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.

Answers and explanations for all 23 questions are found at the bottom of this page. The link after each question takes you to the relevant answer. Please note that while checking the answer to question 3 (for example), you may also be able to see the answer to question 4. If you prefer not to see an answer before you've read the corresponding question, you may wish to look over all the questions before checking any answers.

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 _____.   [answer and explanation]
   

   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 _____.   [answer and explanation]
   
   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.   [answer and explanation]
   
   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 _____.   [answer and explanation]
   
   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?   [answer and explanation]
   
   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?   [answer and explanation]
   
   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 _____.   [answer and explanation]
   
   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 _____.   [answer and explanation]
   
   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 _____.   [answer and explanation]
   
   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 _____.   [answer and explanation]
    
    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 _____.   [answer and explanation]
    
    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.   [answer and explanation]
    
    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.   [answer and explanation]
    
    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?   [answer and explanation]
    
    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, _____. [answer and explanation]
    
    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?   [answer and explanation]
    
    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.   [answer and explanation]
    
    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.   [answer and explanation]
    
    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?   [answer and explanation]
    
    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.   [answer and explanation]
    
    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 _____.   [answer and explanation]
    
    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?   [answer and explanation]
    
    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 _____.   [answer and explanation]
    
    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

Question 1 answer is:   c.   no dominant strategy  ;  a dominant strategy -- it is to always choose "price low"

Explanation: One of the actions available to a player is a "dominant strategy" if it always gives that player a higher individual payoff (or at least as high a payoff) than does any of his other possible strategies regardless of what the other player chooses to do.

[Remember that we are talking about a noncooperative game in which each player chooses only its own action. In other words, we are looking at how one player chooses its action (and the payoff that one player gets as a result) holding constant the action of the other player. We are not considering a case in which the two players can coordinate and choose their actions as a "team."]

In the simple situation described in the question (game played just one time, each firm chooses its action before observing what the other firm does), Firm 1 has only two possible strategies -- charge a "low price" or charge a "high price."

The way to check whether Firm 1 has a dominant strategy is to find its "best response" to each of Firm 2's possible actions. We do this by first assuming that Firm 2 chooses a "high" price, and then seeing what price Firm 1 should choose in order to get itself the highest possible payoff. After this is done, then assume that Firm 2 chooses a "low" price, and again see which price offers a Firm 1 the highest payoff. If the same choice is best for Firm 1 in both situations, then that choice must be Firm 1's dominant strategy.

For Game I, begin by assuming that Firm 2 chooses "high;" in this case, Firm 1 gets a payoff of 20 if chooses "high" and a payoff of 25 if it chooses "low." [These are the two numbers that give Firm 1's two possible payoffs assuming that Firm 2 has chosen "high."] Obviously, Firm 1 does best in this situation by choosing "low." To indicate that "low" is Firm 1's best response to Firm 2 picking "high," we can "circle" the 25 that Firm 1 receives in this case. [In the table shown below, the 25 is bold-faced rather than circled.]

Now assume that Firm 2 chooses "low;" in this case, Firm 1 does best by choosing "high" ("high" gives Firm 1 a payoff of 15, while "low" would give Firm 1 only 10). Again, this can be shown by circling (bold-facing) the appropriate 15.

Our results indicate that Firm 1 has no dominant strategy in Game I. If Firm 1 knows that Firm 2 will price "high," Firm 1 prefers to price "low;" if it1 knows that Firm 2 will price "low," Firm 1 prefers to price "high." In other words, Firm 1's preferred choice depends on what Firm 2 does -- there is no action that is always (individually) best for Firm 1.

Saying that Firm 1 does not have an action that is always best is equivalent to saying that it doesn't have a dominant strategy.

For Game II, follow the same procedure. Assuming first that Firm 2 chooses "high," Firm 1 does best by choosing "low" (Firm 1 gets 25 rather than the 20 it would get it if it picked "high"). Assuming next that Firm 2 chooses "low," Firm 1 again does best by choosing "low" (Firm 1 gets 15 rather than 10).

