AP Micro Game Theory and Strategic Behavior 2 — Questions and Answers
Question 1: What is a cartel in the context of oligopoly markets?
- A government agency that regulates prices in competitive industries
- A single dominant firm that controls an entire industry's output
- A formal agreement among independent firms to coordinate output levels and prices (Correct answer)
- A market in which firms engage in third-degree price discrimination
Correct answer: A formal agreement among independent firms to coordinate output levels and prices
A cartel is a cooperative arrangement in which competing firms formally agree to restrict output and raise prices, collectively acting like a monopoly to earn higher profits.
Question 2: In sequential games, what does 'first-mover advantage' refer to?
- The cost advantage enjoyed by a firm that enters an industry before rivals
- The strategic benefit a player gains by being the first to commit to an action in a sequential game (Correct answer)
- The right of the largest firm to set prices before other firms can respond
- The profit premium earned by colluding firms that initiate a price-fixing agreement
Correct answer: The strategic benefit a player gains by being the first to commit to an action in a sequential game
In a sequential game, the first mover can commit to a strategy that shapes the choices available to later movers, often resulting in a favorable strategic position.
Question 3: In a repeated prisoner's dilemma, which strategy can sustain cooperation over many rounds?
- Always defect in every round to guarantee the best individual outcome
- Choose randomly each round to prevent the opponent from exploiting a predictable pattern
- Tit-for-tat: cooperate in the first round, then mirror the opponent's previous move each subsequent round (Correct answer)
- Defect in all rounds except the very last one
Correct answer: Tit-for-tat: cooperate in the first round, then mirror the opponent's previous move each subsequent round
Tit-for-tat rewards cooperation with cooperation and punishes defection immediately, creating an incentive for both players to sustain mutual cooperation across repeated interactions.
Question 4: What is price leadership in an oligopoly?
- A government-mandated price ceiling applied to the dominant firm in the industry
- A practice where the dominant firm sets a price that rival firms tacitly follow (Correct answer)
- A system in which all firms simultaneously announce prices and the lowest wins customers
- A form of price discrimination in which the leading firm charges different customers different prices
Correct answer: A practice where the dominant firm sets a price that rival firms tacitly follow
Price leadership is an informal coordination mechanism where one firm (often the largest or lowest-cost producer) sets a price and other firms follow, achieving a coordinated outcome without explicit collusion.
Question 5: Which of the following best describes a zero-sum game?
- A game in which all players benefit by cooperating with one another
- A game in which every player's payoff is zero regardless of their strategy
- A game in which one player's gain is exactly equal to another player's loss, so total payoffs sum to zero (Correct answer)
- A game with no Nash Equilibrium in pure strategies
Correct answer: A game in which one player's gain is exactly equal to another player's loss, so total payoffs sum to zero
In a zero-sum game, the total amount of value is fixed, so any gain by one player comes at an equal cost to another — unlike most economic games where cooperation can create mutual gains.
Question 6: What is the key distinction between a dominant strategy and a Nash Equilibrium?
- A Nash Equilibrium requires all players to have dominant strategies, while a dominant strategy can exist without a Nash Equilibrium
- A dominant strategy is optimal regardless of opponents' choices; a Nash Equilibrium is a profile of strategies from which no player wants to deviate unilaterally (Correct answer)
- A dominant strategy always leads to a socially optimal result, while a Nash Equilibrium never does
- There is no meaningful distinction; the two concepts are equivalent
Correct answer: A dominant strategy is optimal regardless of opponents' choices; a Nash Equilibrium is a profile of strategies from which no player wants to deviate unilaterally
A dominant strategy is individually best no matter what opponents do; a Nash Equilibrium is a combination of strategies (not necessarily dominant for each player) where no one benefits from a unilateral change.
Question 7: Why is OPEC most accurately described as a cartel in economic terms?
- It is a supranational government body with authority to set global oil prices by law
- Member countries independently maximize their own oil revenues without coordinating with others
- Member countries coordinate production quotas to restrict output and influence global oil prices (Correct answer)
- It subsidizes oil production to lower energy costs for importing countries
Correct answer: Member countries coordinate production quotas to restrict output and influence global oil prices
OPEC functions as a cartel because its members collectively agree on production levels in order to control supply, raise world oil prices, and increase member revenues above what competitive markets would yield.
AP Micro Game Theory and Strategic Behavior 2
What is a cartel in the context of oligopoly markets?