practice quiz study

The use of psychological incentives to solve commitment problems would be least effective in games played:

once between strangers

Suppose that a vaccine is developed for a highly contagious strain of flu. The likelihood that anyone will get this flu decreases as more people receive the vaccine. One of the demand curves below represents the private demand for the vaccine and the other represents the social demand for the vaccine. The external benefit of each dose is:

20

Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street; businesses locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. ______ residents of Miniville live west of point B, and _____ live east of point A.

200; 200

In this game, how many dominant strategies does Player B have?

4

The essential reason some species of whales have nearly been driven to extinction is that:

it is difficult to define and enforce property rights to whales.

Which of the following is NOT an example of an activity with external benefits?

Eating a sandwich in the dining hall

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month. Moe could obtain a snore-eliminating device for $50 per month. The least costly solution to the externality present in this situation is for:

Moe to eliminate his snoring.

Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. What is the equilibrium outcome of this game?

Player 1 chooses Up and Player 2 chooses Down.

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. -Suppose Quick Burger has the legal right to operate a drive-through window, and Quick Burger and the Sunshine Café can negotiate with each other at no cost. Which of the following arrangements would lead to the socially optimal outcome?

The Sunshine Café pays Quick Burger $10,500 per month not to operate the drive-though window.

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The Sunshine Café CANNOT negotiate with each other, then will Quick Burger operate a drive-though window?

Yes, because Quick Burger's payoff is higher when it operates a drive-through.

The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. Is this game a prisoner's dilemma?

Yes, because if both firms played their dominated strategy, they each would earn a higher payoff than when they both play their dominant strategy.

Lee and Cody are playing a game in which Lee has the first move at A in the decision tree shown below. Once Lee has chosen either aggression or cooperation, Cody, who can see what Lee has chosen, must choose either aggression or cooperation at B or C. Both players know the payoffs at the end of each branch. In the equilibrium of this game, Lee chooses ______, and then Cody chooses ______.

aggression; cooperation

When Row Resorts and Column Cruises both play their dominant strategy:

both firms do worse than if they had both played their dominated strategy.

The reason that the prisoner's dilemma presents a dilemma is that:

each player has an incentive to play his or her dominant strategy, but when both choose the dominant strategy each player has a lower payoff than if they both had chosen the dominated strategy.

P-TV and QRS-TV are trying to decide whether to air a sit-com or a reality show in a given time slot. Viewers like both sit-coms and reality shows, but sit-coms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below. Given the information in this decision tree, if QRS-TV announces that it will air a sit-com, it can expect to:

earn $5 million.

This graph shows the marginal cost and marginal benefit associated with roadside litter clean up. Assume that the marginal benefit curve and marginal cost curve each have their usual slope. According to this graph, the marginal benefit of litter removal is highest when the ______ bag of litter is removed.

first

One thousand adults live in Milltown. Every day, they all leave work at 4:30 p.m., arrive home at exactly 5:00 p.m., and go to bed at 9:00 p.m. Three fundraisers, Alpha, Beta, and Charlie, have targeted Milltown's population. To get a donation, they must call Milltown's residents after they get home from work but before they go to bed. Because the charities raising the funds are identical, the first to call a willing donor will get the donation. To an economic naturalist, this scenario would explain why:

fundraising calls typically occur shortly after people arrive home from work.

Total economic surplus will be ______ in nations with well-defined property rights than in nations with poorly-defined property rights.

higher

Refer to the figure below. If negotiation is impractical, the socially optimal level of production can be achieved by:

imposing a tax on paper equal to the external cost.

The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. Firm A's dominant strategy is to ______, and Firm B's dominant strategy is to ______.

invest; invest

Suppose there are two small island countries: Avarice, which is populated by people who are completely self-interested, and Altruism, which is populated by people who have adopted social norms of generosity and cooperation. Commitment problems will be:

largely avoided in Altruism, but prevalent in Avarice.

An external benefit implies that private markets will provide ______ than the socially optimal quantity, and an external cost implies that private markets will provide ______ than the socially optimal quantity.

less; more

A village has five residents, each of whom has an accumulated savings of $50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. Assume that if a villager is indifferent between buying a bond and buying a goat, the villager will buy a goat. When the each villager decides how to invest based on his or her narrow self-interest, total village income will be ______ when the village collectively decides how to invest.

lower than

Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. At the extreme right end, all 100 voters lie to the left. Suppose Candidate X is running against Candidate Y. If Candidate Z enters the race:

most of the voters who were going to vote for Y will now vote for Z.

Refer to the figure below. If Cory chooses A, then Jess's best response is:

to choose B.

The town of Pleasantville has two local TV stations. If one of them invests in the newest weather forecasting technology, one can predict that:

the other station will upgrade its weather forecasting technology.

If the production of a good generates a positive externality, then:

there will be deadweight loss at the market equilibrium quantity.

Suppose that in most car collisions between cars of unequal size, the smaller car sustains the most damage and its occupants suffer the most injury. In answering the following question, assume that, on average, smaller cars generate less air pollution than larger cars and that every person in the economy drives at least one car. In deciding what kind of car to buy, individuals:

will have a strong incentive buy large cars because large cars are safer than small cars.