80

Identify the Nash equilibrium.

a. Both firms produce low output

b. Both firms produce high output

c. Firm A produces low output and Firm B produces high output

d. Firm A produces high output and Firm B produces low output

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

18. The table given below represents the payoff matrix of firms A and B, when they choose to produce either high output or low output. In each cell, the figure on the left indicates Firm B’s payoffs and the figure on the right indicates Firm A’s payoffs.

Firm A

Firm B

Low Output

High Output

Low Output

High Output

25

25

40

5

15

X

30

Y

If X = 10 and Y = 15, then which of the following conclusions can be drawn from the information given in the table?

a. The game has a Nash equilibrium and a dominant-strategy equilibrium.

b. The game has a Nash equilibrium but not a dominant-strategy equilibrium.

c. The game does not have a Nash equilibrium but has a dominant-strategy equilibrium.

d. The game has neither a Nash equilibrium nor a dominant-strategy equilibrium.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

19. The table given below represents the payoff matrix of firms A and B, when they choose to produce either high output or low output. In each cell, the figure on the left indicates Firm B’s payoffs and the figure on the right indicates Firm A’s payoffs.

Firm A

Firm B

Low Output

High Output

Low Output

High Output

25

25

40

5

15

X

30

Y

If X = 15 and Y = 10, then the information in the table implies that the game has:

a. a Nash equilibrium and a dominant strategy equilibrium.

b. a Nash equilibrium but not a dominant-strategy equilibrium.

c. no Nash equilibrium but has a dominant-strategy equilibrium.

d. neither a Nash equilibrium nor a dominant-strategy equilibrium.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

20. The table given below represents the payoff matrix of firms A and B, when they choose to produce either high output or low output. In each cell, the figure on the left indicates Firm B’s payoffs and the figure on the right indicates Firm A’s payoffs.

Firm A

Firm B

Low Output

High Output

Low Output

High Output

25

25

40

5

15

X

30

Y

If X = 10 and Y = 15, then from the information in the table we can say that:

a. the payoff matrix represents a prisoner's dilemma game.

b. the game has a dominant-strategy equilibrium.

c. the game has a Nash equilibrium.

d. the payoff matrix represents a Cournot oligopoly.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

21. Which of the following statements is true of Nash equilibrium?

a. Each firm chooses its dominated strategy to arrive at a Nash equilibrium.

b. In a Nash equilibrium, both firms are always worse off than if they had colluded.

c. Each firm always chooses the strategy with the lower payoff to arrive at a Nash equilibrium.

d. In a Nash equilibrium, each firm's choice is the best one given the strategy of the other player.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

22. Which of the following is true for a two-person game which has a Nash equilibrium?

a. Only one of the two players will have a dominant strategy.

b. The game must have a dominant-strategy equilibrium.

c. The dominant strategy of the players must be different.

d. The game may or may not have a dominant-strategy equilibrium.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

23. All games that have a dominant-strategy equilibrium _____ have a Nash equilibrium; all games with a Nash equilibrium _____ have a dominant-strategy equilibrium.

a. may not; must

b. must; must

c. may not; may not

d. must; may not

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

24. Which of the following oligopoly models has an equilibrium that can be described as a Nash equilibrium?

a. Cournot oligopoly model

b. Dominant firm and competitive fringe oligopoly model

c. Bertrand oligopoly model

d. Kinked-demand oligopoly model

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

25. A Nash equilibrium occurs when:

a. a unilateral move by a participant makes him better off.

b. participants have an incentive to deviate from the equilibrium.

c. no can move from the equilibrium and improve the outcome.

d. cheating by participants ensures better payoffs.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

26. The prisoner’s dilemma illustrates a situation in which:

a. neither player has a dominant strategy, hence at equilibrium both are better off.

b. the Nash equilibrium is superior to the dominant-strategy equilibrium.

c. each oligopolist behaves as if it were a perfectly competitive firm.

d. each player pursuing his/her self-interest generates a collective outcome that is inferior for both.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

27. A prisoner’s dilemma game is one in which:

a. only one of the two prisoners has a dominant strategy.

b. altruistic motives by each player leads to an outcome where all players are equally well off.