In this game, therefore, we conclude that Firm 1 does have one action is always best for itself. No matter what Firm 2 does, Firm 1 always does better individually (holding constant Firm 2's action) by pricing "low" than it does by pricing "high." Holding constant Firm 2's action, therefore, we see that pricing "low" is always the best action for Firm 1. We thus say that pricing "low" is Firm 1's dominant strategy.

Question 2 answer is:   d.   any number between 10 and 14

Explanation: The prisoners' dilemma is called a "dilemma" because a person involved in such a game faces a conflict between taking one action that is always beneficial to him- or herself individually (in other words, is a dominant strategy), or taking another action that (if everybody did the same) would be beneficial for the group.

This question asks about the game having the structure of a prisoners' dilemma. To have such a structure, a player in the game must have a dominant strategy. We see that if Firm B chooses Action II, Firm A does better by choosing Action II than it does by choosing Action I. The dominant strategy in the prisoners' dilemma game must therefore be to choose Action II.

In this game, if Firm B chooses Action I, then Firm A can get either a payoff of x (by choosing Action I) or a payoff of 14 (by choosing Action II). Since we know that Action II must be the dominant strategy, we know that x must be less than 14.

The existence of a dominant strategy, however, is not the end of the story. For a game to be a prisoners' dilemma, it must be true that when both players use their dominant strategy, they both end up with a lower payoff than they would experience had they both chosen the more cooperative action. Thus, the x in this game must have a larger value than the "10" that appears in the "Action II"-"Action II" box. [Note: since Action II is the dominant strategy in a prisoners' dilemma, the Action II-Action II outcome must be the equivalent of what we've called the defect-defect outcome (the equilibrium outcome) of a prisoners' dilemma (and the Action I-Action I outcome must be the equivalent of a cooperate-cooperate outcome.]

So, combining the two restrictions on the value of x, we see that it must be greater than 10 and less than 14.

Question 3 answer is:   a.   defect  ;  cooperate  ;  defect-defect

Explanation: Two key elements of a prisoners' dilemma are: (i) there's one action available to a player that always leaves him or her (at least in the short run) individually better off (holding constant the actions of the other players), but (ii) if every player tries to help him- or herself individually, each of them ends up personally worse off than he or she would have been in a different outcome. In other words, trying to help yourself hurts the group; if everybody tries to gain individually, they all end up worse off.

In such games, the "help-yourself-at-the-expense-of-the-group action" is often called the "defect" choice, while the "don't-grab-for-personal-gain-so-as-to-leave-the-group-better-off action" is often called the "cooperate" choice.

In this example, a fishing crew helps itself individually by catching as many fish as it can. This is the "defect" strategy. If all crews act in this way, however, the stock of fish can become so depleted that (eventually) there are fewer fish for any boat to catch. [This negative-for-everybody outcome may take some time to develop.]

There are strong individual incentives to choose "defect", and in this example it appears that just about all fishing crews have done so. Perhaps some sort of formal international agreement will allow them to restrain their fishing (to switch to the "cooperate-cooperate" outcome) in order to let the fish population build back up. [A formal agreement may be necessary because each fishing crew would see no gain from an individual decision to reduce its fish catch.]

Question 5 answer is:   b.   A "prisoners' dilemma" game has both characteristics; a "chicken" game has only characteristic I.

Explanation: First, remember that both "prisoners' dilemma" and "chicken" are noncooperative games in which the players pick their actions separately -- a player has no control over the action of the other player.

Characteristic I talks about an outcome in which both players are worse off than they are in some other outcome. In other words, it refers to an outcome that is mutually-harmful for both players. This sort of outcome arises in both games.

In a "prisoners' dilemma" game, a player chooses between "cooperate" and "defect, and the payoffs are such that both players are worse off in the "defect"-"defect" outcome than they are in the "cooperate"-"cooperate" outcome.

