# Game Theory Strategic Decision Making and Behavioral Economics

**Chapter 11**

**
Game Theory, Strategic Decision Making, and Behavioral Economics
**

**True / False Questions**

1. Game theory tells how to win at games of chance.

True False

2. Strategic reasoning applies to situations where decisions are
interdependent.

True False

3. Game theory suggests that when we act in our own immediate best
interest, this leads to the best of all possible outcomes.

True False

4. Game theory replaces the standard supply and demand model used by
economists.

True False

5. The prisoner's dilemma is a theoretical tool with little in the way of
practical applications.

True False

6. The prisoner's dilemma provides an explanation of why detectives
interview suspects separately in television crime shows.

True False

7. The payoff matrix shows the outcome for only one player in a game
situation.

True False

8. The Code of Silence attributed to the Mafia is one way to avoid the
prisoner's dilemma.

True False

9. In experiments testing game theory, cheap talk does not affect the
outcome of a game.

True False

10. A dominant strategy means that one player will always win the game.

True False

11. Loss aversion means that people are made worse off by losses.

True False

12. "Framing effects" suggests that the wording of questions affects
people's survey responses.

True False

13. When some people do not act rationally, others can profit from that
irrationality.

True False

14. "Leaving money on the table" refers to the potential gains to be made
when people act irrationally.

True False

**Multiple Choice Questions**

15. Formal economic reasoning applied to situations in which decisions are
interdependent is called:

A. economic decision making.

B. monopolistic decision making.

C. competitive decision making.

D. game theory.

16. Game theory is designed to study situations where each agent's
decisions are:

A. interdependent.

B. independent.

C. constrained.

D. uninformed.

17. Game theory:

A. is more restrictive than the standard supply/demand model.

B. is more flexible than the standard supply/demand model.

C. replaces the standard supply/demand model.

D. replaces the monopoly model.

18. Game theory:

A. is the best model for perfect competition.

B. replaces the standard supply/demand model.

C. is the best model for monopoly.

D. complements the standard supply/demand model.

19. The formal game theory model assumes that:

A. markets are contestable when no barriers to entry exists.

B. the dominant firm in the industry will set product price and other firms
will follow.

C. each player tries to anticipate the reaction of its rivals when making a
decision.

D. each player ignores the possible reaction of its rivals when making a
decision.

20. Taking explicit account of a rival's expected response to a decision
you are making is called:

A. economic decision making.

B. monopolistic decision making.

C. strategic decision making.

D. competitive decision making.

21. A screening question is structured:

A. to screen unqualified applicants for a job.

B. to extract information from prisoners.

C. to alter respondent's behavior.

D. to reveal strategic information about the person who answers.

22. The prisoner's dilemma is a well-known game in which:

A. cooperation is always the best independent action.

B. independent action is not necessarily the best joint action, but is the
best independent action.

C. players always cheat.

D. players never cheat.

23. The prisoner's dilemma is an example of:

A. a non-cooperative game.

B. a cooperative game.

C. a non-strategic game.

D. a sequential game.

24. The values in a payoff matrix show:

A. the gains and losses of decisions for each player regardless of
decisions of other players.

B. the best possible outcomes of various players in a game.

C. the gains and losses of decisions for each player given the decisions of
other players.

D. the worst possible outcomes of various players in a game.

25. The matrix below represents a payoff matrix for a:

A. zero sum game.

B. non-zero sum game.

C. repeated game.

D. sequential game.

26. The matrix below represents a payoff matrix for a:

A. zero sum game.

B. non-zero sum game.

C. repeated game.

D. sequential game.

27. The equilibrium solution for the payoff matrix below is:

A. 1, 1

B. 2, 0

C. 0, 2

D. -1, -1

28. The equilibrium solution for the payoff matrix below is:

A. -1, -1

B. 5, 0

C. 2, 2

D. 10, 1

29. Consider the payoff matrix below facing two criminals.

Their options are either to confess or not to confess. The payoffs
represent the number of years each will spend in jail. The Nash equilibrium
for the above payoff matrix is:

A. A: 20 yrs, B: 20 yrs

B. A: 50 yrs, B: 2 yrs

C. A: 2 yrs, B: 50 yrs

D. A: 10 yrs, B: 10 yrs

30. If individuals can credibly cooperate and split the gains, which payoff
is the most likely?

A. 1, 50

B. 1, 1

C. 2, 1

D. 5. 5

31. The National Hockey League locked out the hockey players in an effort
to negotiate a salary cap with the players' union. A cap would limit the
payroll of each team. League officials acknowledged that the teams have
brought the problem on themselves by overspending and overpaying some
players in an effort to compete for the best players. Why would the teams
have caused this problem for themselves?

A. They used explicit collusion instead of implicit collusion.

B. They tried to create a contestable market and now suffer because there
are no barriers to entry.

C. They were caught in the logic of the prisoner's dilemma in which each
player maximizing his own self-interest leads to an outcome that is worse
off for everyone.

D. They tried to create a cartel and suffered the consequences of too much
collusion.

32. Don and Dana have both been accused of insider trading. Don knows that
if he confesses while Dana keeps silent, he will receive a one-month jail
sentence. He also knows that if Dana confesses and he keeps silent, he will
receive a twelve month jail sentence. If neither of them confesses, there
will be insufficient evidence to convict either of insider trading, but
there is enough evidence to convict each of them individually of
obstructing justice, which carries a 2-month sentence. If both of them
confess, they will both serve a three-month jail sentence. This situation
is:

A. an example of cartel behavior.

B. an application of the prisoner's dilemma.

C. not realistic because those accused of insider trading always keep
silent.

D. not realistic because those accused of insider trading are never
encouraged to confess.

33. Don and Dana have both been accused of insider trading. Don knows that
if he confesses while Dana keeps silent, he will receive a one-month jail
sentence. He also knows that if Dana confesses and he keeps silent, he will
receive a twelve month jail sentence. If neither of them confesses, there
will be insufficient evidence to convict either and they will serve no
time. If both of them confess, they will both serve a three-month jail
sentence. Don's best strategy is to:

A. confess in order to avoid the possibility of a one-year jail sentence.

B. confess because then he will not have to serve a jail sentence.

C. not confess because keeping silent ensures that they will not have to
serve jail sentences.

D. not confess because doing so guarantees a jail sentence.

34. TV crime shows illustrate the prisoner's dilemma when:

A. the judge ponders the sentence for the crimes.

B. the prisoners go to prison for the first time.

C. the police interview suspects in the same room.

D. the police interview suspects in different rooms.

35. When suspects are interviewed in different rooms they do not know what
the other suspects are going to do and hence seek the best deal for
themselves. This illustrates:

A. that criminals are irrational.

B. the idea of a cooperative game.

C. the idea of a non-cooperative game.

D. that the police are not taking into account the suspects' rights.

36. In standard game theory, cheap talk:

A. will fool all players into cooperating.

B. doesn't affect the outcome of the game.

C. benefits only trustworthy people.

D. changes the pay-offs.

37. What is true about the payoff matrix below?

A. Players cannot jointly do better by cooperating.

B. Players cannot escape the 0-0 payoff.

C. Player A is better off lying that he will choose column 1 and then
choosing column 2.

D. Player B is better off lying that he will choose row 1 and then choosing
row 2.

38. What is true about the payoff matrix below?

A. Only player A has a dominant strategy.

B. Only player B has a dominant strategy.

C. Both players A and B have dominant strategies.

D. Neither player A nor B has a dominant strategy.

39. What is true about the payoff matrix below?

A. Only player A has a dominant strategy.

B. Only player B has a dominant strategy.

C. Both player A and B have dominant strategies.

D. Neither player A nor B has a dominant strategy.

40. A strategy that is preferred by an individual regardless of an
opponent's decision is called:

A. a Nash equilibrium.

B. a Vickery position.

C. a framing strategy.

D. a dominant strategy.

41. A set of strategies in which no player can improve his or her payoff by
changing his own action is called:

A. a Nash equilibrium.

B. a Vickery position.

C. a framing strategy.

D. a dominant strategy.

42. A Nash equilibrium is:

A. the payoff that maximizes joint payoff.

B. the output level that minimizes average total cost.

C. the strategy that maximizes the outcome of all the players.

D. the set of strategies such that no player can improve their position by
changing his own action.

43. A Nash equilibrium assumes that a player follows his best strategy:

A. given that the other players follow a random strategy.

B. given that the other players follow their worst strategy.

C. given that the other players follow their best strategy.

D. regardless of what other players do.

44. A Nash equilibrium refers to a:

A. cooperative game.

B. a sequential game.

C. a repeated game.

D. a non-cooperative game.

45. The Nash equilibrium in the payoff matrix below is:

A. -1, -1.

B. -1, 1.

C. 1, -1.

D. there is no Nash equilibrium.

46. Consider the payoff matrix below facing two criminals.

Their options are either to confess or not to confess. Given this
information:

A. A has a dominant strategy but B does not.

B. B has a dominant strategy but A does not.

C. Both A and B have dominant strategies.

D. Neither A nor B have dominant strategies.

47. Consider the payoff matrix below facing two firms selling the same
product in the same market. They must choose whether to price the good at a
high or low price.

Given this information:

A. A has a dominant strategy but B does not.

B. B has a dominant strategy but A does not.

C. Both A and B have dominant strategies.

D. Neither A nor B have dominant strategies.

Consider the payoff matrix below facing Harry and Sally when each chooses to go to the coffee shop listed. Harry wants to avoid Sally at the coffee shop and is not happy when Sally ends up in the same shop he chooses. Sally would like to see Harry, so she is not happy when Harry ends up in a different coffee shop from her.

48. Given this payoff:

A. A has a dominant strategy but B does not.

B. B has a dominant strategy but A does not.

C. Both A and B have dominant strategies.

D. Neither A nor B has a dominant strategy.

49. Assuming that Sally and Harry go to the coffee shop each day, what is
Harry's best strategy?

A. Go to Starbucks because Sally won't go there.

B. Go to Dunkin Donuts because Sally won't go there.

C. Go to Starbucks one day and Dunkin Donuts the next, and maintain that
pattern.

D. Randomly choose between going to Starbucks and Dunkin Donuts.

Consider the payoff matrix below facing Harry and Sally when each chooses to go to the coffee shop listed. Both Harry and Sally would like to meet each other but are shy about asking one another out on a date.

50. What is Harry's best strategy?

A. Harry has no best strategy.

B. Go to Dunkin Donuts.

C. Go to Starbucks.

D. Stay at home.

51. If Harry and Sally go to the coffee shop every day, what is Harry's
best strategy?

A. Harry has no best strategy.

B. Choose one shop to go to and keep going to it.

C. Randomly choose between the two shops and hope Sally will end up there
too.

D. Stay at home.

52. The potential for return to cooperation is greatest in:

A. zero sum games.

B. repeated games.

C. sequential games.

D. simultaneous move games.

53. A sequential game is one where:

A. players act together to achieve a common goal.

B. players take turns making moves/decisions.

C. players make their moves/decision at the same time.

D. there is never a winner if players act rationally.

54. A simultaneous game is one where:

A. players act together to achieve a common goal.

B. players take turns making moves/decisions.

C. players make their moves/decisions at the same time.

D. there is never a winner if players act rationally.

55. In a sequential game:

A. the first player always has the advantage.

B. the second player always has the advantage.

C. neither player ever has any advantage.

D. either player could have the advantage depending on the game.

56. Which of the following games has a first-mover advantage?

A. Tic tac toe.

B. Prisoner's dilemma.

C. Rock, paper, scissors.

D. Vickrey auction.

57. The best strategy for each player if this game is repeated is:

A. his or her dominant strategy.

B. a mixed strategy.

C. to cheat.

D. to collaborate.

58. A mixed strategy is most useful:

A. in sequential games.

B. in simultaneous games.

C. in both sequential and simultaneous games.

D. only when the outcome is random.

59. In a mixed strategy:

A. the payoffs are mixed during each round.

B. the order of who chooses first is mixed.

C. moves can be predicted.

D. players try to avoid demonstrating a pattern.

60. A mixed strategy means a player:

A. makes random moves in a sequential game.

B. makes random moves in a simultaneous game.

C. mixes random moves with nonrandom moves.

D. mixes optimal and suboptimal moves to confuse her opponent.

61. Backward induction means a player:

A. studies his opponent's moves to figure out what he did wrong.

B. studies what other players have done in similar situations.

C. studies the rules of the game to determine how to make her next move.

D. works from the desired outcome to determine the decisions that lead to
that outcome.

62. Backward induction will not lead to a determinate sequence of actions
for:

A. games with dominant strategies.

B. sequential games.

C. simultaneous move games.

D. mixed strategy games.

63. Optimal rollback strategies are most difficult in:

A. sequential games.

B. simultaneous games.

C. zero-sum games.

D. repeated games.

64. In the 2/3s game, in which you are to choose a number between 1 and 100
which is 2/3^{rd}s of the average chosen by the group, the rollback
strategy is to:

A. choose a number randomly.

B. be the last person to choose a number.

C. be the first person to choose a number.

D. choose zero.

65. The rationality assumptions of game theory:

A. always hold in the real world.

B. never hold in the real world.

C. sometimes hold in the real world.

D. make game theory irrelevant.

66. Most games in real life:

A. require intuition, common sense and calculations.

B. require a mixed strategy.

C. require a rollback strategy.

D. have a best solution.

67. A Nash equilibrium:

A. always exists.

B. is always reached in game playing.

C. may sometimes not be reached because people assume others react
rationally.

D. may sometimes not be reached because people do not assume that others
act rationally.

68. Informal game theory:

A. relies on deductive logic.

B. shows how the Nash equilibrium is reached.

C. assumes people calculate their optimal strategy.

D. considers how people actually think and behave.

69. In a standard sealed bid auction, the person who bids:

A. the highest gets the object of the bid.

B. the second highest gets the good and pays that price.

C. the second highest has the option to receive the good if she pays the
price of the highest bidder.

D. the highest gets the object but pays the price bid by the second highest
bidder.

70. In a sealed bid Vickery auction, the person who bids:

A. the highest gets the object of the bid at the price he or she bid.

B. the second highest bidder gets the good and pays that price.

C. the second highest bidder has the option to receive the good if he or
she pays the price of the highest bidder.

D. the highest bidder gets the object but pays the price bid by the second
highest bidder.

71. In a standard highest sealed bid auction, a bidder's best strategy:

A. is to bid what he would be willing to pay.

B. is to bid slightly more than what he or she expects the second highest
bidder to bid.

C. always ensures that the person who wants it the most will get the bid.

D. requires the bidder to understand game theory to bid properly.

72. In a Vickrey auction, a bidder's strategy:

A. is to bid what he would be willing to pay.

B. is to bid just slightly more than the next bidder.

C. is to bid just below the next highest bidder.

D. requires the bidder to understand game theory to bid properly.

73. Behavioral economics helps explain:

A. why people are rational.

B. why people are selfish.

C. why being selfish is rational.

D. the degree to which people are altruistic.

74. Assuming the standard assumptions, in a repeated play ultimatum game,
the first player's best strategy in the last round is to:

A. split the money evenly with a bit more going to yourself.

B. give the most money to the opponent.

C. give the most money to yourself.

D. take all the money for yourself.

75. Assuming the standard assumptions, in a single play ultimatum game, the
second player's best strategy in the last round is to:

A. reject all but evenly split offers.

B. accept any offer greater than zero.

C. accept only those offers over 50 percent of the total.

D. reject all offers.

76. Assuming the standard assumptions, in an infinitely long repeated play
ultimatum game, the second player's best strategy is most likely to:

A. reject offers that appear unfair.

B. accept any offer.

C. accept only those offers over 50 percent of the total.

D. reject all offers.

77. If people are given one of two items of the same value and are given
the choice to exchange it:

A. about fifty percent will make the change since half will prefer the
other item.

B. everyone will keep the first item since it was free.

C. everyone will trade since people like to trade.

D. most will keep the original item since they are averse to losing what
they have.

78. Loss aversion in behavioral economics refers to how people are averse
to:

A. losses in a game of chance such as poker.

B. stock market losses.

C. losing something a person already has.

D. the loss of something of high value.

79. If two choices are the same but one is presented in a positive manner
and one in a negative context, people:

A. are rational and respond the same.

B. respond the same because of loss aversion.

C. respond differently because of loss aversion.

D. respond differently because of the framing effects.

80. The fact that airlines offer off-peak airline discounts rather than
peak-time surcharges is an example of:

A. loss aversion.

B. framing effects.

C. non-zero sum game.

D. irrational behavior.

81. Why might the economy as a whole conform to the predictions of a model
even if not all people are rational?

A. The standard model doesn't assume rationality.

B. Those people who are rational will profit from those who are not.

C. Those people who are irrational will profit from those who are not.

D. It won't; for the standard model to work, all people must be rational.

Chapter 11 Game Theory, Strategic Decision Making, and Behavioral Economics
Answer Key

**True / False Questions**

1. Game theory tells how to win at games of chance.

__FALSE__

Game theory is about using reasoning when decisions are interdependent.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-1
Topic: Strategic Reasoning
*

2. Strategic reasoning applies to situations where decisions are
interdependent.

__TRUE__

This is the definition of strategic reasoning.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Easy
Learning Objective: 11-1
Topic: Strategic Reasoning
*

3. Game theory suggests that when we act in our own immediate best
interest, this leads to the best of all possible outcomes.

__FALSE__

Game theory suggests exactly the opposite. Cooperation is frequently better than acting in accord with our immediate self-interest.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-2
Topic: Strategic Reasoning
*

4. Game theory replaces the standard supply and demand model used by
economists.

__FALSE__

Game theory complements rather than replaces the standard economic models.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Hard
Learning Objective: 11-2
Topic: Strategic Reasoning
*

5. The prisoner's dilemma is a theoretical tool with little in the way of
practical applications.

__FALSE__

The prisoner's dilemma is useful in many real world situations.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Easy
Learning Objective: 11-3
Topic: Prisoner's Dilemma
*

6. The prisoner's dilemma provides an explanation of why detectives
interview suspects separately in television crime shows.

__TRUE__

By interviewing suspects separately the police can offer a lighter sentence to the one who confesses first, thereby breaking down the cooperation between the suspects.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Analysis
Difficulty: Medium
Learning Objective: 11-3
Topic: Prisoner's Dilemma
*

7. The payoff matrix shows the outcome for only one player in a game
situation.

__FALSE__

A payoff matrix shows the outcome of each player in the game.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Easy
Learning Objective: 11-4
Topic: Payoff Matrices
*

8. The Code of Silence attributed to the Mafia is one way to avoid the
prisoner's dilemma.

__TRUE__

The central element of the Code of Silence is to ensure that the suspects know their partners will not confess.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Analysis
Difficulty: Medium
Learning Objective: 11-4
Topic: Prisoner's Dilemma
*

9. In experiments testing game theory, cheap talk does not affect the
outcome of a game.

__FALSE__

While in standard game theory, cheap talk has no effect, in experiments cheap talk has been shown to be a way to induce individuals to coordinate their actions and establish trust.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Analysis
Difficulty: Easy
Learning Objective: 11-4
Topic: Strategic Reasoning
*

10. A dominant strategy means that one player will always win the game.

__FALSE__

A dominant strategy is simply the best strategy for a player regardless of the opponent's move.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Analysis
Difficulty: Hard
Learning Objective: 11-4
Topic: Dominant and Mixed Strategies
*

11. Loss aversion means that people are made worse off by losses.

__FALSE__

Loss aversion means that people value things that they actually possess more than things that they don't.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Hard
Learning Objective: 11-5
Topic: Behavioral Economics
*

12. "Framing effects" suggests that the wording of questions affects
people's survey responses.