c. self-interest by each player leads to an outcome where all players are worse off than if they had cooperated.

d. self-interest by each player leads to an outcome where all players are better off than if they had cooperated.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

28. Consider a duopoly market where the players agree to collude. The single-period prisoner’s dilemma game applied to this market generally predicts that:

a. the firms will maintain the collusion agreement.

b. one firm will cheat on the agreement while the other will not.

c. both firms will cheat and the collusion agreement will break down.

d. the firms will be worse off from collusion than cheating.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

29. The table given below shows the payoffs (in terms of years spent in the jail) to Sundance and Butch who choose between the options ‘confess’ and ‘don’t confess’. In each cell, the figure on the left indicates payoffs for Butch and the figure on the right indicates payoffs for Sundance.

Sundance

Butch

Confess

Don’t Confess

Confess

Don’t Confess

X

Y

1

10

10

1

2

2

Years in Jail

What values for X and Y will make this payoff matrix a prisoner’s dilemma?

a. X = 3 years, Y = 11 years

b. X = 11 years, Y = 3 years

c. X = 5 years, Y = 5 years

d. X = 1 years, Y = 1 years

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

30. The table given below shows the payoffs (in terms of years spent in the jail) to Sundance and Butch who choose between the options ‘confess’ and ‘don’t confess’. In each cell, the figure on the left indicates payoffs for Butch and the figure on the right indicates payoffs for Sundance.

Sundance

Butch

Confess

Don’t Confess

Confess

Don’t Confess

X

Y

1

10

10

1

2

2

Years in Jail

What values will not make this payoff matrix a prisoner’s dilemma?

a. X = 7 years, Y = 7 years

b. X = 6 years, Y = 6 years

c. X = 5 years, Y = 5 years

d. X = 1 years, Y = 1 years

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

31. Which of the following is a defining characteristic of a prisoner’s dilemma game?

a. There is no equilibrium in this game, so the strategic choice of one player is independent of the other’s.

b. The equilibrium is not a Nash equilibrium.

c. The payoffs in equilibrium are lower than that could be achieved with different choices.

d. Self-interested behavior by each player results in maximum personal gain but lower social gain.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

32. A prisoner's dilemma equilibrium is:

a. identical to the monopolistically competitive equilibrium.

b. a Nash equilibrium.

c. not a dominant-strategy equilibrium.

d. the same as the perfectly competitive equilibrium.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

33. Which of the following is true of a prisoner’s dilemma game?

a. It does not have an equilibrium.

b. It has a dominant-strategy equilibrium.

c. It does not have a Nash equilibrium.

d. It ensures better payoffs to the players compared to other games.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

34. An effective and enforceable collusion in a duopoly will result in:

a. a monopoly price and output in the market.

b. a perfectly competitive outcome.

c. an inefficient equilibrium.

d. a large consumer surplus.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

35. Which of the following is likely to occur if two firms in a duopoly market decide to collude and produce the same output and charge the same price?

a. Each firm will receive twice the profit they earned before the agreement.

b. Together the firms will produce less than the monopoly output.

c. Each firm will receive exactly half of the monopoly profit.

d. None of the firms will have an incentive to charge a lower price.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

36. Assume that two firms are engaged in a pricing rivalry and attempt collusion. If each firm knows that the pricing game will last for a finite number of periods, and the collusion contract is not enforceable, then they will have an incentive to:

a. cheat in every period.

b. cheat in alternate periods.

c. cheat in every period but the first.

d. cheat in every period but the last.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

37. Which of the following, if true, would decrease the stability of a cartel?

a. The cartel includes a large number of competitive firms.

b. Cheating by any of the cartel members is punishable.

c. The cartel involves repeat games.

d. The cartel is enforceable.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

38. In an oligopoly game, the possibility of cheating by one of the players:

a. is higher, the more the number of players in the game.

b. is higher in case of repeated games.

c. is lower, the more the number of players in the game.

d. is lower if the game is played less than twice.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

39. In an oligopoly game, the greater the number of players who are colluding:

a. the lower the possibility of cheating.

b. the more elastic the demand curve of the cheater.

c. the higher the payoff received by each player from colluding.

d. the lower will be the profit from cheating.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

40. A repeated game is a game:

a. that is played simultaneously by different sets of players.

b. that is played more than once, but under different rules each time.

c. that is played more than once, by the same set of players.

d. that is played by a different set of players each time.