In a "chicken" game, a player chooses between "swerve" (or "give in") and "not swerve" (or be "tough"), and the payoffs are such that both players are worse off in the "not swerve"-"not swerve" outcome than they are in the "swerve"-"swerve" outcome.

Characteristic II states that the mutually-harmful outcome described in (I) in an equilibrium of the game. A game is in an equilibrium outcome when each player is using his or her best response to what the other player is doing.

In a prisoners' dilemma, the mutually-harmful "defect"-"defect" outcome arises when each player uses his or her Dominant Stratgey (which is to "defect"). [A player has a Dominant Strategy when one of his possible actions always leaves him better off than would his other possible action (holding constant the choice of the other player. In a one-time prisoners' dilemma a player always gets a higher personal payoff by choosing to "defect" than he gets by choosing to "cooperate" regardless of what the other player does.] In a one-time prisoners' dilemma, a player could never help herself by switching from "defect" to "cooperate". The "defect"-"defect" outcome therefore is an equilibrium of a one-time prisoners' dilemma (because neither player can gain by changing just her own action).

In a chicken game, however, the mutually-harmful "tough"-"tough" outcome is one that players might find themselves in accidentally. This could happen if each player commits to being "tough" in hopes of getting the other player to "give in". [Such a commitment strategy can work well if only one player uses it, and the other really does give in.] If the players found themselves in the "tough"-"tough" outcome, however, either one would wish that he had picked a different action -- when the other player is "tough", a player is better off "giving in" than also being "tough". In a chicken game, the "tough"-"tough" outcome is thus not an equilibrium because either player could have helped himself by changing only his own action.

[By the way, Game II in Question 10 is a game in which the payoffs have the pattern of a prisoner's dilemma. In this case, to "price low" is to "defect." Given whatever action is chosen by Firm 2, Firm 1 can always increase its own payoff by choosing "low" (and the same is true for Firm 2). When both firms choose "low," however, they both end up worse off than if both had picked "high."]

Question 7 answer is:   d.   neither a prisoners' dilemma nor a chicken Game

The "game" between Sam and I has two of the characteristics of a prisoners' dilemma; namely, each player has a dominant strategy, and there's a single equilibrium outcome. No matter what Sam does, my payoff is higher if I choose to "cheer" than it is if I choose to be "quiet". Sam's dominant strategy is also to "cheer". The "cheer"-"cheer" outcome is the game's equilibrium.

For a game to be called a prisoners' dilemma, though, there must be a "dilemma" -- there must be a conflict between doing something that helps yourself and doing something that is beneficial for the overall group. In a prisoners' dilemma, if each player tries to help him- or herself, all the players end up worse off than they would have been if they had chosen some other action.

That sort of conflict does not exist in this game. When Sam and I each help ourselves by "cheer"ing, we also help the other person -- the outcome in which we both "cheer" is the best-possible outcome for both of us. The fact that helping yourself also helps the group means that this situation does not qualify as a prisoners' dilemma.

It also does not qualify as a chicken game. There are several reasons for this. One is that each playEr has a dominant strategy; a player in a chicken game doesn't. Another reason is that there is only one equilibrium in this game; a chicken game has two equilibria.

So, if this game is neither a prisoners' dilemma nor a chicken game, what is it? The answer is that it's "game" we haven't studied in this class; you won't be asked to try to "name" it. [We didn't study this game for a good reason -- from a strategic viewpoint, it isn't very interesting -- there's no conflict between the players. We can confidently predict that both players will cheer, and will be happy doing so.]

Question 8 answer is:   d.   not be a prisoners' dilemma nor a chicken game

As in the previous answer, since the question states that each player has a dominant strategy, we can immediately decide that the game can't be a chicken game -- a player in that game doesn't have a dominant strategy.

In a prisoners' dilemma game, a player does have a dominant strategy. When both players use their dominant strategies, the game ends up in its (unique) Nash equilibrium. If each player's payoff in this equilibrium is his or her second-best outcome, however, the game can't be a prisoners' dilemma.

