Chapter 13 Questions:
1. Which of the following is a sequential game?
A.Monopoly
B. boxing
C. Rock-paper-scissors (Roshambo)
D. paintball
2. Dynamic and static games have outcomes that
A. are always different.
B. are not Nash equilibria.
C. may be different.
D. result from dominant strategies.
3.Implicit collusion, where players do not have an explicit agreement
A. results in cheating.
B. maximizes total surplus in the market.
C. are not strictly prohibited under antitrust laws.
D. are strictly prohibited under antitrust laws.
4. If firms adopt a strategy that triggers a permanent punishment, the result in an indefinitely repeated game is
A. economically inefficient.
B. the noncooperative Nash equilibrium.
C. undefined.
D. the collusive Nash equilibrium.
5. Repeated games are conducive to
A. explicit cooperation.
B.corruption.
C. tacit cooperation.
D. failing to have a Nash equilibrium.
6. Which of the following is a dynamic game?
A. chess
B. flipping pennies
C. Rock-paper-scissors (Roshambo)
D. None of the above.
7. The trench warfare case during World War I is an example of a(n)
A. nonminuscooperative Nash equilibrium.
B. Tit-for-tat strategy.
C. explicit agreement.
D. None of the above.
8. When a prisoners' dilemma game is repeated a finite number of times (T)
A. cooperation continues until the Tminus2 round, where the players will switch to a nonminuscooperative Nash equilibrium.
B. cooperation unravels during the first round of the game, resulting in the static game Nash equilibrium.
C. firms cooperate and achieve the collusive Nash equilibrium for all rounds.
D. None of the above.
9. When there's uncertainty as to the length of a game
A. firms will randomly pick among the Nash equilibria.
B. firms will cooperate because they treat the game as one that is infinitely repeated.
C. cooperation can potentially occur if trigger strategies are adopted.
D. cooperation still does not occur, because cooperation unravels at the beginning of the game.
10. A an example of a game in which a leader moves first, and then the other rivals follow is a ________ game.
A. finite move
B. Stackelberg model
C. Tit-for-tat
D. Cournot model
11. Walmart has a reputation for using a variety of legal means to prevent unionization of its stores by frustrating union organizers (Lichtenstein, 2008). Why would it make sense for Walmart to spend more trying to deter unionization at a given store than it would save by preventing unionization at that one store? (Hint: Walmart has thousands of stores in the United States alone and thousands more in other countries. Would the theory of repeated games apply?)
Walmart might spend more trying to deter unionization at a given store than it would save by preventing unionization at that one store because this strategy
A.makes Walmart a first-mover in a sequential game.
B. is Walmart's dominant strategy for that particular store.
C. discourages unionization at other stores.
D. makes unionization profitable at other stores.
E. reveals Walmart's profit levels so rivals won't enter.
12. In an indefinitely repeated game, a firm might use a ________ to ________ a rival that defects from a cooperative strategy.
A. legal maneuver; sue
B. trigger strategy; punish
C. tacit threat; dissuade
D. trigger strategy; threaten
13. In a tit-for-tat strategy, a player
A. maximizes the joint profit in the game.
B.copies the action of its rival's prior move in the subsequent rounds.
C. randomly punishes its rival.
D. ensures that the joint profit is maximized in each round.
14. In a finitely repeated prisoners' dilemma game
A. firms cooperate for most of the rounds, but switch to the non-cooperative outcome in the final couple of rounds.
B. firms will only cooperate if they each adopt a tit-for-tat strategy.
C. firms do not cooperate and the static game Nash equilibrium is the outcome for each round.
D. firms cooperate and achieve the collusive Nash equilibrium for all rounds.
15. If firms execute a strategy that triggers a permanent punishment, the result in an indefinitely repeated game is
A. the non-cooperative Nash equilibrium.
B. undefined.
C. economically inefficient.
D. the collusive Nash equilibrium.
Chapter 14 Questions:
1. Making many risky bets
A. is irrational.
B. is called risk-pooling and can reduce risk.
C. is called risk pooling and increases your expected value.
D. reduces your expected value.
2. On any given day, a salesman can earn $0 with a 40% probability, $100 with a 40% probability, or $300 with a 20% probability. His expected earnings equal
A. $0.
B. $100 because that is what he will earn on average.
C.$100 because that is the most likely outcome.