Learning Objective: Explore how the outcome in the case of a prisoner’s dilemma differs in a repeated-game versus a single-period setting.

41. Which of the following, if true, would allow oligopolists to enjoy greater profits through collusion?

a. The collusion contract is non-binding.

b. The game is being played only once.

c. The players are not allowed to interact among themselves.

d. The collusion contract is enforced by an external authority.

Learning Objective: Explore how the outcome in the case of a prisoner’s dilemma differs in a repeated-game versus a single-period setting.

42. Under which of the following game theory circumstances is a collusive outcome most likely?

a. Prisoner's dilemma

b. Repeated games

c. Games with dominant-strategy outcomes

d. Games with Nash equilibrium

Learning Objective: Explore how the outcome in the case of a prisoner’s dilemma differs in a repeated-game versus a single-period setting.

43. A tit-for-tat strategy is one in which:

a. each player mimics the action taken by the other player in the previous period.

b. each player does the opposite of the action taken by the other player in the previous period.

c. each player randomly chooses an action.

d. one player always plays the same strategy irrespective of the other player’s choice.

Learning Objective: Explore how the outcome in the case of a prisoner’s dilemma differs in a repeated-game versus a single-period setting.

44. Assume that Hines Corporation and Lamb Inc., each produce a homogeneous product and that the two firms are the only two sellers in the market. The two firms have agreed to a collusive price agreement and expect demand and cost conditions to remain unchanged over time. If the pricing game is repeated indefinitely and Hines knows that Lamb is playing a tit-for-tat strategy, then Hines’ best strategy is to:

a. cut price in every period.

b. cut price in alternate periods.

c. comply with the agreement.

d. increase price in alternative periods.

Learning Objective: Explore how the outcome in the case of a prisoner’s dilemma differs in a repeated-game versus a single-period setting.

45. The "live and let live" policy was followed by the soldiers in the trenches during World War I despite the passions of battle and the military logic of “kill or be killed”. The cooperative equilibrium that emerged among the rivals in this situation is an example of:

a. a single-period Nash equilibrium.

b. a dominant strategy.

c. a winning strategy.

d. a repeated-game prisoner’s dilemma.

Learning Objective: Explore how the outcome in the case of a prisoner’s dilemma differs in a repeated-game versus a single-period setting.

46. In an oligopoly game, the incentive to cheat is reduced when:

a. it is a one-period game and there are only a few players.

b. the game is repeated a finite number of times and all players are aware of it.

c. it is a one-period game and the payoffs from cooperation are higher than the payoffs from cheating.

d. the game is repeated indefinitely and there is a threat of retaliation in subsequent periods.

Learning Objective: Explore how the outcome in the case of a prisoner’s dilemma differs in a repeated-game versus a single-period setting.

47. Asymmetric information describes a situation in which:

a. both sides of the market are totally uninformed.

b. one side of the market has better information than the other side of the market.

c. the price is fixed and neither side of the market can influence it.

d. the buyer can affect the price of the product while the seller cannot.

Learning Objective: Analyze asymmetric information and market outcomes in the case where consumers have less information than sellers.

48. Which of the following product markets is most likely to be characterized by the "lemons" problem?

a. Products that are sold only during a particular season

b. Sophisticated products that are generally resold after use

c. Products whose quality can be easily judged by inspection

d. Products that are advertised heavily

Learning Objective: Analyze asymmetric information and market outcomes in the case where consumers have less information than sellers.

49. In economics, the term “lemon” is used to describe:

a. any product that commands a very high market price.

b. any product which repeatedly breaks down.

c. a product for which there is an excess demand in the market.

d. a product that most people do not need.

Learning Objective: Analyze asymmetric information and market outcomes in the case where consumers have less information than sellers.