This is because one of the characteristics of a prisoners' dilemma is that there has to be an outcome -- that arises from both players choosing their non-dominant strategy -- in which both players experience a higher payoff than they do in the equilibrium outcome.

However, if both players are getting their second-best outcome in the Nash equilibrium, the only way they could both do better would be if -- after both switch to the other action -- they both experience their best outcome; i.e., if they both get a "4" on a 1-4 scale. But, if there's an outcome that results in both players getting a "4", then that outcome would have to he the Nash equilibrium (because neither player would ever want to switch away from it). If there's an equilibrium in which each player (and, of course, the overall group) does well as possible, there's no dilemma between indiviual gain and group gain. As a result, the game can't be a prisoners' dilemma.

[It's also true that a player couldn't possibly have a non-dominant strategy choice that could ever result in a payoff of "4" (on a 1-4 scale). There's more than one reason to explain why the game described in this question can't be a prisoners' dilemma.]

[If you find the above explanation confusing, you might want to try drawing a game payoff grid to illustrate the situation described in the question/explanation. Looking at such a table might make it obvious why the game described in

Question 9 answer is:   b.   prisoners' dilemma

One of the differences between a (one-time) prisoners' dilemma and a (one-time) chicken game is whether advance knowledge of one player's choice could influence the other player's choice. In other words, if -- before A had to choice his or her action -- Player A knew what Player B was going to do, would that knowledge affect A's choice.

If a game is truly a prisoners' dilemma, advance knowledge doesn't matter. Since a player in a (one-time) prisoners' dilemma has a dominant strategy --- which is to act in the "aggressive" way --- he or she is going to do the same thing no matter what the other player does. In contrast, advance knowledge in a (one-time) chicken game should affect a player's choice. If player A knows for sure that player B is choosing the aggressive option, then player A does better by backing off, and choosing the more passive option. On the other hand, if player A knows for sure that player B is being passive, then player A does better by being aggressive.

In addition to the above characteristic, a game that qualifies as a prisoners' dliemma also has to have a second characteristic --- the equilibrium outcome (that results from both (all) players choosing their dominant strageies) must leave the players worse off than they would be if both (all) of them had chosen a different action.

Consider the situation in which the colleges described in the question find themselves. If college X spends a lot on marketing, then college Y has an incentive to do so as well -- if it doesn't it will fall behind in the rankings. If college X doens't spead a lot on marketing, then college Y still has an incentive to do so -- that way in can move up the rankings.

We conclude that college Y has an incentive to behave in the same way regardless of what college X does. This game is therefore not a chicken game.

We still have to check to see whether the game has the second feature of a prisoners' dilemma. When both (all) colleges are spending on marketing to increase their applicant numbers, their efforts efforts cancel out -- neither college gains relative to the other, and both (all) are spending a lot of money. Both (all) would be better off if they could all agree to spend less on this kind of marketing. Thus, the second characteristic is also present, and the game between the college admissions departments qualifies as a prisoners' dilemma.

Question 10 answer is:   c.   the costs of acquiring workers, equipment, raw materials and those due to the asthma

Explanation: The marginal social cost of producing a good is the sum of the marginal private cost (the costs the producer itself pays to make a good; these include the costs of hiring workers, buying equipment, etc.) and the marginal external cost (the costs imposed on "third parties" who niether produce or purchase the relevant good, but who are affected by the externality -- in this case, by the pollution). [To understand why Private Costs also count as Social Costs, just think in terms of opportunity cost. All the resources could have used for some other activity; using them in one particular way is therefore a cost to society.]

In this particular example, the costs of acquiring workers, equipment, etc, obviously count as marginal private costs, while the affects of the pollution-induced asthma count as marginal external costs.

The correct measure of marginal social cost therefore includes both of these kinds of cost.

Question 11 answer is:   a.   a marginal external cost larger than $50

Explanation: Remember that the true marginal social cost of producing a good reflects both the costs the producing firm itself has to pay (the marginal private cost) and the costs imposed on third parties (the marginal external cost). In other words, MSC = MPC + MEC.

