Problem set for week 8

Question 1

1. In sequential games,
   a. Players take turns and observe their rivals choices before they make their
   choices
   b. Players take turns but don’t observe their rivals choices before they make their
   choices
   c. Players move at the same time
   d. None of the above

Answer 1

A

Question 2

Irene’s Dairy is deciding whether or not to enter the market for ice cream, currently
monopolized by Mattie’s Ice-cream. If Irene enters the market, Mattie can either accommodate
her and share his £10million in profits equally with Irene or fight her and cause a £5million
loss for each in a price war.
2. In a sequential game, if Irene decides to enter the market, what would be Mattie’s best
response?
a. Accommodate
b. Fight
c. Run away
d. Shut down

Answer 2

A

Question 3

3. What would the Nash equilibrium be in this sequential game?
   a. Enter, fight
   b. Enter, Accommodate
   c. Do not enter, Fight
   d. Do not enter, Accommodate

Answer 3

B

Question 4

4. If Mattie wants to discourage Irene from entering the market, what strategy should he
   follow?
   a. Threaten to always accommodate
   b. Always accommodate
   c. Threaten to always fight
   d. All of the above

Answer 4

C

Question 5

Consider a simultaneous move game between a union and a company. If both the parties
bargain hard, each would gain nothing. If only one party bargains hard the accommodating
party gets a profit of £1 million while the bargaining party gets a £5 million, while if they both
accommodate, they each get £3 million.
7. What would be the Nash equilibrium of this game?
a. Bargain hard, bargain hard
b. Firm bargains hard, union accommodates
c. Union bargains hard, firm accommodates
d. Both B&C

Question 6

8. Could both parties do better than in Nash equilibrium?
   a. Yes, both parties can do better without hurting each other if they cooperated
   b. No, one party can only do better at the expense of the other
   c. Yes, because this situation is a type of prisoners’ dilemma
   d. No, each party has its best possible outcome

Answer 6

B

Question 7

9. If the union leader has already sent strikers to the picket line before entering negotiations,
   the union has
   a. Eliminated half of the strategies of the game
   b. Forced the firm to choose the best response in the union’s best interest
   c. Made it in the firm’s best interest to accommodate their requests
   d. All of the above

Answer 7

D

Question 8

a) In game theory, what are the basic elements of a game? What situations in business are
games designed to analyse? Give examples of situations in business where a game would be
helpful in their analysis, and situations where using a game would not be appropriate.

Question 9

b) In game theory, explain the idea of a ‘best response’. Then explain how the concept of
Nash equilibrium uses the idea of best responses to work out the outcome of a game.