50. Karen hires a carpenter from a firm providing carpentry services, for remodeling the cabinets in her kitchen. She is unaware of the productivity of the carpenter who is sent by the firm. The carpenter, however, is perfectly aware of the labor hours required for the task. Which of the following problems is being faced by Karen in this situation?

a. A prisoner’s dilemma

b. The asymmetric information problem

c. The moral hazard problem

d. The tragedy of commons

Learning Objective: Analyze asymmetric information and market outcomes in the case where consumers have less information than sellers.

51. The "lemons" model suggests that in cases of asymmetric information between buyers and sellers:

a. low-quality goods become the preferred choice.

b. consumers are indifferent between the purchase of high- and low-quality goods.

c. the proportion of low quality goods in the market increases.

d. the availability of high quality goods in the market increases.

Learning Objective: Analyze asymmetric information and market outcomes in the case where consumers have less information than sellers.

52. The "lemons" model suggests that in cases of asymmetric information between buyers and sellers:

a. high-quality goods will slowly drive out low quality goods due to market pressures.

b. consumers will choose both high- and low-quality goods but the general trend is toward improving quality.

c. the quantity supplied of goods with better quality tends to decline.

d. buyers end up paying a high price for high-quality goods and low price for low-quality goods.

Learning Objective: Analyze asymmetric information and market outcomes in the case where consumers have less information than sellers.

53. To avoid getting a “lemon” house, buyers hire inspectors because:

a. the marginal benefit of getting a “lemon” house exceeds the inspector’s fee.

b. the marginal cost of getting a “lemon” house is lower than the inspector’s fee.

c. the marginal cost of not getting a “lemon” house is less than the inspector’s fee.

d. the marginal benefit of not getting a “lemon” house exceeds the inspector’s fee.

Learning Objective: Analyze asymmetric information and market outcomes in the case where consumers have less information than sellers.

54. People are not always fully informed about product quality because:

a. they are more concerned about prices and least concerned about quality.

b. their choices are typically affected by package design rather than the quality.

c. the benefits from acquiring information about quality may not be worth the cost of gathering that information.

d. the products available in a market are more or less homogenous, with very little price dispersion.

Learning Objective: Analyze asymmetric information and market outcomes in the case where consumers have less information than sellers.

55. Firms that produce and sell technologically advanced products in a market make additional efforts to develop a good reputation and a brand name. This is because:

a. the brand name alone is sufficient to boost sales every year.

b. the brand name makes a firm’s product perfectly price elastic.

c. the brand name lowers a firm’s cost of production in the long run.

d. the brand name provides reliable information about the quality of the firm’s product.

Learning Objective: Analyze asymmetric information and market outcomes in the case where consumers have less information than sellers.

56. Empirical analysis with respect to the used car market suggests that:

a. the "lemons" model holds and in the end bad cars totally drive out good cars from the market.

b. the lack of information among consumers drives up the price of bad cars.

c. consumers are partially informed about the quality of used cars making the "lemons" model only partly valid.

d. consumers do not try to gather information to any appreciable degree and depend on the recommendations made by the sellers.

Learning Objective: Analyze asymmetric information and market outcomes in the case where consumers have less information than sellers.

57. Adverse selection describes a situation in which:

a. the buyers of insurance consistently make the wrong decision and buy too much insurance.

b. insurance companies find most of their customers coming from high risk groups.

c. insurance companies find most of their customers coming from low risk groups.

d. the buyers of insurance can reduce the probability of occurrence of the risky event against which they are insured.

Learning Objective: Explain how insurance markets may function when information is imperfect and there is the possibility of either adverse selection or moral hazard.

58. Which of the following practices allows insurance firms to reduce the costs imposed by the high-risk customers?

a. A homeowners’ insurance covers only the market value of structures and contents

b. A higher premium is charged under a group insurance than a single party insurance

c. A vehicle insurance charges different rates of premium each year

d. A fixed claim is honored by a fire insurance contract for all the houses in an apartment

Learning Objective: Explain how insurance markets may function when information is imperfect and there is the possibility of either adverse selection or moral hazard.

59. All-you-can-eat restaurants tend to attract “undesirable” customers, i.e., mostly people who overeat. According to this statement, the problem encountered by such restaurants can be described as:

a. a prisoner’s dilemma.

b. a moral hazard.

c. an adverse selection.

d. an agency dilemma.