Producing a unit of a good is (socially) efficient (so doing will raise economic surplus) if and only if the value of that unit to consumers (the marginal value) exceeds the correctly measured cost of producing that unit (the marginal social cost). Or, producing a unit is socially efficient if and only if MV > MSC = MPC + MEC.

In this question, marginal value = 300 and marginal private cost = 250. Thus, MV exceeds MSC only if MEC is less than 50.

Question 12 answer is:   a.   more than  ;  less than

Explanation: When the production of a good creates a "external cost" (also called a "spillover cost"), firms do not bear the whole cost of producing the good (nor do consumers). This is because part of the cost of producing the good is external, in the sense that it affects parties other the producers and consumers of the good.

Since firms do not bear the external cost, they will have a tendency to ignore that cost. In other words, production levels will depend on the costs directly paid by the producers and consumers -- the quantity produced will be the quantity at which the market demand and market supply curves cross. This output level is inefficiently large -- since firms ignore part of the cost of their action, they will engage in more than the efficient level of production.

Put another way, firms are willing to produce more of their output as long as the price that consumers will pay is enough to cover the firms' private costs of production. This is a problem, since the external cost implies that the social cost of production exceeds the private cost of production. From an efficiency point-of-view, production should stop when the price that consumers will pay for a unit equals the social cost of producing that unit. Since marginal social cost exceeds marginal private cost, demand hits MSC at a lower quantity than it hits MPC.

When the production of a good creates a "external benefit", the person who chooses how much of an activity to undertake does not experience the whole benefit from the good. This is because part of the benefit from the good is external, in the sense that it affects parties other the buyer (or seller) of the good.

Since potential buyers of the good do not (fully) feel the external benefit, they will have a tendency to not pay full attention to those benefits. In other words, purchasing decisions will depend on the benefits directly felt by the buyer (and on the costs felt by the producer) -- the quantity purchased will be the quantity at which the private benefit equals the private cost. This quantity level is inefficiently small -- since the buyers ignore part of the benefit of their action, they'll engage in less than the efficient level of the activity.

Note that the second part of this question would have been answered the same way if the question had refered to a product with the characteristics of a "public good" (which is a particular example of a good that has a "positive externality"). For this case, an explanation of the answer is what is given below.

A good has the characteristics of a "public good," if (a) any unit of the good can be simultaneously "consumed" by all people, and (b) it is "impossible" (or very difficult) to prevent a person who didn't pay for the good from consuming it. These two characteristics imply that a person who contributes very little (or nothing) toward the purchase of a public good can still benefit from the purchases funded by the contributions of others.

Therefore, a person who could potentially contribute to helping to pay for a "public good" good will have an incentive to "free ride." In other words, the person may be able to gain (individually) by holding back on paying for the good herself, while still planning to consume the amounts of the good that are purchased using other peoples' contributions.

Since all people who could contribute to buying the public good will feel the incentive to "free ride," voluntary (unregulated) private decisions will lead to less than the efficient level of good being produced.

Question 13 answer is:   d.   Both statements are false.

Explanation: To begin, note that appreciating the significance of the word "must" in the two relevant statements is critical to answering the question correctly. The statements in the question are true only if the indicated effects on society must be true. If the described social effect is something that might happen, but isn't something that must happen, then the statement isn't a true one.

Earlier in the semester, we might have read both of these statements are thought that they must be true. At that time, we might have believed that we could determine the social impact of a good or service by knowing only these two things: (i) the private willingness to pay (which equals the value or the benefit) of the person who consumes the item, and (ii) the private cost of the producer of the unit.

Weeks ago, we would have said that if the value of a item to a consumer exceeded the cost to the firm of producing that item, then the production and consumption of that good was socially beneficial. And, we would have said that if the value of a item to the single person who was willing to pay the most for it was less than what the item would cost a firm to produce it, then the production and consumption of that good was not socially beneficial.