__TRUE__

People will respond differently to positively and negatively worded questions.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-5
Topic: Behavioral Economics
*

13. When some people do not act rationally, others can profit from that
irrationality.

__TRUE__

Irrational behavior means that something was not maximized and the extra amount not obtained by that behavior allows for profit opportunities.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Analysis
Difficulty: Hard
Learning Objective: 11-6
Topic: Behavioral Economics
*

14. "Leaving money on the table" refers to the potential gains to be made
when people act irrationally.

__TRUE__

When people do not act fully rationally, there are unrealized gains. Those gains are called "money on the table" and may be captured by someone else.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Hard
Learning Objective: 11-6
Topic: Behavioral Economics
*

**Multiple Choice Questions**

15. Formal economic reasoning applied to situations in which decisions are
interdependent is called:

A. economic decision making.

B. monopolistic decision making.

C. competitive decision making.

** D.**
game theory.

See the definition of game theory in the text.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Knowledge
Difficulty: Easy
Learning Objective: 11-1
Topic: Strategic Reasoning
*

16. Game theory is designed to study situations where each agent's
decisions are:

** A.**
interdependent.

B. independent.

C. constrained.

D. uninformed.

Game theory is best applied to strategic thinking. This is when decisions are interdependent.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-1
Topic: Strategic Reasoning
*

17. Game theory:

A. is more restrictive than the standard supply/demand model.

** B.**
is more flexible than the standard supply/demand model.

C. replaces the standard supply/demand model.

D. replaces the monopoly model.

Game theory examines the assumptions behind the standard supply/demand model, and is therefore more flexible.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Analysis
Difficulty: Medium
Learning Objective: 11-1
Topic: Strategic Reasoning
*

18. Game theory:

A. is the best model for perfect competition.

B. replaces the standard supply/demand model.

C. is the best model for monopoly.

** D.**
complements the standard supply/demand model.

The reasoning of game theory is consistent with the supply/demand model.

BLOOM'S TAXONOMY: Analysis

Difficulty: Medium

Learning Objective: 11-1

Topic: Strategic Reasoning

19. The formal game theory model assumes that:

A. markets are contestable when no barriers to entry exists.

B. the dominant firm in the industry will set product price and other firms
will follow.

** C.**
each player tries to anticipate the reaction of its rivals when making a
decision.

D. each player ignores the possible reaction of its rivals when making a decision.

The key assumption of game theory is interdependent choices.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Easy

Learning Objective: 11-1

Topic: Strategic Reasoning

20. Taking explicit account of a rival's expected response to a decision
you are making is called:

A. economic decision making.

B. monopolistic decision making.

** C.**
strategic decision making.

D. competitive decision making.

See the definition of strategic decision making in the text.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Easy

Learning Objective: 11-1

Topic: Strategic Reasoning

21. A screening question is structured:

A. to screen unqualified applicants for a job.

B. to extract information from prisoners.

C. to alter respondent's behavior.

** D.**
to reveal strategic information about the person who answers.

See the definition of a screening question in the text.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-1

Topic: Strategic Reasoning

22. The prisoner's dilemma is a well-known game in which:

A. cooperation is always the best independent action.

** B.**
independent action is not necessarily the best joint action, but is the
best independent action.

C. players always cheat.

D. players never cheat.

In the prisoner's dilemma game, cooperation is beneficial for both prisoners, but difficult to achieve. There are gains to both cooperative and independent action. Individuals don't always act in their best joint interest.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-2
Topic: Prisoner's Dilemma
*

23. The prisoner's dilemma is an example of:

** A.**
a non-cooperative game.

B. a cooperative game.

C. a non-strategic game.

D. a sequential game.

The prisoner's dilemma is a game in which each player's dominant strategy leads to a less desirable outcome for both players, than if they had cooperated. It is example of a game where players are unable to cooperate for their self-interest, because they are unable to ensure that the other player will do so, and because each player has an incentive to choose the non-cooperative option (where the prisoner confesses).

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-2

Topic: Prisoner's Dilemma

24. The values in a payoff matrix show:

A. the gains and losses of decisions for each player regardless of
decisions of other players.

B. the best possible outcomes of various players in a game.

** C.**
the gains and losses of decisions for each player given the decisions of
other players.

D. the worst possible outcomes of various players in a game.

The values in a payoff matrix show both gains and losses of various decisions based on the decisions of all other players in the game.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-2
Topic: Payoff Matrices
*

25. The matrix below represents a payoff matrix for a:

A. zero sum game.

** B.**
non-zero sum game.

C. repeated game.

D. sequential game.

This is a non-zero sum game because the sum of all the squares isn't the same for both participants. It cannot be a repeated or sequential game because the decisions in the prisoner's dilemma are made once and simultaneously.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Synthesis
Difficulty: Hard
Learning Objective: 11-2
Topic: Payoff Matrices
*

26. The matrix below represents a payoff matrix for a:

** A.**
zero sum game.

B. non-zero sum game.

C. repeated game.

D. sequential game.

Because the sum of the values in each square is the same, this is a zero sum game. It cannot be a repeated or sequential game because the decisions in the prisoner's dilemma are made once and simultaneously.

BLOOM'S TAXONOMY: Synthesis

Difficulty: Hard

Learning Objective: 11-2

Topic: Payoff Matrices

27. The equilibrium solution for the payoff matrix below is:

** A.**
1, 1

B. 2, 0

C. 0, 2

D. -1, -1

The equilibrium solution is where each player maximizes the expected payoff. A is best off choosing column 2. So, knowing that A will choose column 2, B will choose row 2.

BLOOM'S TAXONOMY: Synthesis

Difficulty: Hard

Learning Objective: 11-2

Topic: Payoff Matrices

28. The equilibrium solution for the payoff matrix below is:

A. -1, -1

B. 5, 0

C. 2, 2

** D.**
10, 1

The equilibrium solution is where each player maximizes the expected payoff. Regardless of what B chooses, A is better off choosing Column 2. Knowing that, B is best off choosing row 2.

