Page 692 - Krugmans Economics for AP Text Book_Neat

Module 65 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. Suppose world leaders Nikita and Margaret are engaged in an a. Identify any Nash equilibria that exist in this game, and
arms race and face the decision of whether to build a missile. explain why they do or do not exist.
Answer the following questions using the information in the b. Which set of actions maximizes the total payoff for Nikita
payoff matrix below, which shows how each set of actions will and Margaret?
affect the utility of the players (the numbers represent utils c. Why is it unlikely that they will choose the payoff-maximizing
gained or lost). set of actions without some communication?
2. For each of the following characteristics of an industry, explain
Nikita
Build missile Don’t build whether the characteristic makes it more likely that oligopolists
missile
will play noncooperatively rather than engaging in tacit
collusion.
–10 –20
Build a. Each oligopolist expects several new firms to enter the
missile market in the future.
–10 8
b. It is very difficult for a firm to detect whether another firm
Margaret has raised output.
Don’t 8 0 c. The firms have coexisted while maintaining high prices for a
build long time.
missile –20 0

Tackle the Test: Multiple-Choice Questions
1. Each player has an incentive to choose an action that, when 4. In the context of the Thelma and Louise story in the module,
both players choose it, makes them both worse off. This suppose that Louise discovers Thelma’s action (confess or don’t
situation describes confess) before choosing her own action.
a. a dominant strategy.
Louise
b. the prisoners’ dilemma.
c. interdependence. Don’t confess Confess
d. Nash equilibrium.
e. tit for tat. Louise gets Louise gets
5-year 2-year
2. Which of the following types of oligopoly behavior is/are Don’t sentence. sentence.
illegal? confess
I. tacit collusion
Thelma gets Thelma gets
II. cartel formation 5-year sentence. 20-year sentence.
III. tit for tat Thelma
a. I only Louise gets Louise gets
b. II only 20-year 15-year
c. III only sentence. sentence.
d. I and II only Confess
e. I, II, and III
Thelma gets Thelma gets
3. A situation in which each player in a game chooses the action 2-year sentence. 15-year sentence.
that maximizes his or her payoff, given the actions of the other
players, ignoring the effects of his or her action on the payoffs Based on the payoff matrix provided, Louise will
received by others, is known as a: a. confess whether or not Thelma confessed.
a. dominant strategy. b. not confess only if Thelma confessed.
b. cooperative equilibrium. c. not confess only if Thelma didn’t confess.
c. Nash equilibrium. d. not confess regardless of whether or not Thelma confessed.
d. strategic situation. e. confess only if Thelma did not confess.
e. prisoners’ dilemma.

650 section 12 Market Structures: Imperfect Competition