After the recent material covered in class, however, we recognize that knowing the private benefit and private cost of an item might not be the end of the story. In particular, we recognize that the production or consumption of a good might create an external effect, and that such an external effect is relevant to any statement about the social impact of a good or service.

This question, of course, doesn't state that such external effects exist, but it also doesn't say that they don't exist. We therefore have to consider the possibility that such effects are present.

In part (i) of the question, we know that a unit has a private cost (to Firm A) of $45, and has a private benefit to some consumer (which matches his or her willingness to pay) of $50. If we know that there is no external effect associated with this item, we would conclude it must create a positive net benefit for society. However, there is at least the possibility that item creates an external cost, and if that negative externality is valued at more than $5, then the production and use of the good is not a positive for society.

Based on the information given in the question, therefore, the statement that producing the good "must be beneficial for society" is not a true statement.

In a similar way, knowing that a firm's private cost to create a unit is $35, while the relevant conumer's private benefit from that unit is $30, isn't enough to tell us how the production and use of that good must effect society. If there's a positive externality (valued at nore than $5) associated with the item, then producing and using the item would be positive for society. We don't know such an external benefit exists, but since it could, the statement that producing the good must be harmful for society is not true.

Question 17 answer is:   b.   1

Explanation: Remember that the definition of a "public good" implies the following. If one unit of a public good is available to the members of a community, then each member of the community can fully "consume" (and fully benefit from) that unit. [While it doesn't really matter in this question, this is true regardless of whether or not a person pays for the good.] For example, if one unit of a public good is provided to a two-person community, then each person in the community benefits from one whole unit of the good (so that the unit is not "divided up," in which case each person would benefit from only one-half unit).

If one unit of the good is provided, both People A and B can fully benefit from it. In fact, Person A gets a benefit valued at $14 from one unit of the good, and Person B gets a benefit valued at $8. In this case, making one unit of the good available to the group produces $22 worth of benefit for the community. Since a unit of the good costs only $20 to purchase, there is a positive net benefit (the benefit exceeds the cost). In other words, it is effcient to provide the first unit.

For the second unit, the benefits are $12 and $6. If that second unit was provided, it would be fully available to both people, and the community as a whole would receive $18 from it. Since a unit of the good costs $20, the summed benefits of the unit are less than the unit's cost, and providing the unit would create a negative net benefit (it would not be efficient).

The same conclusion holds for the third unit, which would provide only $14 of benefit to the community.

Note the providing a unit can be efficient even if no single person gets a benefit from it that exceeds its cost. Since we are analyzing a public good that is available to all, we must sum the benefits that all the members of the community receive, and compare that sum to the cost of the item.

Note also that this question asks only about whether or not purchasing the good would create a positive or negative net benefit. It does not ask whether or not the good actually will be purchased. Due in part to the incentive of a person to free ride that exists for a public good, the outcome of whether or not a public good will be purchased depends (in part) on how the purchase would be financed.

Suppose, for instance, that this good would be purchased only if one person decided to pay for it voluntarily. Furthermore, suppose that each person considered only his or her own private benefits and costs when deciding whether to buy it. With these assumptions, no purchase would occur, because a single person (who gets at most a benefit of $14) would never find it worthwhile to pay $20 to buy the good. Thus, private, voluntary, decision-making may fail to acquire a good even when it would be socially-efficient to do so.

Question 18 answer is:   e.   both private good X and public good Y  ;  only private good X

Explanation: When considering a (pure) private good, we know that one unit of the good can be consumed by only one person, and that those who don't pay for the good can be prevented from consuming it. Here, a good that is valued at $3 per unit costs only $2 per unit to produce. Clearly, value exceeds cost, so there would be a net gain to society if (many units of) this good were produced. Furthermore, the information in the question implies that potential consumers of private good X would be willing to pay more for the good than what it costs to produce it (it is only by paying their own money for the good that they can get access to it). The production of this good thus appears to be a potentially profitable business opportunity. We can therefore be confident that a free-market economic system would produce private good X.