BLOOM'S TAXONOMY: Synthesis

Difficulty: Hard

Learning Objective: 11-2

Topic: Payoff Matrices

29. Consider the payoff matrix below facing two criminals.

Their options are either to confess or not to confess. The payoffs
represent the number of years each will spend in jail. The Nash equilibrium
for the above payoff matrix is:

** A.**
A: 20 yrs, B: 20 yrs

B. A: 50 yrs, B: 2 yrs

C. A: 2 yrs, B: 50 yrs

D. A: 10 yrs, B: 10 yrs

The Nash equilibrium is where each player maximizes the expected payoff. Regardless of what B chooses, A is better off choosing Column 1. Knowing that, B is better off choosing row 1.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Synthesis
Difficulty: Hard
Learning Objective: 11-3
Topic: Nash Equilibrium
*

30. If individuals can credibly cooperate and split the gains, which payoff
is the most likely?

** A.**
1, 50

B. 1, 1

C. 2, 1

D. 5. 5

The square with the highest joint payoff is the most likely if the players can cooperate, because it has the highest joint payoff which they can then divide between themselves.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-2

Topic: Payoff Matrices

31. The National Hockey League locked out the hockey players in an effort
to negotiate a salary cap with the players' union. A cap would limit the
payroll of each team. League officials acknowledged that the teams have
brought the problem on themselves by overspending and overpaying some
players in an effort to compete for the best players. Why would the teams
have caused this problem for themselves?

A. They used explicit collusion instead of implicit collusion.

B. They tried to create a contestable market and now suffer because there
are no barriers to entry.

** C.**
They were caught in the logic of the prisoner's dilemma in which each
player maximizing his own self-interest leads to an outcome that is worse
off for everyone.

D. They tried to create a cartel and suffered the consequences of too much collusion.

The logic of the prisoner's dilemma is what limits cooperation among competitors.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Application
Difficulty: Hard
Learning Objective: 11-2
Topic: Prisoner's Dilemma
*

32. Don and Dana have both been accused of insider trading. Don knows that
if he confesses while Dana keeps silent, he will receive a one-month jail
sentence. He also knows that if Dana confesses and he keeps silent, he will
receive a twelve month jail sentence. If neither of them confesses, there
will be insufficient evidence to convict either of insider trading, but
there is enough evidence to convict each of them individually of
obstructing justice, which carries a 2-month sentence. If both of them
confess, they will both serve a three-month jail sentence. This situation
is:

A. an example of cartel behavior.

** B.**
an application of the prisoner's dilemma.

C. not realistic because those accused of insider trading always keep silent.

D. not realistic because those accused of insider trading are never encouraged to confess.

See the explanation of the prisoner's dilemma.

BLOOM'S TAXONOMY: Application

Difficulty: Hard

Learning Objective: 11-2

Topic: Prisoner's Dilemma

33. Don and Dana have both been accused of insider trading. Don knows that
if he confesses while Dana keeps silent, he will receive a one-month jail
sentence. He also knows that if Dana confesses and he keeps silent, he will
receive a twelve month jail sentence. If neither of them confesses, there
will be insufficient evidence to convict either and they will serve no
time. If both of them confess, they will both serve a three-month jail
sentence. Don's best strategy is to:

A. confess in order to avoid the possibility of a one-year jail sentence.

B. confess because then he will not have to serve a jail sentence.

** C.**
not confess because keeping silent ensures that they will not have to serve
jail sentences.

D. not confess because doing so guarantees a jail sentence.

Since they each do better by not confessing assuming the other person does not confess, their best strategy is not to confess. Draw the pay-off table to see this clearly.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Application
Difficulty: Hard
Learning Objective: 11-2
Topic: Payoff Matrices
*

34. TV crime shows illustrate the prisoner's dilemma when:

A. the judge ponders the sentence for the crimes.

B. the prisoners go to prison for the first time.

C. the police interview suspects in the same room.

** D.**
the police interview suspects in different rooms.

When suspects are interviewed in different rooms they do not know what the other suspects are going to do and hence seek the best deal for themselves.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Analysis
Difficulty: Medium
Learning Objective: 11-2
Topic: Prisoner's Dilemma
*

35. When suspects are interviewed in different rooms they do not know what
the other suspects are going to do and hence seek the best deal for
themselves. This illustrates:

A. that criminals are irrational.

B. the idea of a cooperative game.

** C.**
the idea of a non-cooperative game.

D. that the police are not taking into account the suspects' rights.

This meets the definition of a non-cooperative game since they do not know the moves of the other person.

BLOOM'S TAXONOMY: Analysis

Difficulty: Medium

Learning Objective: 11-2

Topic: Prisoner's Dilemma

36. In standard game theory, cheap talk:

A. will fool all players into cooperating.

** B.**
doesn't affect the outcome of the game.

C. benefits only trustworthy people.

D. changes the pay-offs.

Cheap talk, because it is not enforceable, will not change the outcome of the game in standard game theory because players have no trust in one another.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Analysis
Difficulty: Medium
Learning Objective: 11-2
Topic: Strategic Reasoning
*

37. What is true about the payoff matrix below?

** A.**
Players cannot jointly do better by cooperating.

B. Players cannot escape the 0-0 payoff.

C. Player A is better off lying that he will choose column 1 and then choosing column 2.

D. Player B is better off lying that he will choose row 1 and then choosing row 2.

Since both players are better off choosing column 1 and row 1 respectively, which has the same joint payoff as the other options, they are not better off cooperating. A is better off saying he will choose column 1 and in fact choosing column 1. B is better off saying he will choose row 1 and in fact choosing row 1.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Analysis
Difficulty: Medium
Learning Objective: 11-2
Topic: Payoff Matrices
*

38. What is true about the payoff matrix below?

A. Only player A has a dominant strategy.

B. Only player B has a dominant strategy.

** C.**
Both players A and B have dominant strategies.

D. Neither player A nor B has a dominant strategy.

Since both players are better off choosing column 1 and row 1 respectively regardless of what the other player does, both have dominant strategies.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Analysis
Difficulty: Medium
Learning Objective: 11-4
Topic: Dominant and Mixed Strategies
*

39. What is true about the payoff matrix below?

A. Only player A has a dominant strategy.

** B.**
Only player B has a dominant strategy.

C. Both player A and B have dominant strategies.

D. Neither player A nor B has a dominant strategy.

Player A is better off choosing Column 2 if B chooses row 1 and Column 1 if B chooses row 2. Player B is better off choosing Row 1 regardless of what A does. So, player B has a dominant strategy, but A does not.

