The following 23 questions cover some of the material that is relevant for the fourth exam.

The exact questions given below will not be on the exam. Questions that are similar to (at least) some of them will be. Understanding the answers to these questions will therefore help you prepare for the exam.

Please note that studying for the fourth exam should entail more than merely reviewing this page. The exam itself has 17 questions, and while these questions cover some of what we've done in class, there will certainly be topics appearing on the exam that do not appear in these sample questions. Make sure to also study both your class notes and the homework questions, and to read the outside readings (see the main class web page).

1. Firm 1 and Firm 2 interact in a market. Each firm has two possible strategies -- it can either "price high" or "price low."

   Each of the accompanying tables describes one set of payoffs the firms could receive. The lower, left-hand number in each square represents Firm 1's payoff; the upper, right-hand number represents Firm 2's payoff (a higher number is better for a firm than is a lower number). [Assume the firms interact just one time, that the firms choose their actions simultaneously, and that the firms can't sign binding contracts.]
   

   

   Based on the payoffs described in the tables, complete the following statement about the situation facing Firm 1. In Game I, Firm 1 has _____; in Game II, Firm 1 has _____.

   1. a dominant strategy -- it is to always choose "price low"  ;  no dominant strategy
   2. a dominant strategy -- it is to always choose "price high"  ;  no dominant strategy
   3. no dominant strategy  ;  a dominant strategy -- it is to always choose "price low"
   4. no dominant strategy  ;  a dominant strategy -- it is to always choose "price high"
   5. no dominant strategy  ;  no dominant strategy

   

2. Consider the accompanying table showing (in the standard way) two player's payoffs from a game. The x represents a specific number; higher numbers always represent more favorable outcomes. This game will have the structure of a prisoners' dilemma if and only if x is _____.
   1. any number greater than 8
   2. any number between 8 and 10
   3. any number between 8 and 14
   4. any number between 10 and 14
   5. any number greater than 14

3. The following passages appear in a story about fishing in the Gulf of California that appeared in the April 10, 2002 issue of The New York Times.

   American and Japanese ships were the first to exploit it. Now fleets of Mexican fisherman, mostly unlicensed and ungoverned, are taking whatever they can, as fast as they can, for the American and Asian markets. Every important species of fish in the sea is in sharp decline, fishermen and marine scientists say. ... "The philosophy is: get it now; grab it -- if I don't, the next guy will," said Juan Pablo Gallo, a marine biologist in Guanmas.

   Unlike the games studied in class, this situation involves many players (each fishing boat) rather than just two. Still, the "game" has the essential characteristics of a prisoners' dilemma, in which "catch as much as you can today" is the "_____" strategy and "catch less today so that the population of fish can build up for the future" is the "_____" strategy. Currently, the outcome that is occurring in the equivalent of the _____ result.
   1. defect  ;  cooperate  ;  defect-defect
   2. defect  ;  cooperate  ;  cooperate-cooperate
   3. cooperate  ;  defect  ;  defect-defect
   4. cooperate  ;  defect  ;  cooperate-cooperate
   5. Actually, this situation described in the article is not at all like a prisoners' dilemma.

   

4. Consider the accompanying table showing (in the standard way) two player's payoffs from a game. The x represents a specific number; higher numbers always represent more favorable outcomes. This game will have the structure of a chicken game if and only if x is _____.
   1. any number greater than 4
   2. any number between 4 and 6
   3. any number between 4 and 1
   4. any number less than 4 (including negative numbers)
   5. any number less than 1 (including negative numbers)

5. Consider the following two characteristics that a two-player, simultaneous-move game, which is played only one time, and in which each player has two possible actions, could have.
     (I)   The game has one outcome in which both players are worse off than they are in some other outcome.
     (II) The mutually-harmful outcome described in (I) is an equilibrium of the game.
   Which of the following statements is correct?
   1. A "prisoners' dilemma" game has both characteristics; a "chicken" game also has both characteristics.
   2. A "prisoners' dilemma" game has both characteristics; a "chicken" game has only characteristic I.
   3. A "prisoners' dilemma" game has both characteristics; a "chicken" game has only characteristic II.
   4. A "chicken" game has both characteristics; a "prisoners' dilemma" game has only characteristic I.
   5. A "chicken" game has both characteristics; a "prisoners' dilemma" game has only characteristic II.