D. $200 because that is what he will earn on average.
3. Expected utility is
A. indeterminant for risk preferring people.
B. negative for risk-averse people.
C. the maximum utility that a person can get from a set of possible outcomes.
D. the probability-weighted mean of the utility gained from a set of possible outcomes.
4. Someone who is risk-averse has
A. less marginal utility of wealth than someone who is risk-neutral.
B. increasing marginal utility of wealth.
C. diminishing marginal utility of wealth.
D. constant marginal utility of wealth.
5. A(n) ________ relates each possible outcome to its probability of occurrence.
A. expected value
B. probability distribution
C. frequency
D. coin toss
6. Bob invests $50 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is NOT
A. risk averse.
B. rational.
C. risk neutral.
D. risk preferring.
7. Someone who is risk-preferring has
A. diminishing marginal utility of wealth.
B. constant marginal utility of wealth.
C. less marginal utility of wealth than someone who is risk-preferring.
D. increasing marginal utility of wealth.
8. Your friend Dimitre tells you that he thinks that his favorite basketball team has a 70% chance of winning the next game. This is an example of a(n)
A. Risk-averse statement.
B. Friedman-Savage preferences.
C. subjective probability.
D. objective probability.
Chapter 15 Questions:
1. According to Edelman (2011), the widely-used online "trust" authorities issue certifications without adequate verification, giving rise to adverse selection. Edelman finds that TRUSTe-certified sites are more than twice as likely to be untrustworthy as uncertified sites. Explain why.
Online sites verified by TRUSTe-certified are more than twice as likely to be untrustworthy as uncertified sites because
A. suspicious sites are more likely to seek verification by a "trust" authority.
B. web surfers alter their behavior based on whether sites are certified.
C. "trust" authorities know more about online sites than the site owners.
D. web surfers know more about online sites than "trust" authorities.
E. "trust" authorities no longer monitor sites once they've been certified.
2.A study by Jean Mitchell found that urologists in group practices that profit from tests for prostate cancer order more of them than doctors who send samples to independent laboratories. Doctors' groups that perform their own lab work bill Medicare for analyzing 72% more prostate tissue samples per biopsy and detect fewer cases of cancer than doctors who use outside labs (Weaver, Christopher, "Prostate-Test Fees Challenged," Wall Street Journal, April 9, 2012). Explain these results. Do they necessarily demonstrate moral hazard or is there another possible explanation?
These results illustrate
A. adverse selection because doctors who use independent labs have an incentive to test the optimal number of samples.
B. moral hazard because doctors who use independent labs attract patients who are less likely to have prostate cancer.
C. moral hazard because Medicare provides doctors a contingent contract resulting in the optimal number of samples tested.
D. moral hazard because doctors who perform their own lab work have an incentive to test more than the optimal number of samples.
E. adverse selection because doctors who perform their own lab work attract patients more likely to have prostate cancer.
3.The state of California set up its own earthquake insurance program in 1997. Because the state agency in charge has few staff members, it will pay private insurance carriers to handle claims for earthquake damage. These insurance firms will receive 9% of each approved claim. Is this compensation scheme likely to lead to opportunistic behavior by insurance companies? What would be a better way to handle the compensation?
A. Yes, it creates a moral hazard. It would be better to pay a flat fee per claim plus a modest hourly rate to handle claims.
B. No because the fee is only paid on claims that are approved.
C. No because 9% is a high enough fee to discourage shirking.
D. Yes, it creates an adverse selection problem. It would be better to pay a flat fee per claim plus a modest hourly rate to handle claims.
4. A promoter arranges for many different restaurants to set up booths to sell Cajun-Creole food at a fair. Appropriate music and other entertainment are provided. Restaurants agree to pay a share of their earnings to the promoter, but the promoter cannot monitor how much business each restaurant does.
However, the promoter requires that customers can buy food using only "Cajun Cash," which is scrip with the same denominations as actual cash sold by the promoter at the fair. How does Cajun Cash solve a potential moral hazard problem that might arise between the promoter and the restaurants?
Cajun Cash helps solve the problem associated with moral hazard between the promotor and the restaurants because
A. the promotor cannot lie about the amount of Cajun Cash spent.
B. the promotor is able to eat for free with Cajun Cash.
C. restaurants cannot hide the amount of food they sell.
D. restaurants can signal honesty by using Cajun Cash.
E. customers find it difficult to monitor the amount spent with Cajun Cash.
5. Traditionally, doctors have been paid on a fee-for-service basis. Now doctors are increasingly paid on a capitated basis (they get paid for treating a patient for a year, regardless of how much treatment is required), though a patient may still have to pay a small fee each visit.
In this arrangement, doctors form a group and sign a capitation contract whereby they take turns seeing a given patient. What are the implications of this change in compensation for moral hazard and for risk bearing?
The likely effect of doctors being paid on a capitated basis on moral hazard and risk bearing is
A. doctors will increase the services they provide because they benefit from more revenue.
B. patients will take better care of themselves because they bear a larger portion of medical costs.
C. doctors will shirk more of their duties because a given doctor receives the same amount of revenue no matter how many times he sees a patient.
D. patients will demand more services because they bear more risk from health problems.
E. doctors will work harder because they bear less risk from income variation.
6. Sometimes a group of hungry students will go a restaurant and agree to share the bill at the end regardless of who orders what. What is the implication of this fee-sharing arrangement on the size of the overall bill? Why?
When hungry students agree to share the bill at the end of a restaurant meal, the size of the bill will
A. increase because each student only pays a fraction of the amount they order.
B. increase because each student benefits from the amount other students order.
C.decrease because each student will screen the amount other students order.
D. increase because the amount each student orders is a signal of ability.
E. decrease because each student cannot control the amount other students order.