ECON 2100 (Summer 2016 Sections 10 & 11) Exam #4D

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1 ECON 2100 (Summer 2016 Sections 10 & 11) Exam #4D Multiple Choice Questions: (3 points each) 1. I am taking of the exam. D. Version D 2. was the first economist to argue that the problem of externalities could potentially be solved by simply internalizing the externality by clearly and completely defining property rights, and then allowing affected parties to negotiate with one another. A. Ronald Coase B. Milton Friedman C. John Nash D. Arthur Pigou 3. Tony and Dennis are playing a two player simultaneous move game. Tony s two available strategies are High and Low. Tony chooses to play High with probability one quarter and Low with probability three quarters. It appears as if Tony A. cannot possibly be choosing a strategy that is a best reply to the strategy chosen by Dennis. B. is definitely choosing a strategy that is a best reply to the strategy chosen by Dennis. C. is playing a pure strategy. D. is playing a mixed strategy. 4. A widget is a good that is both non-excludable and non-rival in consumption. Based upon this information, we would expect that if widgets were traded in a free market, then A. widgets would be given away for free (i.e., traded at a price of $0). B. the level of trade would be less than the efficient number of widgets. C. the level of trade would be more than the efficient number of widgets. 5. refers to efforts by firms to coordinate their actions in an attempt to increase both total industry profit and individual profit of each firm. A. Game theory B. The Coase Theorem C. The Tragedy of the Commons D. Collusion 6. In general terms, Market Failure refers to A. the argument for why if a public good were supplied in the marketplace, the amount provided would be less than the efficient quantity. B. the practice of charging different consumers different prices for different units of a good (which the price difference not resulting from differences in production costs). C. the argument that the best way to deal with problems related to externalities is to clearly and completely define property rights, and then allow affected parties to negotiate with one another. D. a situation in which the free market outcome results in either more than or less than the efficient level of trade.

2 7. Which of the following types of goods are non-excludable? A. Private Goods and Common Goods. B. Private Goods and Collective Goods. C. Public Goods and Common Goods. D. Public Goods and Collective Goods. For questions 8 through 11, consider the market illustrated below: 29 $ Marginal Social Costs c d a b e 13,000 19,300 32,000 Marginal Private Costs Marginal Private Benefits 8. It would appear as if A. production/consumption of this good generates a positive externality. B. production/consumption of this good generates a negative externality. C. this good is a Pure Public Good. D. this good is clearly being produced by a cartel. 9. At the free market outcome, there is a Deadweight-Loss equal to. A. area (f) B. areas (c)+(d) C. area (b) D. area (a) = Marginal Social Benefits Quantity 10. The efficient level of trade in this market is, while the free market level of trade is. A. 0; 13,000. B. 13,000; 19,300. C. 19,300; 13,000. D. 32,000; 13, Which of the following policies would result in the efficient amount of the good being traded? A. Completely banning the production/purchase of this good. B. Imposing a Per Unit Tax of $6.50 on sellers of this good. C. Imposing a Per Unit Tax of $9.50 on sellers of this good. D. Having the government provide 19,300 units of the good (and imposing an income tax on citizens in order to generate money to cover the costs of producing these units). f

3 12. After going trick-or-treating on Halloween Ty and his younger brother Logan decide to pool all of the candy they collected. Each of them is able to take and consume a piece of candy from the common pool whenever he wants. Consequently, the candy is a common resource that is nonexcludable but rival in consumption. Economic theory would suggest that the candy will be consumed it would have been if each child privately owned the candy that he himself had received. A. more quickly than B. at exactly the same pace as C. less quickly than D. None of the above answers are correct (since economic theory would not provide any insights whatsoever on an issue of this nature). 13. Which of the following goods best fits the definition of a Private Good? A. A satellite radio broadcast. B. An FA-22 Raptor fighter jet. C. A venti iced coffee from Starbuck s. D. Fish in the ocean. For Questions 14 through 17, consider the following simultaneous move game: Player 2 Left Right Player 1 Top 150, 45 50, 125 Bottom 100, , If Player 2 were to choose Left, then the best reply for Player 1 would be to A. choose Right. B. also choose Left. C. choose Top. D. choose Bottom. 15. In this game, A. both Player 1 and Player 2 have a dominant strategy. B. neither Player 1 nor Player 2 has a dominant strategy. C. Player 1 has a dominant strategy, but Player 2 does not. D. Player 2 has a dominant strategy, but Player 1 does not. 16. This game A. fits the definition of a Prisoner s Dilemma. B. does not have any Nash Equilibria (even in mixed strategies ). C. has an equilibrium in which Player 1 chooses Top and Player 2 chooses Right. D. None of the above answers is correct. 17. Suppose that Player 2 chose to randomize and a play a mixed strategy for which he chooses Left with probability three quarters (i.e., ¾) and Right with probability one quarter (i.e., ¼). Given this choice by Player 2, Player 1 s expected payoff is A. greater from choosing Top than from choosing Bottom. B. greater from choosing Bottom than from choosing Top. C. exactly the same if he chooses Top or Bottom. D. positive if he chooses Top but negative if he chooses Bottom.