BLOOM'S TAXONOMY: Analysis

Difficulty: Medium

Learning Objective: 11-4

Topic: Dominant and Mixed Strategies

40. A strategy that is preferred by an individual regardless of an
opponent's decision is called:

A. a Nash equilibrium.

B. a Vickery position.

C. a framing strategy.

** D.**
a dominant strategy.

See the definition of a dominant strategy in the text.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-4
Topic: Dominant and Mixed Strategies
*

41. A set of strategies in which no player can improve his or her payoff by
changing his own action is called:

** A.**
a Nash equilibrium.

B. a Vickery position.

C. a framing strategy.

D. a dominant strategy.

See the definition of a Nash Equilibrium in the text.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-3
Topic: Nash Equilibrium
*

42. A Nash equilibrium is:

A. the payoff that maximizes joint payoff.

B. the output level that minimizes average total cost.

C. the strategy that maximizes the outcome of all the players.

** D.**
the set of strategies such that no player can improve their position by
changing his own action.

See the definition of a Nash Equilibrium in the text. A Nash equilibrium refers to the set of strategies by all the players, not just one player's individual strategy.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-3

Topic: Nash Equilibrium

43. A Nash equilibrium assumes that a player follows his best strategy:

A. given that the other players follow a random strategy.

B. given that the other players follow their worst strategy.

** C.**
given that the other players follow their best strategy.

D. regardless of what other players do.

See the definition of a Nash Equilibrium in the text. A Nash equilibrium refers to the set of strategies by all the players, not just one player's individual strategy.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-3

Topic: Nash Equilibrium

44. A Nash equilibrium refers to a:

A. cooperative game.

B. a sequential game.

C. a repeated game.

** D.**
a non-cooperative game.

See the definition of a Nash Equilibrium in the text. A Nash equilibrium refers to a non-cooperative game set of strategies. That is, players are unable to cooperate and attempt to make the best decision for themselves, while considering that the other player follows his or her own best strategy.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-3

Topic: Nash Equilibrium

45. The Nash equilibrium in the payoff matrix below is:

A. -1, -1.

B. -1, 1.

C. 1, -1.

** D.**
there is no Nash equilibrium.

A Nash equilibrium is a set of strategies for each player in which no player can improve his or her payoff by changing strategy unilaterally. If B chooses row 1, A's best strategy is to choose column 1. But if B chooses row 2, A's best strategy is to choose column 2. If A chooses column 1, B's best strategy is to choose row 2. But if A chooses column 2, B's best strategy is to choose row 1. So, there is no Nash equilibrium. Each can improve his or her payoff by changing strategy unilaterally.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Synthesis
Difficulty: Hard
Learning Objective: 11-3
Topic: Nash Equilibrium
*

46. Consider the payoff matrix below facing two criminals.

Their options are either to confess or not to confess. Given this
information:

A. A has a dominant strategy but B does not.

B. B has a dominant strategy but A does not.

** C.**
Both A and B have dominant strategies.

D. Neither A nor B have dominant strategies.

Regardless of what B chooses, A is best off choosing Column 1. Regardless of what A chooses, B is best off choosing Row 1. Therefore both have dominant strategies.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Synthesis
Difficulty: Hard
Learning Objective: 11-2
Topic: Dominant and Mixed Strategies
*

47. Consider the payoff matrix below facing two firms selling the same
product in the same market. They must choose whether to price the good at a
high or low price.

Given this information:

A. A has a dominant strategy but B does not.

** B.**
B has a dominant strategy but A does not.

C. Both A and B have dominant strategies.

D. Neither A nor B have dominant strategies.

Regardless of what A chooses, B is better off choosing Column 1. A is better off choosing Row 1 if B chooses Column 1 but Row 2 if B chooses Column 2. So, B has a dominant strategy while A does not.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Synthesis
Difficulty: Hard
Learning Objective: 11-4
Topic: Dominant and Mixed Strategies
*

Consider the payoff matrix below facing Harry and Sally when each chooses
to go to the coffee shop listed. Harry wants to avoid Sally at the coffee
shop and is not happy when Sally ends up in the same shop he chooses. Sally
would like to see Harry, so she is not happy when Harry ends up in a
different coffee shop from her.

48. Given this payoff:

A. A has a dominant strategy but B does not.

B. B has a dominant strategy but A does not.

C. Both A and B have dominant strategies.

** D.**
Neither A nor B has a dominant strategy.

If Harry chooses Starbucks, Sally is best off choosing Starbucks. But if Harry chooses Dunkin Donuts, Sally is best off choosing Dunkin Donuts. Sally does not have a dominant strategy. The opposite is true for Harry. He doesn't have a dominant strategy either.

BLOOM'S TAXONOMY: Synthesis

Difficulty: Hard

Learning Objective: 11-4

Topic: Dominant and Mixed Strategies

49. Assuming that Sally and Harry go to the coffee shop each day, what is
Harry's best strategy?

A. Go to Starbucks because Sally won't go there.

B. Go to Dunkin Donuts because Sally won't go there.

C. Go to Starbucks one day and Dunkin Donuts the next, and maintain that
pattern.

** D.**
Randomly choose between going to Starbucks and Dunkin Donuts.

Since Harry wants to avoid Sally, his best strategy is to randomly choose going to Starbucks or Dunkin Donuts so that he minimizes the possibility of meeting Sally.

BLOOM'S TAXONOMY: Synthesis

Difficulty: Hard

Learning Objective: 11-4

Topic: Dominant and Mixed Strategies

Consider the payoff matrix below facing Harry and Sally when each chooses to go to the coffee shop listed. Both Harry and Sally would like to meet each other but are shy about asking one another out on a date.

50. What is Harry's best strategy?

** A.**
Harry has no best strategy.

B. Go to Dunkin Donuts.

C. Go to Starbucks.

D. Stay at home.

Since Harry wants to see Sally, but he cannot predict which café Sally will choose, he has no best strategy other than to randomly choose between the two and hope Sally ends up there too.

BLOOM'S TAXONOMY: Synthesis

Difficulty: Hard

Learning Objective: 11-4

Topic: Dominant and Mixed Strategies

51. If Harry and Sally go to the coffee shop every day, what is Harry's
best strategy?

A. Harry has no best strategy.

** B.**
Choose one shop to go to and keep going to it.

C. Randomly choose between the two shops and hope Sally will end up there too.

D. Stay at home.

Harry's best strategy is to establish a pattern and stick to it so that Sally will figure out where Harry will be and choose that same location.

