Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

276 GAME THEORY AND OLIGOPOLISTIC BEHAVIOR [CHAP. 12
7. For a prisoners’ dilemma to occur it is sufficient (a) for each player to have a dominant strategy, (b) for both players
to be in Nash equilibrium, (c) for each player to adopt its dominant strategy but to be able to do better by
cooperation, (d ) all of the above.
Ans. (c) See Sections 12.4 and 12.5.
8. One disadvantage of the analysis of the prisoners’ dilemma is that it (a) refers to a one-move game only, (b) does not
lead the players to maximize gains, (c) only applies to economics, (d ) cannot be overcome by cooperation.
Ans. (a) See Section 12.6.
9. The best strategy for repeated prisoners’ dilemma games is (a) tit-for-tat, (b) the dominant strategy, (c) the Nash
equilibrium, (d ) the Cournot solution.
Ans. (a) See Section 12.6.
10. Tit-for-tat refers to the game theory rule that (a) you should cooperate as long as your rival cooperates, (b) you
should not cooperate when your rival does not cooperate, (c) is best to follow in repeated games, (d ) all of the
above.
Ans. (d ) See Section 12.6.
11. The following condition is required for tit-for-tat to be the best strategy in repeated prisoners’ dilemma games:
(a) there must be a reasonably stable set of players, preferably two, (b) each firm must be able to quickly detect
cheating by other firms, (c) demand and cost conditions must be relatively stable (d ) the number of moves must
be infinite, or at least a very large and uncertain, (e) all of the above.
Ans. (e) See Section 12.6.
12. A strategic move refers to all the following except (a) a Nash equilibrium, (b) making a credible threat, (c) adopting
policies to deter entrance into the market, (d ) making a preventive investment.
Ans. (a) See Section 12.7.
Solved Problems
GAME THEORY
12.1 Explain in what way game theory extends the analysis of oligopolistic behavior presented in Chapter 10.
Game theory offers many insights into oligopolistic interdependence and the strategic behavior of oligopolistic
firms that could not be examined with the traditional tools of analysis presented in Chapter 10. Specifically,
game theory is used to identify all the possible responses of a competitor to the actions of an oligopolist and on
how the oligopolist can choose the best strategy or choice open to it.
12.2 Indicate (a) whether game theory can be used only for oligopolistic interdependence and (b) in what way
game theory is similar to playing chess.
(a)
(b)
Game theory is a general theory that can be used to analyze the choice of optimal strategies in any conflict
situation, not just oligopolistic interdependence. For example, it can be used in deciding the optimal amount
of defense expenditures in the face of the nation’s desire for defense and in light of the possible responses that
its defense expenditures elicit in the defense expenditures of other nations.
Game theory is similar to playing chess in the sense that both involve players, strategies, and payoffs. Specifically,
they both involve the choice of optimal strategies in conflict situations.