6. Consider a prisoners' dilemma and a chicken game. Both games are played only one time, and the payoffs -- in the standard patterns -- are assumed to truly represent each player's rankings of the various possible outcomes. In which of these games is it ever possible (i.e., consider all possible actions and outcomes, not just equilibrium choices and outcomes) for a player to change only his choice of action and as a result make both himself and the other player better off?
   1. in only a chicken game
   2. in only a prisoners' dilemma
   3. in both a chicken game and a prisoners' dilemma
   4. in neither a chicken game nor a prisoners' dilemma

   

7. Sam and I like to go to sporting events together. No matter how Sam might choose to act, I get personal enjoyment out of cheering very loudly for the home team (rather than staying quiet). Sam has a similar attitude --- no matter how I might choose to act, he enjoys cheering. Since we support the same team, I get enjoyment from hearing Sam cheer. Again, Sam's attitude is similar. The "game" between Sam and I can be shown in the accompanying table, where higher numbers represent more favorable outcomes.
     The "game" between Sam and I is best described as _____.
   1. a prisoners' dilemma
   2. a chicken game
   3. both a prisoners' dilemma and a chicken game
   4. neither a prisoners' dilemma nor a chicken game

8. A (non-cooperative, simultaneous,) two-player game in which each player chooses one of two possible actions has the following two characteristics. (i) Each player has a dominant strategy. (ii) When each player uses his dominant strategy, the resulting outcome leaves each player with his second-highest payoff (i.e., the one that would be labelled a "3" on a 1 (worst)--4 (best) scale). A game that has these two features could _____.
   1. be a prisoners' dilemma
   2. be a chicken game
   3. be both a prisoners' dilemma and a chicken game
   4. not be a prisoners' dilemma nor a chicken game

9. Consider the "game" played by the college admissions departments at private universities. Since the rankings of colleges (such as those put out by U.S. News and World Report) depend in part on the fraction of applicants admitted to a school (a smaller acceptance rate makes the school rank higher), it really helps a school to raise the number of students who apply to it (so that the school can admit a smaller fraction of those applicants). Suppose that by increasing the amount of money it spends on direct-mail marketing, by waiving application fees for some students, etc., a school can always raise the number of applications it receives. If all admissions departments take such actions, however, then the acceptance rates at all schools change in the same way; i.e., the relative acceptance rates of the schools do not change. Consider colleges choosing between the actions "spend lots of money marketing" or "spend less money marketing". [Note: even though colleges may be involved in repeated game with each other, ignore any repeated-game considerations; answer this question as though the colleges were playing a one-time game with each other.] The incentives felt by the colleges in such a situation are those that exist in a _____.
   1. chicken game
   2. prisoners' dilemma
   3. both a chicken game and a prisoners' dilemma

10. In order to produce its product, a firm must pay enough to hire workers, and must buy both equipment and raw materials. As a result of producing, the firm creates air pollution that imposes costs on some people by worsening the asthma of some of those who breathe it. In calculating the marginal social cost of a unit of this good, we should include the costs _____.
    1. of acquiring workers, equipment, and raw materials only
    2. due to the asthma only
    3. the costs of acquiring workers, equipment, raw materials and those due to the asthma
    4. none of the above costs count as aspects of marginal social cost

11. If a particular unit of output was produced, the marginal value placed upon that good by the person who would consume it equals $300. The marginal private cost paid by the firm that would produce the unit equals $250. Producing this unit would increase the economic surplus created in the market (in other words, producing the unit would be socially efficient) if and only if the production of the unit didn't create _____.  
    1. a marginal external cost larger than $50
    2. a marginal external cost larger than $300
    3. a marginal external cost larger than the marginal private cost
    4. any marginal mxternal cost at all
    5. In fact, the production of this unit would increase economic surplus no matter what marginal external cost might be created by production of the good.

