650 section 12 Market Structures: Imperfect Competition
Module 65 AP Review
Check Your Understanding
- Suppose world leaders Nikita and Margaret are engaged in an
arms race and face the decision of whether to build a missile.
Answer the following questions using the information in the
payoff matrix below, which shows how each set of actions will
affect the utility of the players (the numbers represent utils
gained or lost).
Build
missile
Build missile
Margaret
Nikita
Don’t
build
missile
Don’t build
missile
8
–10 8
–10 –20
–20
0
0
Solutions appear at the back of the book.
a. Identify any Nash equilibria that exist in this game, and
explain why they do or do not exist.
b. Which set of actions maximizes the total payoff for Nikita
and Margaret?
c. Why is it unlikely that they will choose the payoff-maximizing
set of actions without some communication?
- For each of the following characteristics of an industry, explain
whether the characteristic makes it more likely that oligopolists
will play noncooperatively rather than engaging in tacit
collusion.
a. Each oligopolist expects several new firms to enter the
market in the future.
b. It is very difficult for a firm to detect whether another firm
has raised output.
c. The firms have coexisted while maintaining high prices for a
long time.
Tackle the Test: Multiple-Choice Questions
- Each player has an incentive to choose an action that, when
both players choose it, makes them both worse off. This
situation describes
a. a dominant strategy.
b. the prisoners’ dilemma.
c. interdependence.
d. Nash equilibrium.
e. tit for tat. - Which of the following types of oligopoly behavior is/are
illegal?
I. tacit collusion
II. cartel formation
III. tit for tat
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III - A situation in which each player in a game chooses the action
that maximizes his or her payoff, given the actions of the other
players, ignoring the effects of his or her action on the payoffs
received by others, is known as a:
a. dominant strategy.
b. cooperative equilibrium.
c. Nash equilibrium.
d. strategic situation.
e. prisoners’ dilemma.
4. In the context of the Thelma and Louise story in the module,
suppose that Louise discovers Thelma’s action (confess or don’t
confess) before choosing her own action.
Based on the payoff matrix provided, Louise will
a. confess whether or not Thelma confessed.
b. not confess only if Thelma confessed.
c. not confess only if Thelma didn’t confess.
d. not confess regardless of whether or not Thelma confessed.
e. confess only if Thelma did not confess.
Don’t
confess
Don’t confess
Confess
Confess
Louise gets
5-year
sentence.
Louise gets
2-year
sentence.
Louise gets
20-year
sentence.
Louise gets
15-year
sentence.
Thelma gets
5-year sentence.
Thelma gets
15-year sentence.
Thelma gets
20-year sentence.
Thelma gets
2-year sentence.
Thelma
Louise