Page 693 - Krugmans Economics for AP Text Book_Neat

5. Which of the following is true on the basis of the payoff matrix c. Both Thelma and Louise have a dominant strategy.
provided in Question 4? d. Neither Thelma nor Louise has a dominant strategy.
a. Louise has no dominant strategy, but Thelma does. e. Louise has a dominant strategy only if Thelma confesses.
b. Thelma has no dominant strategy, but Louise does.

Tackle the Test: Free-Response Questions

1. Refer to the payoff matrix provided. You and your competitor
Answer (6 points)
must decide whether or not to market a new product.
1 point: $400 Section 12 Market Structures: Imperfect Competition
You
1 point: Market the new product.
Market Don’t market
1 point: Yes
$100 $0 1 point: Profits are greater (either $100 or $400 versus $0) if I market the
new product, regardless of what my competitor does.
Market
Your competitor $100 $400 $400 $0 1 point: Yes
1 point: Both players marketing the product is a Nash equilibrium because
Don’t
doing. (In fact, in this case both sides want to market the product regardless
market neither side wants to change to not marketing, given what the other side is
$0 $0 of what the other side is doing, so it is a dominant strategy equilibrium as
well as a Nash equilibrium.)
a. If you market the new product and your competitor does
2. Draw a clearly labeled payoff matrix illustrating the
not, how much profit will you earn?
following situation. There are two firms, “Firm A” and
b. If you market the new product, what should your
“Firm B.” Each firm must decide whether to charge a high
competitor do?
price or a low price. If one firm charges a high price and the
c. Do you have a dominant strategy? Explain.
other a low price, the firm charging the high price will earn
d. Does this situation have a Nash equilibrium? Explain.
low profits while the firm charging the low price will earn
high profits. If both firms charge a high price, both earn
high profits and if both firms charge low prices, both earn
low profits.

module 65 Game Theory 651