ECON - 2110 Midterm #3

c. negative externality.

A cost of an activity that falls on people not engaged in the activity is called a(n): a. external benefit. b. prisoner's dilemma. c. negative externality. d. positive externality.

d. games in which timing matters.

A decision tree is used when modeling: a. any type of game. b. simultaneous decisions. c. a prisoner's dilemma. d. games in which timing matters.

a. a player has a strategy that yields the highest payoff regardless of the other player's choice.

A dominant strategy exists if: a. a player has a strategy that yields the highest payoff regardless of the other player's choice. b. both players have the highest payoff when they make the same choice. c. both players make the same choice. d. one strategy yields the highest possible payoff.

a. $0.

A pirate comes to firm B and claims to know what firm A has decided. Given that each firm already knows the payoff matrix, how much would this information be worth to firm B? a. $0. b. $50 million. c. $30 million. d. $70 million.

c. the players' payoffs are smaller when both play their dominant strategy compared to when both play a dominated strategy.

A prisoner's dilemma is a game in which: a. neither player has a dominant strategy. b. one player has a dominant strategy and the other does not. c. the players' payoffs are smaller when both play their dominant strategy compared to when both play a dominated strategy. d. the players' payoffs are larger when both play their dominant strategy compared to when both play a dominated strategy.

b. a tit-for-tat strategy.

A strategy that limits defection in a repeated prisoner's dilemma game is: a. Nash equilibrium. b. a tit-for-tat strategy. c. a cartel. d. an ultimatum bargaining game.

c. $100

If Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price, then what will be Mega's economic profit a. $0 b. $50 c. $100 d. $150

c. invest; invest

Firm A's dominant strategy is to ______, and Firm B's dominant strategy is to ______. a. invest; not invest b. not invest; invest c. invest; invest d. not invest; not invest

d. Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter.

If all three parties can communicate and negotiate with each other at no cost, will Erie Textiles use a filter? a. No, because it makes $200 less in profit with the filter. b. Yes, because the benefit it would receive from being able to advertise that it acts in an environmentally responsible way exceeds the cost of using a filter. c. No, because use of a filter would result in smaller total economic surplus. d. Yes, because fishermen and bird watchers are willing to pay enough to Erie Textiles to offset the cost of using a filter.

c. imposing a tax on paper equal to the external cost.

If negotiation is impractical, the socially optimal level of production can be achieved by a. banning production of paper. b. compensating those injured by the externality. c. imposing a tax on paper equal to the external cost. d. subsidizing paper by the amount of the external benefit.

a. the private marginal cost curve for the activity is below the socially optimal marginal cost curve.

If the Tragedy of the Commons issue is present in a market, one can infer that a. the private marginal cost curve for the activity is below the socially optimal marginal cost curve. b. the private marginal benefit curve for the activity is above the socially optimal marginal benefit curve. c. there is a positive externality associated with this good. d. there is a negative externality associated with this good.

b. does not allocate; some of the costs of paper production do not fall on producers

In the case of the market for paper, the private market ______ resources efficiently because ______. a. does not allocate; demand and supply do not cross at the market equilibrium b. does not allocate; some of the costs of paper production do not fall on producers c. allocates; firms are motivated to maximize profit d. allocates; consumers are willing to pay the external cost of production

b. Cartel.

OPEC is an example of a: a. Monopsony. b. Cartel. c. Monopoly. d. Duopoly.

b. generates an external cost of $50 per ton per year.

One can infer that paper production a. generates no externalities at quantities less than 300 tons per day. b. generates an external cost of $50 per ton per year. c. generates an external cost of $150 per ton per year. d. should be prohibited.

a. a negative externality.

One can infer that the market for paper has a. a negative externality. b. a positive externality. c. market power. d. an efficient outcome.

a. the Tragedy of the Commons.

Overfishing or overhunting on public land are examples of a. the Tragedy of the Commons. b. a negative externality. c. a positive externality. d. an external cost.

c. 150; 0

Suppose Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Mega cheats on the agreement by reducing its price to $1 while Acme continues to comply with the collusive agreement, then Mega will then sell ______ units and Acme will sell ______ units. a. 150; 50 b. 100; 50 c. 150; 0 d. 100; 0

b. negotiation with many individual fishermen and bird watchers was too costly.

Suppose you observe that Erie has not added a filter. You could conclude that the Coase Theorem failed to solve the externality problem because: a. Erie's benefits to operating without a filter are greater than the benefits of a filter to the fishermen and bird watchers. b. negotiation with many individual fishermen and bird watchers was too costly. c. Erie has a property right to the river. d. regulators prevent application of the Coase Theorem when the environment is at stake.

b. I, II, and III.

The basic element(s) of a game are I.the players. II.the strategies. III.the payoffs. IV.the Nash equilibrium. a. I, II, IV. b. I, II, and III. c. I, II, III, IV. d. IV.

b. a greater than optimal level of production.

The existence of a negative externality will result in: a. a less than optimal level of production. b. a greater than optimal level of production. c. prices that are artificially high. d. elimination of deadweight loss.

b. Coase Theorem

The insight that people can always arrive at efficient solutions to the problems caused by externalities if they can negotiate the purchase and sale of the right to perform activities that cause externalities is called the _______. a. Sherman Act b. Coase Theorem c. tragedy of the commons d. prisoner's dilemma

d. 300

The socially optimal quantity of paper is ______ tons per year. a. 0 b. 360 c. 150 d. 300

c. prisoner's dilemma.

This game is an example of a: a. cartel. b. credible promise. c. prisoner's dilemma. d. game with multiple equilibria.

d. Player 1 chooses Down and Player 2 chooses Up.

What is the equilibrium outcome of this game? a. Player 1 and Player 2 both choose Up. b. Player 1 and Player 2 both choose Down. c. Player 1 chooses Up and Player 2 chooses Down. d. Player 1 chooses Down and Player 2 chooses Up.

c. Not all games have a dominant strategy.

Which of the following statements about game theory is TRUE?a. A game must always have a Nash Equilibrium. b. A game must only have one Nash Equilibrium. c. Not all games have a dominant strategy. d. If each players plays their dominant strategy, they will always receive their largest payoff than if they had both played their dominated strategy.