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Week 7 - Tutorial Questions-2

This document contains a series of questions about economics concepts such as externalities, game theory, and market equilibrium. Question 1 asks about negative externalities and how a Pigouvian tax can internalize them. Question 2 provides definitions for game theory terms like cooperative equilibrium and Nash equilibrium. Question 3 presents a prisoner's dilemma scenario to analyze dominant strategies. Question 4 applies game theory to a duopoly market. Question 5 examines another game for dominant strategies and Nash equilibrium.

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38 views

Week 7 - Tutorial Questions-2

This document contains a series of questions about economics concepts such as externalities, game theory, and market equilibrium. Question 1 asks about negative externalities and how a Pigouvian tax can internalize them. Question 2 provides definitions for game theory terms like cooperative equilibrium and Nash equilibrium. Question 3 presents a prisoner's dilemma scenario to analyze dominant strategies. Question 4 applies game theory to a duopoly market. Question 5 examines another game for dominant strategies and Nash equilibrium.

Uploaded by

invinitiblaed
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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WEEK 7_Tutorial Questions

1. A negative externality is created by


A) cleaning up the sidewalk on your block.
B) graduating from university.
C) repainting the house you live in to improve its appearance.
D) keeping a junked car parked on your front lawn.

2. When does a negative externality exist?


A) When there are quantity controls in a market.
B) When there are price controls in a market.
C) When the marginal social cost of producing a good or service exceeds the private
cost.
D) When the marginal private cost of producing a good or service exceeds the social
cost.

3. Which of the following represents the true economic cost of production when firms
produce goods that cause negative externalities?
A) The private cost of production
B) The social cost of production
C) The external cost of production
D) The explicit cost of production

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Figure 11.3

Figure 11.3 shows a market with an externality. The current market equilibrium output
of Q1 is not the economically efficient output. The economically efficient output is
Q2.

4. Refer to Figure 11.3. Suppose the current market equilibrium output of Q1 is not
the economically efficient output because of an externality. The economically
efficient output is Q2. In that case, the diagram shows
A) the effect of a positive externality in the production of a good.
B) the effect of a negative externality in the production of a good.
C) the effect of an external cost imposed on a producer.
D) the effect of an external benefit such as a subsidy granted to consumers of a good.

5. Refer to Figure 11.3. If, because of an externality, the economically efficient


output is Q2 and not the current equilibrium output of Q1, what does S1 represent?
A) The market supply curve reflecting external cost
B) The market supply curve reflecting implicit cost
C) The market supply curve reflecting social cost
D) The market supply curve reflecting private cost

6. Refer to Figure 11.3. If, because of an externality, the economically efficient


output is Q2 and not the current equilibrium output of Q1, what does S2 represent?
A) The market supply curve reflecting private cost
B) The market supply curve reflecting social cost
C) The market supply curve reflecting external cost
D) The market supply curve reflecting implicit cost

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Short-answer Questions

Question 1
What is meant by the term ‘internalising an externality’? How does a Pigovian tax or
subsidy internalise an externality?

Question 2
Give brief definitions of the following concepts:
a. Game theory
b. Cooperative equilibrium
c. Non-cooperative equilibrium
d. Dominant strategy
e. Nash equilibrium

Question 3
Bob and Tom are two criminals who have been arrested for burglary. The police put
Tom and Bob in separate cells. They offer to let Bob go free if he confesses to the
crime and testifies against Tom. Bob is also told that he will serve a 15-year sentence
if he remains silent while Tom confesses. If he confesses and Tom also confesses,
they will each serve a 10-year sentence. Separately, the police make the same offer to
Tom. Assume that if Bob and Tom both remain silent, the police only have enough
evidence to convict them of a lesser crime and they will serve three-year sentences.
a. Use this information to write a payoff matrix for Bob and Tom.
b. Does Bob have a dominant strategy? If so, what is it?
c. Does Tom have a dominant strategy? If so, what is it?
d. What sentences do Bob and Tom serve? How might they have avoided
this outcome?
Question 4
Suppose that Big W and Kmart are competing on whether to stick with barcodes or
switch to radio frequency identification (RFID) tags to monitor the flow of products.
Because many suppliers sell to both Big W and Kmart, it is much less costly for
suppliers to use one system or the other, rather than to use both. The following payoff
matrix shows the profits per year for each company resulting from the interaction of
their strategies.

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a. Briefly explain whether Big W has a dominant strategy.
b. Briefly explain whether Kmart has a dominant strategy.
c. Briefly explain whether there is a Nash equilibrium in this game.

Question 5

Finding dominant strategies is often a very effective way of analysing a game.


Consider the following game: Microsoft and Apple are the two firms in the market for
operating systems. Each firm has two strategies: charge a high price or charge a low
price.

a. What (if any) is the dominant strategy for each firm?


b. Is there a Nash equilibrium? Briefly explain.

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