Learning Objective: Explain how insurance markets may function when information is imperfect and there is the possibility of either adverse selection or moral hazard.

60. Group health plans, that offer policies covering all of a firm’s employees, can partly address the adverse selection problem by:

a. increasing the incentive to take care of one’s health.

b. reducing the likelihood that high-risk people will be overrepresented.

c. limiting the coverage provided to people with existing health problems.

d. increasing the probability of a person falling sick.

Learning Objective: Explain how insurance markets may function when information is imperfect and there is the possibility of either adverse selection or moral hazard.

61. Moral hazard describes a situation in which:

a. the buyers of insurance consistently make the wrong decisions and buy too much insurance.

b. insurance companies are unable to sell the amount of insurance they feel is optimal.

c. insurance companies find most of their customers coming from low risk groups.

d. the buyers of insurance behave in ways that raise the probability of the unfavorable outcome.

Learning Objective: Explain how insurance markets may function when information is imperfect and there is the possibility of either adverse selection or moral hazard.

62. Which of the following is the best explains the moral hazard problem?

a. Chronically ill people are more likely to purchase health care insurance.

b. Only owners of poor quality used cares put them up for sale.

c. People who are highly risk-averse are less likely to invest in the stock market.

d. Drivers with airbags in their cars drive a little more recklessly.

Learning Objective: Explain how insurance markets may function when information is imperfect and there is the possibility of either adverse selection or moral hazard.

63. Fred was suffering from a nasal tissue blockage that could be corrected either through an operation or with medical treatment for about two months. Fred’s doctor clearly told him that the condition was not acute and he did not need surgery. Fred, however, insisted on the surgical removal of the blockage, being aware that his medical insurance would cover the entire cost of this surgery. The situation described here can be associated with which of the following problems?

a. Price dispersion

b. Moral hazard

c. Lemons problem

d. Prisoner’s dilemma

Learning Objective: Explain how insurance markets may function when information is imperfect and there is the possibility of either adverse selection or moral hazard.

64. Which of the following terms is used in the medical insurance industry to describe the percentage of the hospital bill borne by the patient?

a. Premium

b. Deductible

c. Coinsurance rate

d. Coverage rate

Learning Objective: Explain how insurance markets may function when information is imperfect and there is the possibility of either adverse selection or moral hazard.

65. Health insurance companies often place limitations on the services covered by the insurance to deal with the:

a. prisoner’s dilemma problem.

b. asymmetric information problem.

c. common resource problem.

d. limited price information problem.

Learning Objective: Explain how insurance markets may function when information is imperfect and there is the possibility of either adverse selection or moral hazard.

66. _____ is the term used to describe the total amount of the hospital cost that is borne by a patient before insurance coverage becomes effective.

a. Copayment

b. Premium

c. Deductible

d. Coinsurance

Learning Objective: Explain how insurance markets may function when information is imperfect and there is the possibility of either adverse selection or moral hazard.

67. Hannah is willing to pay at least $850 and at most $1,000 for a new dishwasher. She goes to the various electronic stores in her neighborhood to compare the prices and the product features that differentiate one brand from the other. Which of the following can be categorized as Hannah’s search cost?

a. The maximum price that Hannah is willing to pay for the dishwasher

b. The difference between the maximum and the minimum price that Hannah is willing to pay for the dishwasher

c. The transportation cost incurred while going from one store to another to collect information on prices and product features.

d. The price that Hannah ultimately pays while purchasing the dishwasher

Learning Objective: Show how limited price information affects price dispersion for a product.

68. Price dispersion for a product falls when:

a. consumers search less.

b. consumers are uninformed.

c. the benefits received by consumers from search are higher than the costs.

d. the cost of acquiring price information is very high.

Learning Objective: Show how limited price information affects price dispersion for a product.

69. Which of the following lowers the marginal benefit from a search related to a product?

a. High price dispersion

b. High price elasticity of demand for a product

c. Long time devoted to search

d. High price of the product

Learning Objective: Show how limited price information affects price dispersion for a product.