The characteristics of a (pure) public good are: (i) when one person consumes some of the good, the amount available for others is not reduced, and (ii) those who don't pay for the good can not be prevented from consuming whatever units of it are produced. it. Here, one unit of the good costs $600 to produce, and would create $900 worth of value (since that one unit would provide $3 of value to all 300 people). There would thus be a net gain to society if (at least) one unit of this good was produced.

We can't, however, be sure that public good Y will actually be produced. This is because the characteristics of a public good create an incentive for an individual to "free ride" by not paying for such a good himself, while hoping to be able to benefit from whatever quantities of the good are purchased (using the payments made by others). In this case, each of the 300 people might know that it would be good thing if public good Y were somehow paid for, but each person also knows that his or her best personal outcome would be if he or she paid nothing, but others paid enough for Y to be funded. Since everybody feels this incentive, a world in which all payments are voluntary may well see few people who are willing to contribute their own money to help buy public good Y. It's possible that some kind of organized effort could raise enough money to pay for Y, but we certainly can't be confident of that outcome.

Question 19 answer is:   b.   "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."

Explanation: One determines which country (or which person) possesses the "comparative advantage" in producing a particular good by comparing that country's opportunity cost of producing the good with the opportunity cost of the other country (or person). The country that can produce the good at the lowest opportunity cost has the "comparative advantage".

In contrast, the "absolute advantage" in producing a certain good depends only on which country can (with the use of a given amount of resources) produce more units of that good.

In the question, statement I describes the quantity of output of a good that can be produced; this information is relevant to determining absolute advantage. Statement II describes (without ever actually using the term) the opportunity cost of producing a good; this information is relevant to determining comparative advantage.

Statement II by itself, however, is not enough to determine which country possesses comparative advantage. To make that judgment, one muct be able to compare the country's opportunity cost with that of another country. Answer (b) -- and only answer (b) -- provides the needed information.

Question 20 answer is:   a.   lower than  ;  a comparative

Explanation: Remember that a country has a comparative advantage over another country in producing a good if its opportunity cost of producing that good is lower than is the opportunity cost in some other country. Opportunity cost is measured in terms of a trade off -- producing more of one good entails giving up some of another. In contrast, a country has an absolute advantage over another country if it is able to produce more units of a certain good (at the same cost) than is another country.

This question gives us information about opportunity costs, but not about total output. Therefore, the question can tell us only about comparative advantage; it cannot tell us anything about absolute advantage.

In particular, the question tells us that England has a lower opportunity cost of producing a bicycle than does Portugal. We know this because we are told that producing one more bike in England entails giving up 1 unit of cloth, while producing one more bike in Portugal entails giving up 2 units of cloth. Thus the opportunity cost of making bikes is lower in England than it is in Portugal (a lower opportunity cost means that the production of Good A entails giving up less of Good B). We therefore say that England has a comparative advantage over Portugal in the production of bicycles.

To be able to make any statement about absolute advantage, we'd have to have information about the total amounts of bicycles and cloth that England and Portugal can produce. Since the question does not supply any information about total production, we know nothing about absolute advantage.

[While it doesn't matter to this question, we can also determine which country has a comparative advantage in the production of cloth. The question says that there is a 1:1 tradeoff in England and a 1 bike: 2 cloth tradeoff in Portugal. This tells us that, in order to produce 1 more cloth, England must give up 1 bike, but to do the same, Portugal must give up only 1/2 bike. Since the opportunity cost of producing cloth is lower in Portugal than it is England, Portugal has a comparative advantage in producing cloth.]

Question 21 answer is:   e.   Based on the information given above, we can't say for sure that any of (a)-(c) must be true.

Explanation: The basic definition of comparative advantage tells us that one country has a comparative advantage over another in the production of a certain good if (and only if) the country has a lower opportunity cost of producing that good.

To increase the production of a certain good, a country has to shift some of its resources -- workers, land, equipment, computers, etc. -- into the production of that good. These resources must be shifted away from some other activity; as a result, the country's production of some other good must fall. The drop in production of the second good is the opportunity cost of increasing the production of the first.

