Chapter 10: Test Bank Multiple Choice Questions Managerial Economics and Business Strategy, 5e

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Chapter 10: Test Bank Multiple Choice Questions 1. Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in prof ... its. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn $1 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is a) For each firm to advertise. b) For neither firm to advertise. c) For your firm to advertise and the other not to advertise. d) None of the above. Answer: A Difficulty: Med 2. Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn $1 million. If you and your rival plan to be in business for 10 years, then the Nash equilibrium is a) For each firm to advertise every year. b) For neither firm to advertise in early years, but to advertise in later years. c) For each firm to not advertise in any year. d) For each firm to advertise in early years, but not advertise in later years. Answer: A Difficulty: Med 3. Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn $1 million. If you and your rival plan to hand your business down to your children (and this "bequest" goes on forever) then a Nash equilibrium when the interest rate is zero is a) for each firm to not advertise until the rival does, and then to advertise forever. b) for your firm to never advertise. c) for your firm to always advertise when your rival does. d) for each firm to advertise until the rival does not advertise, and then not advertise forever. Answer: A Difficulty: Med Managerial Economics and Business Strategy, 5e Page 14. If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non advertising firm will earn $5 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is a) For each firm to advertise. b) For neither firm to advertise. c) For your firm to advertise and the other not to advertise. d) None of the above. Answer: B Difficulty: Med 5. If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non advertising firm will earn $5 million. If you and your rival plan to be in business for 10 years, then the Nash equilibrium is a) For each firm to advertise every year. b) For neither firm to advertise in early years, but to advertise in later years. c) For each firm to not advertise in any year. d) For each firm to advertise in early years, but not advertise in later years. Answer: C Difficulty: Med 6. If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non advertising firm will earn $5 million. If you and your rival plan to hand your business down to your children (and this "bequest" goes on forever) then a Nash equilibrium is a) for each firm to not advertise until the rival does, and then to advertise for ever. b) for each firm to never advertise. c) for each firm to always advertise. d) for each firm to advertise until the rival does not advertise, and then not advertise forever. Answer: B Difficulty: Med Page 2 Michael R. BayeQuestions 7, 8, and 9 are based on the following game, where firms one and two must independently decide whether to charge high or low prices. Firm One Firm Two High Price Low Price High Price (10, 10) (5, -5) Low Price (5, -5) (0, 0) 7. Which of the following are Nash equilibrium payoffs in the one-shot game? a) (0, 0) b) (5, -5) c) (-5, 5) d) (10, 10) Answer: D Difficulty: Med 8. Which of the following are the Nash equilibrium payoffs (each period) if the game is repeated 10 times? a) (0, 0) b) (5, -5) c) (-5, 5) d) (10, 10) e) none of the above Answer: D Difficulty: Med 9. Suppose the game is infinitely repeated. Then the "best" the firms could do in a Nash equilibrium is to earn per period. a) (0, 0) b) (5, -5) c) (-5, 5) d) (10, 10) e) none of the above Answer: D Difficulty: Med Managerial Economics and Business Strategy, 5e Page 310. Consider the following entry game. Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard", firm B ensures that firm A makes a loss of $1 million, but firm B only makes $1 million in profits. On the other hand, if firm B plays "soft", the new entrant takes half of the market, and each firm earns profits of $5 million. If firm A stays out, it earns zero while firm B earns $10 million. Which of the following are Nash equilibrium strategies? a) (enter, hard) and (not enter, hard) b) (enter, soft) and (not enter, soft) c) (not enter, hard) and (enter, soft) d) (enter, hard) and (not enter, soft) Answer: C Difficulty: Hard 11. Consider the following entry game. Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard", firm B ensures that firm A makes a loss of $1 million, but firm B only makes $1 million in profits. On the other hand, if firm B plays "soft", the new entrant takes half of the market, and each firm earns profits of $5 million. If firm A stays out, it earns zero while firm B earns $10 million. Which of the following are perfect equilibrium strategies? a) (enter, soft) b) (not enter, soft) c) (enter, hard) d) (not enter, hard) Answer: A Difficult [Show More]

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