70. For which of the following commodities will the benefit from search be the highest?

a. Washing machines

b. Real estate

c. Apparels

d. Books

Learning Objective: Show how limited price information affects price dispersion for a product.

71. Higher-priced products exhibit less relative price dispersion because:

a. consumers do more research on goods they really like.

b. the high price alone signals that the product is of good quality.

c. consumers do more research on more expensive goods.

d. producers invest heavily in the advertisement and promotion of such products.

Learning Objective: Show how limited price information affects price dispersion for a product.

72. Which of the following is likely to result from successful advertising?

a. A decrease in the market power of the firm

b. A decline in the demand for the firm’s product

c. A decrease in the firm’s input costs

d. A decline in the price elasticity of demand for the firm’s product

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

73. Which of the following is not true of advertising?

a. It results in diseconomies of scale in production.

b. It can operate as a barrier to the entry of new firms.

c. It creates a scope for breaking into an entrenched market.

d. It influences the tastes and preferences of consumers.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

74. Advertising is profitable for a firm when:

a. it increases search costs for the consumers of the firm’s product.

b. it raises the price of the good being advertised.

c. it makes the demand for the firm’s product more inelastic.

d. it reduces the barriers to the entry of new firms.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

75. The view that advertising serves as a source of information suggests that advertising is:

a. a low-cost way of providing information on price and quality of products and making markets work better.

b. a way of creating artificial product differentiation that induces consumers to buy products they really do not demand.

c. effective only when it is used by monopolists.

d. beneficial to consumers but adds to a firm’s irrecoverable costs of production.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

76. How will the demand curve faced by a firm change when all the firms in an industry start advertising their product, compared to the situation when only this firm was advertising?

a. The demand curve will become perfectly price inelastic.

b. The demand curve will become less elastic.

c. The demand curve will become more elastic.

d. The demand curve will become more inelastic.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

77. An analysis of the relationship between advertising and price indicates that advertising:

a. can lower the price of the product.

b. increases price dispersion.

c. has no impact on a product’s price.

d. makes the demand for the product highly price elastic.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

78. Bella, a dentist, purchases a new SUV worth $45,000 after comparing the prices quoted by the different car dealers. She incurs a total transportation cost of $100 while visiting the different showrooms and loses fees worth $500 for spending four business hours away from the dental clinic. What will be the full price of the SUV?

a. $45,500

b. $45,400

c. $45,600

d. $45,100

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

79. Which of the following is a benefit of advertising on the Internet?

a. It reduces the producer’s cost of production.

b. It lowers the true price consumers pay for the product by reducing consumers’ search costs.

c. It increases the supply of the product in the market and lowers its money price.

d. It reduces the deadweight loss in the market.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

80. The _____ price of a product is the sum of the money price and the search cost that consumers incur.

a. choke

b. selling

c. retail

d. full

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

Question Type: True/False

81. The three most common elements in game theory models are players, strategies, and payoffs.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

82. The three most common elements in game theory models are labor, capital, and returns.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

83. The three most common elements in game theory models are price, output, and profit.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

84. The three most common elements in game theory models are firms, inputs, and output.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

85. Each firm chooses its dominated strategy to arrive at a Nash equilibrium.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

86. In a Nash equilibrium, both firms are always worse off than if they had colluded.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

86. Each firm always chooses the strategy with the lower payoff to arrive at a Nash equilibrium.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

88. In a Nash equilibrium, each firm's choice is the best one given the strategy of the other player.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

89. In a two-person game which has a Nash equilibrium, only one of the two players will have a dominant strategy.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

90. In a two-person game which has a Nash equilibrium, the game must have a dominant-strategy equilibrium.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

91. In a two-person game which has a Nash equilibrium, the dominant strategy of the players must be different.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

92. In a two-person game which has a Nash equilibrium, the game may or may not have a dominant-strategy equilibrium.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

93. A prisoner’s dilemma game does not have an equilibrium.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

94. A prisoner’s dilemma game has a dominant-strategy equilibrium.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

95. A prisoner’s dilemma game does not have a Nash equilibrium.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

96. A prisoner’s dilemma game ensures better payoffs to the players compared to other games.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

