Question 3: (7 points)
Part (A): 2 points
These are points for just being able to read the payoff matrix in this game. Since we know
that Firm 1 is choosing Costly Ads, then you must focus on the top half of the matrix. If
Firm 2 is choosing Cheap Ads, then the game ends in the top right square.i. 1 point: $250
ii. 1 point: $75Part (B): 2 points
The key here is obviously to know what it means to have a dominant strategy. A dominant
strategy is one that is always superior to the other option, no matter what the rival firm is
doing. For example, if Firm 2 plays Costly Ads, Firm 1 should do the same because $100
(Costly Ads) beats $75 (Cheap Ads). If Firm 2 were to play Cheap Ads, Firm 1 would play
Costly Adsbecause $250 (Costly Ads) beats $200 (Cheap Ads). So Firm 1 would always play
Costly Ads. The same is true of Firm 2.i. 1 point: Yes, playing Costly Adsis a dominant strategy for both firms.
ii. 1 point: Because, no matter what the rival firm is doing, this strategy always beats
Cheap Ads.Part (C): 1 point
The outcome is that both firms earn $100 because, without collusion, both will play the
dominant strategy, Costly Ads.Part (D): 2 points
A prisoners’ dilemma is a situation where playing the dominant strategy produces an out-
come that, in hindsight, could have been better for both if the firms could have colluded
and coordinated their strategies.1 point: Yes, it is an example of a prisoners’ dilemma.1 point: Both firms could have improved profits ($200 each versus $100 each) by colluding
with a selection of Cheap Ads.Scoring and Interpretation
AP Microeconomics Practice Exam 2
Multiple-Choice Questions:
Number of correct answers: ______
Number of incorrect answers: ______
Number of blank answers: ______Did you complete this part of the test in the allotted time? Yes/NoFree-Response Questions:- __/11
- __/7
- __/7
Did you complete this part of the test in the allotted time? Yes/No204 › Step 5. Build Your Test-Taking Confidence
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