Chapter 14/Strategy
CHAPTER 14Strategy
MULTIPLE CHOICE
Choose the one alternative that best completes the statement or answers the question.
1)In a two-player simultaneous game, if player A has a dominant strategy and player B does not, player B will
A) employ a mixed strategy.
B) choose his best strategy assuming that player A plays her dominant strategy.
C) not achieve a Nash equilibrium.
D) assume that player A does not choose her dominant strategy.
Answer: B
Diff: 0
Topic: Preventing Entry: Simultaneous Decisions
2)In a two-player simultaneous game where neither player has a dominant strategy,
A) there is never a Nash equilibrium.
B) there is only one Nash equilibrium.
C) the actual outcome can be unpredictable.
D) the actual outcome will not be a Nash equilibrium.
Answer: C
Diff: 1
Topic: Preventing Entry: Simultaneous Decisions
Figure 14.1
3)Figure 14.1 shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is true?
A) Firm A does not have a dominant strategy.
B) Firm B does not have a dominant strategy.
C) Neither firm entering is a Nash equilibrium.
D) The outcome of the game is unpredictable.
Answer: B
Diff: 1
Topic: Preventing Entry: Simultaneous Decisions
4)Figure 14.1 shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is true?
A) Firm A has a dominant strategy.
B) Firm B has a dominant strategy.
C) Neither firm entering is a Nash equilibrium.
D) The outcome of the game is unpredictable.
Answer: A
Diff: 1
Topic: Preventing Entry: Simultaneous Decisions
5)Figure 14.1 shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is true?
A) Only firm A will enter the market.
B) Only firm B will enter the market.
C) Neither firm entering is a Nash equilibrium.
D) The outcome of the game is unpredictable.
Answer: A
Diff: 1
Topic: Preventing Entry: Simultaneous Decisions
6)Figure 14.1 shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is true?
A) Since firm B has no dominant strategy, its decision is unpredictable.
B) Since firm B's decision is unpredictable, firm A's decision is unpredictable.
C) Neither firm entering is a Nash equilibrium.
D) Firm B will not enter because it knows firm A will.
Answer: D
Diff: 2
Topic: Preventing Entry: Simultaneous Decisions
7)Figure 14.1 shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, what will happen if the government offers a $30 subsidy to airlines that serve this route?
A) Both firms will enter profitably.
B) Firm A will decide not to enter since firm B will.
C) Firm B is still better off not entering.
D) Neither firm will have a dominant strategy.
Answer: A
Diff: 1
Topic: Preventing Entry: Simultaneous Decisions
8)Figure 14.1 shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, how many Nash equilibria are there?
A) 0
B) 1
C) 2
D) It cannot be determined.
Answer: B
Diff: 1
Topic: Preventing Entry: Simultaneous Decisions
9)Figure 14.1 shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, what happens if the government imposes a $20 per firm tax on firms that service this route?
A) Neither firm has a dominant strategy.
B) Not entering is a dominant strategy for both firms.
C) Neither firm entering is a Nash equilibrium.
D) Only firm A will enter.
Answer: A
Diff: 2
Topic: Preventing Entry: Simultaneous Decisions
10)Figure 14.1 shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, and the government imposes a $20 per firm tax on firms that service this route, which of the following maximizes the firms' joint profits?
A) Neither firm services the route.
B) Firm A offers firm B $20 to not enter.
C) Both firms will service this route.
D) Firm B offers firm A $30 to not enter.
Answer: B
Diff: 2
Topic: Preventing Entry: Simultaneous Decisions
Figure 14.2
11)Figure 14.2 shows the payoff to two gasoline stations, A and B, deciding to operate in an isolated town. If firm A chooses its strategy first, then
A) firm A will not enter.
B) firm B's entry is blockaded.
C) both firms will enter.
D) firm A will enter and firm B will not.
Answer: C
Diff: 0
Topic: Preventing Entry: Sequential Decisions
12)Figure 14.2 shows the payoff to two gasoline stations, A and B, deciding to operate in an isolated town. Suppose a $60 fee is required to enter the market. If firm A chooses its strategy first, then
A) firm A will not enter.
B) neither firm will enter.
