5. Scenario: Two rival firms are considering sponsoring an event. Each firm beli

Question

5. Scenario: Two rival firms are considering sponsoring an event. Each firm believes that sponsoring the event will increase its sales by a certain percentage. The payoff matrix showing the increase in sales for the firms is given below. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

What is likely to be the impact on Firm A's sales if Firm A decides to sponsor the event?
a) A 2 percent increase in sales
b) A 0 percent increase in sales
c) A 5 percent increase in sales
d) A 10 percent increase in sales

6. Which of the following is a difference between an oligopoly with homogeneous products and a monopoly?

a) The firms in an oligopoly with homogeneous products face stiff competition from their rivals, while there is no competition in a monopoly.

b) There are huge barriers to entry in an oligopoly with identical products, while there are no barriers to entry in a monopoly.

c) The firms in an oligopoly with homogeneous products earn positive economic profits in the long run, while a monopoly earns zero economic profits in the long run.

d) The firms in an oligopoly with identical products charge a price higher than marginal cost in the long run, while a monopoly charges a price lower than marginal cost in the long run.

7. Mr. Smith wants to go on a vacation with his wife. Mrs. Smith wants to go to a beach. He, however, wants to go trekking in the hills. The payoff matrix given below shows the units of satisfaction derived in each situation. The first number listed in each cell is the payoff to Mr. Smith, and the second number listed is the payoff to Mrs. Smith.

a) multiple dominant strategy equilibria

b) only one dominant strategy equilibrium
c) only one Nash equilibrium
d) multiple Nash equilibria

8) Which of the following is a feature of an oligopoly?

a) There are a large number of sellers in this market.

b) There are no barriers to entry in this market.

c) Each firm in this market earns zero economic profits.

d) Each firm's actions affect the decisions of its rivals in this market.

Explanation / Answer

5. c) A 5 percent increase in sales
(If firm A decides to sponsor, then Firm B's best response is also to sponsor the event as 2% > 0%, corresponding to 2%, firm A's payoff is 5% which implies firm A's sale will increase by 5%)

6. a) The firms in an oligopoly with homogeneous products face stiff competition from their rivals, while there is no competition in a monopoly.
(In an oligopoly there are a few sellers and buyers so there exists competition but in a monopoly there is a single seller so there is no competition)

7. d) multiple Nash equilibria
(There are two nash equilibria - (5,2) and (2,5))

8. d) Each firm's actions affect the decisions of its rivals in this market.
(In an oligopoly, there are a few sellers, high barriers to entry and actions of a firm affect its rival's decisions)

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