97. Advertising results in diseconomies of scale in production.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

98. Advertising can operate as a barrier to the entry of new firms.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

99. Advertising creates a scope for breaking into an entrenched market.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

100. Advertising influences the tastes and preferences of consumers.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

Question Type: Essay

101. Mia has been awarded a penalty kick. China’s goalie has two possible strategies, to dive left or dive right. Mia can shoot left or shoot right. There is no time for the goalie to determine where the ball is going before she must commit herself to diving left or right. Suppose that the goalie always stops the shot if Mia shoots right and the goalie dives left. On the other hand, Mia always scores if she shoots right uncontested. Mia is not as adept at shooting to the left. When Mia kicks left the goalie stops the shot 75 percent of the time if she dives right, and Mia misses the open goal half the time when shooting left.

a) Summarize this game in a payoff matrix.

b) Does either player have a dominant strategy? Explain.

c) What is the Nash equilibrium? Explain.

Learning Objective: Understand the basics of game theory: a mathematical technique to study choice under conditions of strategic interaction.

102. What is a prisoner’s dilemma? Draw a payoff matrix which illustrates this game.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

103. A buildup of nuclear weapons between two or more nations appears both counterproductive and counterintuitive. But one theory, Mutually Assured Destruction, argues that it is to a nation’s benefit to amass an arsenal of weapons so vast that their use could destroy the whole world. Using a prisoner’s dilemma matrix with a Nash equilibrium, show how that Country A choosing a strategy of spending vast amounts on nuclear weaponry (call it “High”), enough to destroy all of society, rather than a smaller amount (call it “Low), sufficient for self-defense only, is a dominant strategy and a deterrent over Country B.

Learning Objective: Describe the prisoner’s dilemma and its applicability to oligopoly theory as well as many other situations.

104. Like a market for “lemons,” the labor market can also be affected by asymmetric information. Suppose a firm wants to hire more workers. The workers (or sellers of labor) know much more about their true productivity than the firm (or buyer of labor). The firm would like to hire workers and pay them according to their productivity but it is costly for them to hire workers, observe their behavior and productivity (do they work hard? are they on time?), and then fire those that do not perform well. Therefore, the firm would like to know how productive a worker will be before it hires that person. Can the firm acquire information (called a signal) about a worker’s future productivity before hiring them? Can workers somehow signal their future productivity to firms?

Assume there are only 2 types of workers, low productivity or high productivity. Workers with 16 years or more of education will be offered a wage leading to a present value of lifetime income of $2,000,000. Those completing less than 16 years of education are offered a wage leading to a present value of lifetime income equal to $1,000,000.

Suppose that the total cost of various levels of education is given by the equations C_A = 300,000(E-12) and C_B = 200,000(E-12) where type A workers are “low productivity” workers and type B workers are “high productivity” workers, and E represents years of education.

(a) What is the net benefit (difference between the present value of income and total cost) a type A person derives from attaining 16 years of education? What would be the net benefit for type A from 12 years of education? What is the optimal level of education for a type A person?

(b) Is 16 years of education an effective way to distinguish low-ability workers from high-ability workers? Why?

(c) Suppose firms raised the cutoff for the higher wage job to 18 years of education. Would this be an effective signal of worker productivity? Why or why not?

(d) To be an effective signal, what must be the relationship between the cost of acquiring the signal and a worker’s productivity?

(e) How might grade inflation affect the effectiveness of the signal?

Learning Objective: Analyze asymmetric information and market outcomes in the case where consumers have less information than sellers.

105. Define adverse selection and moral hazard and give examples of each.

Learning Objective: Explain how insurance markets may function when information is imperfect and there is the possibility of either adverse selection or moral hazard.

106. Consider two commodities, a refrigerator worth $1,500 and a food processor worth $100. For which of these commodities will a consumer want to bear a higher search cost and why?

Learning Objective: Show how limited price information affects price dispersion for a product.

107. Compare the benefits and the costs of advertising.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.

108. Explain how advertising, when undertaken by all competing firms, actually reduces the market power of the firms.

Learning Objective: Investigate advertising and the extent to which it serves to artificially differentiate products versus provide information to consumers about the availability of products and their prices and qualities.