C) both firms will enter.
D) firm A will enter and firm B will not.
Answer: D
Diff: 2
Topic: Preventing Entry: Sequential Decisions
13)Figure 14.2 shows the payoff to two gasoline stations, A and B, deciding to operate in an isolated town. Suppose a $30 fee is required to enter the market. If firm A chooses its strategy first, then
A) firm A will not enter.
B) neither firm will enter.
C) both firms will enter.
D) firm A will enter and firm B will not.
Answer: C
Diff: 1
Topic: Preventing Entry: Sequential Decisions
14) If only one firm operates in a market, and a potential entrant is blockaded from
entering the market, then the incumbent firm must
A)have acted to prevent entry.
B)be pricing where price equals marginal cost.
C)be a natural monopoly.
D)be the Stackelberg leader.
Answer: C
Diff: 1
Topic: Preventing Entry: Sequential Decisions
15)An incumbent's threat to retaliate after a potential competitor enters the market will be taken seriously by potential competitors if
A) the incumbent can still earn a profit after carrying out the threat.
B) the incumbent earns greater profit carrying out the threat than by accommodating entry.
C) the potential entrant cannot earn a profit if the threat is carried out.
D) the potential entrant's profit exceeds the incumbent's if the threat is carried out.
Answer: B
Diff: 2
Topic: Preventing Entry: Sequential Decisions
16)With regard to preventing entry, if identical firms act simultaneously,
A) they cannot credibly threaten each other.
B) they will all incur losses.
C) only one firm will enter the market.
D) none of them would enter the market.
Answer: A
Diff: 2
Topic: Preventing Entry: Sequential Decisions
17)In the Stackelberg model, the leader has a first-mover advantage because it
A) has lower costs than the follower.
B) commits to producing a larger quantity.
C) reacts to the follower's decision.
D) differentiates its output.
Answer: B
Diff: 1
Topic: Preventing Entry: Sequential Decisions
18)If a Cournot duopolist announced that it will double its output
A) it becomes the leader.
B) the other firm does not view the announcement as credible.
C) the other firm will shut down.
D) the other firm will double output also.
Answer: B
Diff: 1
Topic: Preventing Entry: Sequential Decisions
19)If a Cournot duopolist announced that it will double its output, the other firm does not view the announcement as credible because
A) the announcing firm's profits will fall if it carries out the threat.
B) the other firm's profits will fall if the announcing firm carries out the threat.
C) the other firm's profits will rise if the announcing firm carries out the threat.
D) the other firm will double output also.
Answer: A
Diff: 1
Topic: Preventing Entry: Sequential Decisions
20)If an incumbent faces an identical potential entrant with no costs of entry, the incumbent will
A) produce the Cournot duopolist level of output.
B) produce the Stackelberg leader level of output.
C) set price equal to marginal cost.
D) shut down.
Answer: B
Diff: 1
Topic: Preventing Entry: Sequential Decisions
21)If an incumbent cannot commit and faces an identical potential entrant with relatively high fixed costs that are below the level where entry is blockaded, the incumbent will
A) produce the Cournot duopolist level of output.
B) produce the Stackelberg leader level of output.
C) set price equal to marginal cost.
D) produce a level of output that is greater than the Stackelberg leader level of output.
Answer: D
Diff: 1
Topic: Preventing Entry: Sequential Decisions
22) One firm previously operated as a monopoly. Now, one potential entrant exists.
Consumers would prefer
A)entry, and the firms to split the output equally.
B)no entry, and for the incumbent to produce the Stackelberg leader level of output.
C)entry, and for the incumbent to produce the Stackelberg leader level of output.
D)no entry, and the monopoly to continue.
Answer: C
Diff: 1
Topic: Preventing Entry: Sequential Decisions
23)Incumbents are unaffected by fixed costs of entry while potential entrants are affected by them because
A) for potential entrants the cost is avoidable, while for the incumbent, it is not.
B) fixed costs will be greater for the potential entrant than for the incumbent.
C) fixed costs are zero for the incumbent.
D) incumbents will act to prevent entry at all costs.
Answer: A
Diff: 1
Topic: Preventing Entry: Sequential Decisions
24)Regarding fixed costs of entry,
A) both incumbents and potential entrants are affected by them.