BLOOM'S TAXONOMY: Synthesis

Difficulty: Hard

Learning Objective: 11-4

Topic: Dominant and Mixed Strategies

52. The potential for return to cooperation is greatest in:

A. zero sum games.

** B.**
repeated games.

C. sequential games.

D. simultaneous move games.

Because players can punish one another and thereby enforce agreements, there is a greater potential for returns to cooperation in repeated games.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Analysis
Difficulty: Medium
Learning Objective: 11-5
Topic: Repeated Games
*

53. A sequential game is one where:

A. players act together to achieve a common goal.

** B.**
players take turns making moves/decisions.

C. players make their moves/decision at the same time.

D. there is never a winner if players act rationally.

This is the textbook definition of a sequential game.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Easy
Learning Objective: 11-5
Topic: Simultaneous and Sequential Games
*

54. A simultaneous game is one where:

A. players act together to achieve a common goal.

B. players take turns making moves/decisions.

** C.**
players make their moves/decisions at the same time.

D. there is never a winner if players act rationally.

This is the textbook definition of a simultaneous game.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Easy

Learning Objective: 11-5

Topic: Simultaneous and Sequential Games

55. In a sequential game:

A. the first player always has the advantage.

B. the second player always has the advantage.

C. neither player ever has any advantage.

** D.**
either player could have the advantage depending on the game.

The sequence of play/ decision/decision making may be important but the rules of the game help determine which player has the advantage.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Comprehension
Difficulty: Hard
Learning Objective: 11-5
Topic: Simultaneous and Sequential Games
*

56. Which of the following games has a first-mover advantage?

** A.**
Tic tac toe.

B. Prisoner's dilemma.

C. Rock, paper, scissors.

D. Vickrey auction.

Only sequential games might have first-move advantages. This eliminates the prisoner's dilemma, rock, paper, scissors and the Vickrey auction.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Synthesis
Difficulty: Medium
Learning Objective: 11-5
Topic: Simultaneous and Sequential Games
*

57. The best strategy for each player if this game is repeated is:

A. his or her dominant strategy.

** B.**
a mixed strategy.

C. to cheat.

D. to collaborate.

In this case, each player does best by switching his or her choice based on the choice of the opposing player. Given such a setup, a mixed strategy is the best. Since it is a zero-sum game, there is no payoff to collaborating.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Synthesis
Difficulty: Hard
Learning Objective: 11-4
Topic: Dominant and Mixed Strategies
*

58. A mixed strategy is most useful:

A. in sequential games.

** B.**
in simultaneous games.

C. in both sequential and simultaneous games.

D. only when the outcome is random.

A mixed strategy is used in simultaneous games. They aren't useful in sequential games, because you know the choice of the other player.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-4

Topic: Dominant and Mixed Strategies

59. In a mixed strategy:

A. the payoffs are mixed during each round.

B. the order of who chooses first is mixed.

C. moves can be predicted.

** D.**
players try to avoid demonstrating a pattern.

In a mixed strategy, players choose randomly among moves so that their plays cannot be predicted.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Analysis
Difficulty: Medium
Learning Objective: 11-4
Topic: Dominant and Mixed Strategies
*

60. A mixed strategy means a player:

A. makes random moves in a sequential game.

** B.**
makes random moves in a simultaneous game.

C. mixes random moves with nonrandom moves.

D. mixes optimal and suboptimal moves to confuse her opponent.

A mixed strategy refers to random moves in a simultaneous game.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-4

Topic: Dominant and Mixed Strategies

61. Backward induction means a player:

A. studies his opponent's moves to figure out what he did wrong.

B. studies what other players have done in similar situations.

C. studies the rules of the game to determine how to make her next move.

** D.**
works from the desired outcome to determine the decisions that lead to that
outcome.

Backward induction means one starts with the desired outcome such as a win in chess, and working back toward the first move, one calculates all the ways to reach the desired goal.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-4

Topic: Dominant and Mixed Strategies

62. Backward induction will not lead to a determinate sequence of actions
for:

A. games with dominant strategies.

B. sequential games.

C. simultaneous move games.

** D.**
mixed strategy games.

Since moves cannot be predicted in mixed strategy games, there cannot be a determinate sequence of actions.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Comprehension
Difficulty: Hard
Learning Objective: 11-4
Topic: Dominant and Mixed Strategies
*

63. Optimal rollback strategies are most difficult in:

A. sequential games.

** B.**
simultaneous games.

C. zero-sum games.

D. repeated games.

Because you have to guess what your opponent will do, optimal rollback strategies are most difficult in simultaneous move games.

BLOOM'S TAXONOMY: Comprehension

Difficulty: Hard

Learning Objective: 11-4

Topic: Dominant and Mixed Strategies

64. In the 2/3s game, in which you are to choose a number between 1 and 100
which is 2/3^{rd}s of the average chosen by the group, the rollback
strategy is to:

A. choose a number randomly.

B. be the last person to choose a number.

C. be the first person to choose a number.

** D.**
choose zero.

Because all people are targeting a number that is below the average, all guesses will be declining until they reach zero.

BLOOM'S TAXONOMY: Analysis

Difficulty: Medium

Learning Objective: 11-4

Topic: Dominant and Mixed Strategies

65. The rationality assumptions of game theory:

A. always hold in the real world.

B. never hold in the real world.

** C.**
sometimes hold in the real world.

D. make game theory irrelevant.

The fact that the rationally assumptions do not always hold leads to behavioral economics.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Comprehension
Difficulty: Medium
Learning Objective: 11-5
Topic: Behavioral Economics
*

66. Most games in real life:

** A.**
require intuition, common sense and calculations.

B. require a mixed strategy.

C. require a rollback strategy.

D. have a best solution.

As the author states, most games people play are complicated and require all of these components.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-5

Topic: Behavioral Economics

67. A Nash equilibrium:

A. always exists.

B. is always reached in game playing.

C. may sometimes not be reached because people assume others react
rationally.

** D.**
may sometimes not be reached because people do not assume that others act
rationally.

A Nash equilibrium assumes that a player assumes all other players act rationally. That assumption is sometimes violated in game playing as well as in the real world, but it is also sometimes met.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Comprehension
Difficulty: Hard
Learning Objective: 11-5
Topic: Behavioral Economics
*

68. Informal game theory:

A. relies on deductive logic.

B. shows how the Nash equilibrium is reached.

C. assumes people calculate their optimal strategy.

** D.**
considers how people actually think and behave.

Informal game theory recognizes that people are not high-powered, calculating machines who calculate their optimal strategies for all their actions.

