1
Econ 110
Selected Questions From Chapter 15
1.
Two firms make most of the chips that power a PC: Intel and Advanced Micro Devices. What makes the
market for PC chips a duopoly? Sketch the market demand curve and cost curves that describe the
situation in this market and that prevent other firms from entering.
The market for CPUs is natural oligopoly, most likely
a natural duopoly. There are only two firms in the
market, Intel and AMD, and there are no legal
barriers to entry which limit the number of firms to
two. Because other firms
could
enter the market but
do not do so supports the idea that this industry is a
natural duopoly. The cost curves and demand curve
for this market would be similar to those in Figure
15.1, which shows the situation for a market in which
two firms can satisfy the market demand. In this
situation if a new firm entered the market it be at a
significant cost disadvantage compared to Intel and
AMD and would likely incur economic losses. Such a
prospect deters entry by new competitors.
4.
Consider a game with two players, who cannot communicate, and in which each player is asked a
question. The players can answer the question honestly or lie. If both answer honestly, each receives
$100. If one answers honestly and the other lies, the liar receives $500 and the honest player gets
nothing. If both lie, then each receives $50.
a. Describe the strategies and payoffs of this game.
The game has 2 players (
A
and
B
), and each player has 2 strategies: to answer honestly or to lie.
There are 4 payoffs: Both answer honestly and both receive $100; both lie and both receive $50;
A
lies, and
B
answers honestly and
A
receives $500 and
B
receives $0; and
B
lies, and
A
answers
honestly and
A
receives $0 and
B
receives $500.
b.
Construct the payoff matrix.
The payoff matrix has the following
cells: Both answer honestly:
A
gets
$100, and
B
gets $100; both lie:
A
gets
$50, and
B
gets $50;
A
lies and
B
answers honestly:
A
gets $500, and
B
gets $0; B lies and A answers honestly:
A
gets $0, and
B
gets $500. This
payoff matrix is given to the right.
Lie
Honest
Lie
Honest
B’s
str ategies
A’s strategies
$100
$100
$0
$50
$500
$0
$50
$500

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c.
What is the equilibrium of this game?
The equilibrium is that each player lies and gets $50. If
B
answers honestly, the best strategy for
A
is
to lie because he would get $500 rather than $100. If
B
lies, the best strategy for
A
is to lie because
he would get $50 rather than $0. So
A
’s best strategy is to lie, no matter what
B
does. Repeat the
exercise for
B
.
B
’s best strategy is to lie, no matter what
A
does.
d.
Compare this game to the prisoners’ dilemma. Are the two games similar or different? Explain.
The game is the same as a prisoners’ dilemma. In this game, as in the prisoners’ dilemma game,

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