To determine comparative advantage, therefore, one must know the opportunity cost of producing a certain product in two different countries. Without knowing this tradeoff in production in two different countries, nothing about comparative advantage can be determined.

This question tells us nothing about opportunity cost, and therefore nothing about comparative advantage. Since we don't know comparaive advantage, we son't anything about the beneficial pattern of trade between the two countries. The correct answer is that "none of the above" must be true.

What this question does tell us is that Illyria has an absolute advantage in producing the good called Lednart. That, however, is not what the question is asking.

[To clarify: how could Illyria not have a comparative advantage in producing Lednart. Suppose, for example, that Illyria and Freedonia both have straight-line production possibilities frontiers, and that Illyria could produce 1500 Lednart or 3000 Scimonoce, while Freedonia could produce 1000 Lednart or 1000 Scimonoce. In this case, Fredonia's opportunity cost of producing 1 Lednart is 1 Scimonoce, while Illyria's opportunity cost of producing 1 Lednart is 2 Scimonoce. Freedonia therefore has the comparative advantage in producing Lednart. Illyria, in turn, has the comparative advantage in producing Scimonoce (since its opportunity cost of producing 1 Scimonoce is 1/2 Lednart, while Freedonia's opporunity cost of the same is 1 Lednart).]

Question 22 answer is:   d.   Both (a) -- Upland's production possibilities frontier intersects the axes a larger values for cloth and bread than does Downland's PPF -- and (c) -- Residents of Upland will have a higher standard of living (a higher level of consumption) than will residents of Downland -- are correct.

Explanation: A country with an "absolute advantage" in the production of a particular good is capable of producing more units of that good than can a country with an absolute disadvantage. Answer (a) is thus correct -- a country with an absolute advantage in both goods will have a PPF that is farther out from the origin (and thus hits the axes at larger values) to reflect its greater amounts of possible production.

Answer (c) is also correct, since a country with an absolute advantage in both goods is more productive, and thus will be able to consume more of both goods, than will the other country. [This last statement is true regardless of whether or not there is trade between the two countries.]

Answer (b), however, is not correct. Remember that the concept of "absolute advantage" relates to the number of units of output a country can produce, while the concept of "comparative advantage" relates to the opportunity cost of producing a good.

Consider the following example. For a country to be able to produce more units of Good X, it must reduce its production of Good Y. Measure the cost of producing one more unit of X by determining the drop in production of Y that must occur to make this possible. Say that Country A would have to cut its production of Y by 1 unit in order to produce 1 more unit of X, while Country B would have to cut its production of Y by 2 units in order to produce 1 more unit of X. In this case, the opportunity cost of producing X in lower in Country A than it is in Country B, so we would say that Country A has a comparative advantage over Country B is producing good X.

In the original question, we are told that Upland can produce more cloth and more bread than can Downland, but we are given no information about the countries' opportunity costs of producing these goods. In other words, we are not given the information we need to be able to determine anything about comparative advantage.

Actually, if cloth and bread are the only two goods that Upland and Downland are capable of producing, then (b) is wrong for two reasons. The first is that (as just explained) we are not given the info (opportunity cost) relevant to determine comparative advantage. The second is that it is impossible for one country to have a comparative advantage over another in the production of every good. After all, comparative advantage (opportunity cost) is related to the slope of the production possibilities frontier, and it's impossible for one country's PPF to be both flatter and steeper than another's.

Question 23 answer is:   a.   reduce consumption levels in both country X and country Y

Explanation: When two countries specialize based on comparative advantage and trade with each other, both countries -- even if one is absolutely more productive than is the other for all relevant goods -- gain. Both gain in the sense that citizens of each country are (on average) able to attain levels of consumption that they wouldn't have able to attain without international trade.

If trade allows allows both countries to gain, they it must be the case that a disruption in trade prevents both countries form gaining, and thus leaves both worse off than they would have been had trade continued.