AP Microeconomics 4.5: Oligopoly and Game Theory
Use two-player payoff matrices to analyze oligopoly strategy, dominant actions, Nash equilibrium, collusion incentives, and changing payoffs.
- Syllabus
- Effective Fall 2025
- Course
- AP Microeconomics
Covered syllabus points
4.5 Oligopoly and Game Theory question 1
Tony's Trinkets and Bitaly's Bracelets are the only two firms in a town that produce and sell
jewelry. Tony's Trinkets is deciding whether to produce Unique jewelry or Typical jewelry.
Bitaly's Bracelets is deciding whether to produce Gold jewelry or Silver jewelry. The payoff
matrix shows the payoffs for each combination of strategies. The first entry in each cell
shows Tony's Trinkets' profit, and the second entry shows Bitaly's Bracelets' profit. Each firm
independently and simultaneously chooses its strategy. Assume that the two firms know all the
information in the matrix and do not cooperate.
Question (a)
(a)
Suppose Bitaly's Bracelets chooses to produce Silver jewelry. Is choosing to produce Unique
jewelry the best choice for Tony's Trinkets? Explain using numbers from the payoff matrix.
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Question (b)
(b)
Is Bitaly's Bracelets' dominant strategy to produce Gold jewelry, to produce Silver jewelry, or
does it not have a dominant strategy? Explain using numbers from the payoff matrix.
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Question (c)
(c)
Identify all Nash equilibria for this game.
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Question (d)
(d)
Suppose Tony's Trinkets' profit from producing Typical jewelry increases regardless of what
Bitaly's Bracelets does. What is the minimum amount by which Tony's Trinkets' profit must
increase in order for Typical jewelry to become a dominant strategy: $2, $4, $6, $11, or $15?
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Question (e)
(e)
Suppose instead that these two firms now cooperate and merge into one firm to maximize
their combined profits. The new firm will have two locations and continue to face the same
actions and payoffs. Calculate the new firm's maximum combined profit. Show your work.
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