BLOOM'S TAXONOMY: Comprehension

Difficulty: Medium

Learning Objective: 11-5

Topic: Behavioral Economics

69. In a standard sealed bid auction, the person who bids:

** A.**
the highest gets the object of the bid.

B. the second highest gets the good and pays that price.

C. the second highest has the option to receive the good if she pays the price of the highest bidder.

D. the highest gets the object but pays the price bid by the second highest bidder.

In a standard auction, the highest bidder gets the object at the price she bid.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-5
Topic: Auctions
*

70. In a sealed bid Vickery auction, the person who bids:

A. the highest gets the object of the bid at the price he or she bid.

B. the second highest bidder gets the good and pays that price.

C. the second highest bidder has the option to receive the good if he or
she pays the price of the highest bidder.

** D.**
the highest bidder gets the object but pays the price bid by the second
highest bidder.

This is the concept of a Vickery auction. The highest bidder gets the object, but pays the price bid of the second highest bidder.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Knowledge
Difficulty: Easy
Learning Objective: 11-5
Topic: Auctions
*

71. In a standard highest sealed bid auction, a bidder's best strategy:

A. is to bid what he would be willing to pay.

** B.**
is to bid slightly more than what he or she expects the second highest
bidder to bid.

C. always ensures that the person who wants it the most will get the bid.

D. requires the bidder to understand game theory to bid properly.

The basic idea of a standard sealed bid auction is to outbid the other bidders by as little as possible.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Comprehension
Difficulty: Medium
Learning Objective: 11-5
Topic: Auctions
*

72. In a Vickrey auction, a bidder's strategy:

** A.**
is to bid what he would be willing to pay.

B. is to bid just slightly more than the next bidder.

C. is to bid just below the next highest bidder.

D. requires the bidder to understand game theory to bid properly.

Because the winning bid pays the next-highest bid, he has an incentive to bid what he is willing to pay because he knows he'll pay less.

BLOOM'S TAXONOMY: Comprehension

Difficulty: Medium

Learning Objective: 11-5

Topic: Auctions

73. Behavioral economics helps explain:

A. why people are rational.

B. why people are selfish.

C. why being selfish is rational.

** D.**
the degree to which people are altruistic.

Behavior economics helps to explore the degree to which people are concerned with others.

BLOOM'S TAXONOMY: Comprehension

Difficulty: Hard

Learning Objective: 11-5

Topic: Behavioral Economics

74. Assuming the standard assumptions, in a repeated play ultimatum game,
the first player's best strategy in the last round is to:

A. split the money evenly with a bit more going to yourself.

B. give the most money to the opponent.

** C.**
give the most money to yourself.

D. take all the money for yourself.

In the last round, it makes no sense to reward or punish your opponent; you should try to keep as much for yourself as possible. For the receiving player, it makes sense to accept whatever is offered because if he doesn't accept, he gets nothing.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-5
Topic: Repeated Games
*

75. Assuming the standard assumptions, in a single play ultimatum game, the
second player's best strategy in the last round is to:

A. reject all but evenly split offers.

** B.**
accept any offer greater than zero.

C. accept only those offers over 50 percent of the total.

D. reject all offers.

Because something is better than nothing and there is no possibility for punishment or reward to turn into future gain, the best strategy is to accept any offer.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-5

Topic: Repeated Games

76. Assuming the standard assumptions, in an infinitely long repeated play
ultimatum game, the second player's best strategy is most likely to:

** A.**
reject offers that appear unfair.

B. accept any offer.

C. accept only those offers over 50 percent of the total.

D. reject all offers.

In an infinitely long repeated play ultimatum game, there is the possibility for punishment and reward. Thus, there will be some offers the player will want to reject so that future offers will be raised.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Knowledge
Difficulty: Hard
Learning Objective: 11-5
Topic: Repeated Games
*

77. If people are given one of two items of the same value and are given
the choice to exchange it:

A. about fifty percent will make the change since half will prefer the
other item.

B. everyone will keep the first item since it was free.

C. everyone will trade since people like to trade.

** D.**
most will keep the original item since they are averse to losing what they
have.

In experiments, economists have discovered that people exhibit loss aversion.

BLOOM'S TAXONOMY: Comprehension

Difficulty: Hard

Learning Objective: 11-5

Topic: Behavioral Economics

78. Loss aversion in behavioral economics refers to how people are averse
to:

A. losses in a game of chance such as poker.

B. stock market losses.

** C.**
losing something a person already has.

D. the loss of something of high value.

People have an aversion to the loss of something they already have; they are reluctant to lose that item or to exchange it for something of equal value.

BLOOM'S TAXONOMY: Knowledge

Difficulty: Medium

Learning Objective: 11-5

Topic: Behavioral Economics

79. If two choices are the same but one is presented in a positive manner
and one in a negative context, people:

A. are rational and respond the same.

B. respond the same because of loss aversion.

C. respond differently because of loss aversion.

** D.**
respond differently because of the framing effects.

The framing effect indicates that people respond differently to the same set of choices depending on how the questions are presented.

*
AACSB: Analytic
BLOOM'S TAXONOMY: Comprehension
Difficulty: Easy
Learning Objective: 11-5
Topic: Behavioral Economics
*

80. The fact that airlines offer off-peak airline discounts rather than
peak-time surcharges is an example of:

A. loss aversion.

** B.**
framing effects.

C. non-zero sum game.

D. irrational behavior.

By framing the practice of price discrimination in terms of discounts to travelers, airlines make off-peak travelers feel like they are getting a deal.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-5
Topic: Behavioral Economics
*

81. Why might the economy as a whole conform to the predictions of a model
even if not all people are rational?

A. The standard model doesn't assume rationality.

** B.**
Those people who are rational will profit from those who are not.

C. Those people who are irrational will profit from those who are not.

D. It won't; for the standard model to work, all people must be rational.

The people who are irrational create profit opportunities for people who are rational. Metaphorically, the rational people take the money off the table, which causes the economy to conform to the predictions of the model.

*
AACSB: Reflective Thinking
BLOOM'S TAXONOMY: Knowledge
Difficulty: Medium
Learning Objective: 11-6
Topic: Behavioral Economics
*