12. Each of the two circumstances described below causes the quantity of the relevant good produced (assuming that the quantity produced is determined by voluntary decisions in an unregulated free market) to differ from the efficient quantity. This question asks whether the inefficiency arises because the market produces a quantity that is more than or is less than the efficient quantity. (i) When the production of the relevant good also creates a "negative externality", an unregulated free market tends to produce _____ the efficient quantity. (ii) When the relevant good has the characteristics of a "positive externality", an unregulated free market tends to produce _____ the efficient quantity.
    1. more than  ;  less than
    2. less than  ;  more than
    3. more than  ;  more than
    4. less than  ;  less than
    5. exactly  ;  exactly

13. (i) Firm A's cost to produce a certain unit of a particular product is $45. Some particular consumer would get $50 worth of value from consuming that unit (and thus is willing to pay up to $50 to buy that unit). Determine whether the following statement is true or false: The production (and purchase and use) of this unit must be beneficial for society.
    (ii) Firm B's cost to produce a certain units of a particular product is $35. The particular consumer who is willing to pay the most for this uint is willing to pay up to $30 (but no more) to buy it. Determine whether the following statement is true or false: The production (and purchase and use) of this unit must be harmful for society.
    1. Both statements are true.
    2. The first statement is true; the second statement is false.
    3. The first statement is false; the second statement is true.
    4. Both statements are false.

14. Which of the following pollution-control methods makes it costly for any firm to emit any unit of pollution?
    1. a pollution tax
    2. an emissions credit trading system
    3. both a pollution tax and an emissions credit trading system
    4. neither a pollution tax nor an emissions credit trading system

15. Complete the following two passages.
    (i) Some tiny fraction of a bacteria may have some natural degree of immunity to antibiotics. When a person takes an antibiotic, some fraction of the bacteria in that person's system may survive the drug treatment. This is more likely to happen if the person doesn't continue taking the drug for as long as he is supposed to. If the drug-resistant fraction of the bacteria survives the antibiotic treatment, and reproduces, the bacteria can become very difficult to treat. In this situation, a person who doesn't use all the antibiotic he was given by his doctor is _____ other people.
    (ii) In certain circumstances, government intervention in a market may be appropriate for promoting a more equitable outcome, _____.
    1. imposing a negative externality on ; but such government action could never increase economic efficiency
    2. imposing a negative externality on ; as well as sometimes for increasing economic efficiency
    3. providing a positive externality for ; but such government action could never increase economic efficiency
    4. providing a positive externality for ; as well as sometimes for increasing economic efficiency

16. Each of the following actions benefits (at least some) people. Which is the best example of a (pure) public good?
    1. increasing the number of computers produced and available for purchase
    2. organizing a concert that will be presented in an indoor theater
    3. driving on a crowded city street
    4. releasing sterilized insects to prevent disease-carrying bugs from breeding
    5. All of the above equally satisfy the definition of a (pure) public good.

17. Consider a community made up of two people --- Person A and Person B. This community has the option of buying a certain item. This item has the characteristics of a public good. Any one unit of the public good costs $20 to purchase. If Person A gets to benefit from one unit of this good, he receives a benefit that we value at $14. If Person B gets to benefit from one unit, she receives a benefit valued at $8. If a second unit of the public good were available, Person A would benefit by $12 and Person B would benefit by $6. A third unit would provide A with a benefit of $10 and B with a benefit of $4. In order to provide the best possible (or the most efficient) outcome for the society, _____ unit(s) of this good should be (somehow) provided.
    1. 0
    2. 1
    3. 2
    4. 3

