Second Midterm

You have 50 minutes to answer 32 questions. Good luck!

1. Subjective evaluation of probabilities can exhibit

(A) the law of small numbers;
(B) selfishness;
(C) altruism;
(D) all of the above.
2. Confirmation bias can explain
(A) overconfidence;
(B) ambiguity aversion;
(C) risk aversion;
(D) all of the above.
3. Consider a game with two players (Alice and Bob) and payoffs

Bob Bob
s1 s2
Alice, s1 1, 1 0, 0
Alice, s2 0, 0 1, 1
This game has
(A) a dominant strategy equilibrium;
(B) an iterated dominant strategy equilibrium;
(C) two Nash equilibria in pure strategies;
(D) none of the above.

4. Behavioral evidence suggests that the two agents are most likely to coordinate on the strategy s1 if
(A) Alice can announce her plans prior to playing the game;
(B) Alice and Bob randomize and play both strategies with equal probabilities;
(C) both Alice and Bob can make such announcements;
(D) none of them can announce anything prior to playing the game.

5. Which of the following games have equilibria in dominant strategies?

(A) coordination games;
(B) first-price auctions;
(C) beauty contest games;
(D) none of the above.

6. Spiteful behaviors are often observed in

(A) centipede games;
(B) beauty contest games;
(C) ultimatum bargaining games;
(D) all of the above.

7. Behavioral data suggests that the subjects can do better (get higher payoffs) than the theoretical
equilibria predict in
(A) centipede games;
(B) coordination games with cheap talk;
(C) stag-hunt games with cheap talk;
(D) all of the above.
 8. The ultimatum bargaining game has an equilibrium where the dictator offers 0 (or the smallest mone-
tary unit) to the recipient, and the recipient accepts. This equilibrium assumes
(A) selfishness and backward induction;
(B) altruism and backward induction;
(C) altruism and spite;
(D) randomization and spite.
9. Consider a public-good game where each of 8 players has a $10 endowment and their contributions
to the “public good” are multiplied by a factor of 5 and then shared equally. Then it is a dominant
strategy to share
(A) $0; (B) $1; (C) $9; (D) $10.
10. Your answer in the previous question assumes that
(A) all subjects maximize expected utility;
(B) all subjects are altruistic;
(C) all subjects are selfish;
(D) all of the above.

11. Consider three bidders who have private values that are independently and uniformly distributed
between 0 and 100. Suppose that these values happen to be v1 = 12, v2 = 60, and v3 = 34. Then the
equilibrium price in the second-price auction is
(A) 12; (B) 60; (C) 34; (D) 40.
12. (continued) The equilibrium price in the first-price auction is
(A) 12; (B) 60; (C) 34; (D) 40.
13. (continued) The equilibrium price in the English auction is
(A) 12; (B) 60; (C) 34; (D) 40.
14. (continued) The equilibrium price in the Dutch auction is
(A) 12; (B) 60; (C) 34; (D) 40.
15. The equilibria in these auctions
(A) are all in dominant strategies;
(B) exhibit Winner’s Curse;
(C) on average, second-price auction generates higher equilibrium prices than the first-price;
(D) none of the above.
16. The overbidding in exotic auctions is best explained by
(A) altruism;
(B) sunk-cost fallacy and failures to randomize the bidding strategies;
(C) selfishness;
(D) risk aversion.
17. In experiments, the theoretical prediction for the equilibrium price is most likely to hold for
(A) the Dutch auction;
(B) the English auction;
(C) the second-price auction;
(D) the first-price auction.
18. In experiments with randomly assigned private values, the lowest average revenue among the four basic
auction types (Dutch, English, first-price, second-price) is typically generated by
(A) first-price; (B) second-price; (C) English; (D) Dutch.
19. In experiments, Winner’s Curse
(A) is typical in the English auction with private values;
(B) is typical in the Dutch auction with private values;
(C) occurs persistently in auctions with common values;
(D) can occur in auctions with common values, but bidders quickly learn to shade their bids.
20. Sniping can affect the outcomes in
(A) the Ebay auctions;
(B) first-price auctions with private values;
(C) second-price auctions with private values;
(D) first-price auctions with common values.
21. Experimental evidence shows that
(A) social norms can motivate people better than money;
(B) social norms are easily combined with monetary incentives;
(C) in experiments, people cheat as much as they can if there is no threat of punishment;
(D) all of the above.

22. The empirical evidence in the ultimatum bargaining games shows that it is most common for the
dictators to share
(A) between 10% to 30% of their endowments;
(B) between 40% and 60% of their endowments;
(C) nothing with the recipients;
(D) their entire endowments.
23. Neuroeconomics attributes trust to
(A) high levels of the oxytocin hormone;
(B) overconfidence;
(C) the two distinct systems (spontaneous System 1 and calculating System 2) of decision making;
(D) risk aversion.

24. Which of the following concepts of equilibrium in game theory always exists under the assumption of
expected utility maximization?
(A) dominant strategy equilibrium;
(B) iterated dominant strategy equilibrium ;
(C) Nash equilibrium in mixed strategies;
(D) Nash equilibrium in pure strategies.
25. Consider a game where each of two airlines can choose either low or high fares. Their payoffs are given
by the matrix (the first one in each cell is the profit of Firm 1)

F irm2 F irm2
High Low
F irm1, High 5M, 5M 0M, 4M
F irm1, Low 4M, 0M 2M, 2M

This game has

(A) a dominant strategy equilibrium;
(B) an iterated dominant strategy equilibrium;
(C) two Nash equilibria in pure strategies;
(D) none of the above.
26. Behavioral evidence suggests that the likelihood of both firms choosing high prices can be increased if
their executives can
(A) engage in informal communications and signal their intention to keep high prices;
(B) play mixed strategies;
(C) use the K-level thinking;
(D) none of the above.
27. Consider a game where each player picks a number from 0 to 60. The guess that is closest to half of
the average of the chosen numbers wins a prize. If several people are equally close, then they share the
prize. The game theory implies that in the equilibrium, players should pick
(A) 30; (B) 15; (C) 0; (D) mixed strategy.
28. The K-level thinking model explains why players in the above game can choose
(A) 30; (B) 15; (C) 7.5; (D) all of the above.
29. Consider a stag-hunt game with payoffs

Bob Bob
stag rabbit
Alice, stag 12, 12 0, 10
Alice, rabbit 10, 0 10, 10

This game has

(A) a dominant strategy equilibrium ;
(B) an iterated dominant strategy equilibrium;
(C) two Nash equilibria in pure strategies;
(D) one Nash equilibrium in pure strategies.

30. The most likely experimental outcome in this game would be

(A) (stag, stag); (B) (rabbit, rabbit); (C) (stag, rabbit); (D) (rabbit, stag).

31. Consider a game with two players (Alice and Bob) and payoffs

Bob Bob
s1 s2
Alice, s1 2, −2 0, 0
Alice, s2 0, 0 2, −2

This game has

(A) a dominant strategy equilibrium ;
(B) two Nash equilibria in pure strategies;
(C) one Nash equilibrium in pure strategies;
(D) a Nash equilibrium in mixed strategies.
32. In the equilibrium in the above game, Bob should
(A) always choose the first strategy s1;
(B) always choose the second strategy s2;
(C) choose the first strategy s1 with probability 50% ;
(D) choose the first strategy s1 with probability 60% .