B) potential entrants are affected by them while incumbents are not.
C) neither incumbents nor potential entrants consider them.
D) incumbent's decisions are affected by them, while the potential entrant ignores them.
Answer: B
Diff: 1
Topic: Preventing Entry: Sequential Decisions
Figure 14.3
25)Figure 14.3 shows the payoff matrix facing an incumbent firm and a potential entrant. The potential entrant cannot earn a profit if the incumbent
A) chooses the Cournot level of output.
B) chooses the Stackelberg leader level of output.
C) shuts down.
D) deters entry.
Answer: D
Diff: 0
Topic: Preventing Entry: Sequential Decisions
26)Figure 14.3 shows the payoff matrix facing an incumbent firm and a potential entrant. Assuming a fixed cost of entry, the incumbent will deter entry because
A) it is more profitable than accommodating entry.
B) it increases consumer surplus.
C) the potential entrant winds up with zero profit.
D) the incumbent would earn zero profit if it accommodated entry.
Answer: A
Diff: 1
Topic: Preventing Entry: Sequential Decisions
27)Figure 14.3 shows the payoff matrix facing an incumbent firm and a potential entrant. Assuming a fixed cost of entry, the outcome will be that the incumbent
A) deters entry.
B) chooses the Stackelberg leader level of output but the potential entrant does not enter anyway.
C) chooses the Stackelberg leader level of output and the potential entrant enters.
D) deters entry and earns zero profit.
Answer: A
Diff: 1
Topic: Preventing Entry: Sequential Decisions
28)Figure 14.3 shows the payoff matrix facing an incumbent firm and a potential entrant. If the fixed cost of entry were to increase, which of the following would occur?
A) The incumbent chooses the Cournot level of output.
B) The incumbent shuts down.
C) The entry-deterring level of output rises.
D) The entry-deterring level of output falls.
Answer: D
Diff: 2
Topic: Preventing Entry: Sequential Decisions
29)For an incumbent, investing in plant and equipment that reduces marginal cost while raising total cost makes sense if
A) the incumbent's profit from producing the entry-deterring level of output after making the investment exceeds the profit the firm would earn if it didn't make the investment and entry occurred.
B) the incumbent's profit from producing the entry-deterring level of output after making the investment is positive.
C) the potential entrant cannot enter the market profitably after the incumbent makes the investment and produces the entry-deterring level of output.
D) the potential entrant would not enter the market anyway.
Answer: A
Diff: 2
Topic: Creating and Using Cost Advantages
30)"Learning by doing" allows an incumbent firm to deter entry because
A) it raises the incumbent's marginal cost.
B) it lowers the incumbent's marginal cost.
C) it shifts the demand for the good rightward.
D) it is only available to incumbents and not future entrants.
Answer: B
Diff: 1
Topic: Creating and Using Cost Advantages
31)An incumbent's gain from "learning by doing" is diminished if learning is rapid because
A) the incumbent gets too quick a head start.
B) future entrants can catch up quickly.
C) the incumbent will not bother to learn cost-saving techniques.
D) other firms would not enter anyway.
Answer: B
Diff: 1
Topic: Creating and Using Cost Advantages
32)An incumbent's gain from "learning by doing" is diminished if learning is slow because
A) the incumbent gets too quick a head start.
B) future entrants cannot catch up.
C) the incumbent will not bother to learn cost-saving techniques.
D) the early cost reduction enjoyed by the incumbent is very small.
Answer: D
Diff: 1
Topic: Creating and Using Cost Advantages
33)Which of the following would not represent an incumbent's strategy to deter entry?
A) building excess capacity
B) limit pricing
C) patents
D) restricting output
Answer: D
Diff: 1
Topic: Creating and Using Cost Advantages
34)Recently, the American Institute of Certified Public Accountants changed the educational requirements for certification from 120 college credits to 150 college credits. This policy change represents
A) an increased cost to potential entrants.
B) a reduction in costs for incumbents.
C) an increased cost for incumbents.
D) accommodated entry.
Answer: A
Diff: 1
Topic: Creating and Using Cost Advantages
35) An incumbent firm lobbying government officials to require any new firms that
enter the market to include costly pollution-reducing devices, is an example of
A)learning by doing.