18. Suppose that 300 people each get enjoyment that they value at $3 from consuming one unit of (pure) private good X. A unit of this private good costs $2 to produce. A different 300 people each get enjoyment that they value at $3 from having access to one unit of (pure) public good Y. A unit of this public good costs $600 to produce. Complete the following. Social efficiency would be increased if people had access to _____. Now consider an economic system that functions entirely on the basis of private (self-interested) financial decision making; i.e., people decide entirely on their own whether or not to make any sort of payment. Complete the following. In such a society, we would be very confident that _____ would be produced.
    1. only private good X  ;  both private good X and public good Y
    2. only private good X  ;  only private good X
    3. only public good Y  ;  only private good X
    4. both private good X and public good Y  ;  both private good X and public good Y
    5. both private good X and public good Y  ;  only private good X

19. Consider the following two statements about country X.
    I.   "If the residents of X devote all their resources to producing Skoorb, they can produce 10,000 units of it."
    II.   "If the residents of X shift enough of their resources to increase their production of Skoorb by one unit, they will decrease their production of Llah by two units."
    Knowing which of the following about country Y -- when compared with the proper one of the above sentences -- would allow us to determine whether country X or country Y has a comparative advantage in producing Skoorb?
    1. "If the residents of Y devote all their resources to producing Skoorb, they can produce 15,000 units of it."
    2. "If the residents of Y shift enough of their resources to increase their production of Skoorb by one unit, they will decrease their production of Llah by four units."
    3. Knowing either (a) or (b) allows us to determine comparative advantage.
    4. Only by knowing both (a) and (b) can we determine comparative advantage.
    5. We don't have to know anything about country Y to determine comparative advantage.

20. England and Portugal are both capable of producing cloth and/or bicycles. Anytime England wishes to produce 1 more bicycle, it must reduce its cloth production by 1 unit. Anytime Portugal wishes to produce 1 more bicycle, it must reduce its cloth production by 2 units. Using this information we can say that the opportunity cost of producing a bicycle in England is _______ is the opportunity cost of producing a bicycle in Portugal. We can therefore also say that England has _______ advantage in producing bicycles.
    1. lower than  ;  a comparative
    2. lower than  ;  an absolute
    3. higher than  ;  a comparative
    4. higher than  ;  an absolute
    5. equal to  ;  no

21. The countries of Freedonia and Illyria are of equal size, and residents of both countries are capable of producing Lednart. If Freedonia devoted all its resources to producing this good, it could produce 1000 units of Lednart. If Illyria devoted all its resources to the same task, it could produce 1500 units of Lednart. Based on this information alone, we know for sure that _____.
    1. Illyria has a comparative advantage over Freedonia in the production of Lednart
    2. Illyria should produce more units of Lednart than its residents wish to consume, and should export some of its production
    3. Freedonia should produce more units of Lednart than its residents wish to consume, and should export some of its production
    4. Both (a) and (b) are true.
    5. Based on the information given above, we can't say for sure that any of (a)-(c) must be true.

22. Suppose that both Upland and Downland are both capable of producing cloth and bread. The only information we have about these two countries is that Upland has an absolute advantage in production over Downland in the production of both cloth and bread. Based only on this information, which of the following statements is true?
    1. Upland's production possibilities frontier intersects the axes at larger values for cloth and bread than does Downland's PPF.
    2. Upland has both a comparative advantage over Downland in producing cloth and a comparative advantage over Downland in producing bread.
    3. Residents of Upland will have a higher standard of living (a higher level of consumption) than will residents of Downland.
    4. Both (a) and (c) are correct.
    5. All of (a), (b), and (c) are correct.

23. Suppose that country X has a higher level of productivity than does country Y for every good that the two countries can produce. These two countries have been engaged in international trade (where each specialized based on its comparative advantage). Recently, the outbreak of new disease (call it "SARS") has caused a dramatic decrease in the trade between the two countries. This reduction in international trade will _____.
    1. reduce consumption levels in both country X and country Y
    2. reduce consumption levels in country X but raise consumption in country Y
    3. reduce consumption levels in country Y but raise consumption in country X
    4. raise consumption levels in both country X and country Y