B)raising all firms' costs.
C)raising rivals' costs.
D)limit pricing.
Answer: C
Diff: 1
Topic: Creating and Using Cost Advantages
36)The monopoly can shift the demand for its product rightward by
A) accommodating entry.
B) advertising new uses for its product.
C) moving along the learning curve.
D) All of the above.
Answer: B
Diff: 1
Topic: Advertising
37)A firm will increase its spending on advertising until
A) it has monopolized the market.
B) it has deterred all future entry.
C) the marginal benefit of advertising is zero.
D) the marginal benefit of advertising equals the marginal cost of advertising.
Answer: D
Diff: 0
Topic: Advertising
38)If identical firms sell an undifferentiated product, advertising is likely to be
A) used to attack the rivals' products.
B) collectively undertaken by the industry group.
C) strategically aimed at deterring entry.
D) focused on secret ingredients.
Answer: B
Diff: 0
Topic: Advertising
39)A firm's advertising can help rivals
A) if it focuses on a general problem that the product addresses.
B) if it focuses on a secret ingredient that only this firm possesses.
C) if rivals do not advertise.
D) if rivals advertise.
Answer: A
Diff: 1
Topic: Advertising
40)In a duopoly, if advertising only takes customers from rivals rather than attracting new customers, then
A) neither firm will advertise.
B) there is no dominant strategy.
C) the result is similar to the prisoners' dilemma.
D) only one firm will advertise.
Answer: C
Diff: 2
Topic: Advertising
41)In a duopoly, if advertising only takes customers from rivals rather than attracting new customers, then
A) the Nash equilibrium does not maximize the joint payoff.
B) the Nash equilibrium maximizes the joint payoff.
C) firms need not collude to maximize their joint payoff.
D) there is no dominant strategy.
Answer: A
Diff: 2
Topic: Advertising
42)In a duopoly, if advertising only takes customers from rivals rather than attracting new customers, then
A) the Nash equilibrium maximizes the joint payoff.
B) firms must collude to maximize the joint payoff.
C) the Nash equilibrium is that neither firm advertises.
D) there is no dominant strategy.
Answer: B
Diff: 2
Topic: Advertising
43)In a duopoly, if advertising only takes customers from rivals rather than attracting new customers, joint profits are maximized when
A) both firms advertise.
B) neither firm advertises.
C) the Nash equilibrium is achieved.
D) each firm plays its dominant strategy.
Answer: B
Diff: 2
Topic: Advertising
44) In a duopoly, if advertising only takes customers from rivals rather than attracting
new customers, the two firms would prefer
A)the Nash equilibrium level of advertising.
B)to advertise more than the current level.
C)to not change the level of advertising.
D)an advertising ban.
Answer: D
Diff: 1
Topic: Advertising
TRUE/FALSE/EXPLAIN
1)In a simultaneous game where both players prefer doing the opposite of what the opponent does, a Nash equilibrium does not exist.
Answer: False. There are two Nash equilibria. In each, the two players are doing the opposite of one another. The problem is, it is difficult to know which equilibrium is achieved without some form of collusion.
Diff: 1
Topic: Preventing Entry: Simultaneous Decisions
2)If an incumbent threatens to retaliate against entry, but its profits are greater under accommodated entry than under the proposed threat, potential entrants will ignore the threat.
Answer: True. The threat is not credible since the incumbent firm is better off accommodating entry than retaliating.
Diff: 1
Topic: Preventing Entry: Sequential Decisions
3)Fixed costs of entry create an advantage for potential entrants since incumbents have already made these expenditures while potential entrants can avoid these costs.
Answer: False. The advantage is to the incumbent. The incumbent ignores the fixed entry cost since it is a sunk cost. For the potential entrant, the fixed entry cost can be avoided if entry does not occur. Thus, the fixed entry cost is an added expense to entrants.
Diff: 1
Topic: Preventing Entry: Sequential Decisions
4)Investments that lower a firm's marginal cost discourage entry.
Answer: True. By lowering marginal cost, a firm commits to producing large levels of output. Thus, the incumbent's threat to retaliate against entry is credible.