4 18. LeBron and James manage the only two gas stations in a small town in rural Ohio. Each morning they simultaneously choose prices to charge for that day. As a consequence of the two prices which are chosen, each gas station earns a particular level of profit. If we were to model this interaction as a game, it would be most reasonable to think of as the strategies. A. LeBron and James B. their profits C. their customers D. their prices 19. Which of the following statements is a strategic rule of thumb identified in lecture? A. If you are playing a game with no pure strategy Nash equilibrium, both you and your opponent should place equal probability weight on each of your available pure strategies. B. If you have a dominant strategy, use it. C. If your rival has a dominant strategy, expect her to never use it; thus, you should NOT use your strategy which is the best reply to the dominant strategy of your rival. For questions 20 and 21, consider the market illustrated below: $ Marginal Private Costs = 7.60 Marginal Social Costs 7.00 b a 6.20 d c e Marginal Social Benefits 5.50 f g 5.15 h Marginal Private Benefits 0 quantity 28,500 30, The efficient level of trade in this market is, while the free market level of trade is. A. 0; 28,500 B. 28,500; 30,750 C. 30,750; 28,500 D. 30,750; At the free market equilibrium outcome Total Consumers Surplus (i.e., the surplus of the people who actually purchase the good) is equal to and Deadweight Loss is equal to. A. areas (a)+(b)+(c)+(d) ; area (f). B. areas (a)+(c) ; area (f). C. areas (a)+(b) ; area (e). D. areas (a)+(c) ; area (e).

5 22. If a good is such that it is very difficult (or very costly) to prevent consumption by those who do not pay for the good, then the good in question is. A. rival in consumption B. non-rival in consumption C. excludable D. non-excludable 23. states that for every game with a finite number of players, each with a finite number of available pure strategies, there exists at least one equilibrium (potentially in mixed strategies). A. Zermelo s Existence Theorem B. The Pigovian Taxation Theorem C. The Coase Theorem D. Nash s Existence Theorem 24. One way to potentially correct for the market failure which would result if a public good were provided in a free market is to: A. have the government decide upon the quantity to be provided (presumably, a best estimate of the optimal quantity), and then tax people to cover the costs of providing the good. B. impose a tax on the purchase of the item, so that fewer units are traded. C. completely ban the production/consumption of the item, so that no trade takes place. D. None of the above answers are correct, since this is a trick question because there is no possible way to correct for the market failure which would result from a public good being provided in a free market. 25. Which of the following statements related to imposing a corrective Pigouvian Tax in the presence of a negative externality is true? A. A Pigouvian Tax will reduce the level of trade in a market. B. A Pigouvian Tax will not generate any revenue for the government. C. A Pigouvian Tax will create a Deadweight-Loss where there wasn t one to start. D. Economists typically favor command-and-control regulations (such as strict limits on levels of or bans on pollution) over Pigouvian Taxes over. 26. Good Y is rival in consumption but non-excludable. Consequently, if a society simply relies upon free, unregulated markets to decide how much Good Y is produced/consumed/used we would expect to have A. an inefficient outcome from too little production/consumption/use. B. an inefficient outcome from too much production/consumption/use. C. an inefficient outcome from having the ideal amount of production/consumption/use. D. an efficient outcome. 27. A broadly refers to a benefit from an activity realized by someone who is not engaging in the activity. A. cartel B. negative externality C. positive externality D. collective good

6 28. is the study of decision making environments in which the outcome for any one decision maker depends upon not only their own actions, but also upon the actions of other decision makers. A. Macroeconomic Theory B. Public Choice Theory C. Game Theory D. Oligopoly Theory 29. The reintroduction of the gray wolf into the wilderness of the Western United States during the last several decades A. led to ranchers in the region realizing an external cost as a result of having some of their livestock killed by the return of this predator. B. illustrates how something similar to the Coasian Solution to the problem of externalities can be implemented in order to reduce Deadweight-Loss. C. was undertaken by a cartel of firms, and was therefore inefficient. 30. Which of the following is NOT one of the three basic elements of a game? A. Rules of the game. B. Strategies. C. Players. D. None of the above answers is correct (since each is one of the basic elements of a game). 31. There would be a positive Deadweight-Loss from too much production/consumption/trade taking place if we simply let a free market decide upon the level of production/consumption/trade for A. a public good. B. a good which generates a significant positive externality. C. a good which generates a significant negative externality. For Questions 32 and 33, consider the simultaneous move game illustrated below. Arrows have been drawn to illustrate the best reply for each player for each strategy which could be chosen by his rival. If Top, Left is realized, Player 1 realizes a payoff of w > 0 and Player 2 realizes a payoff of x > 0. If Bottom, Right is realized, Player 1 realizes a payoff of y > 0 and Player 2 realizes a payoff of z > 0. Left Player 1 Top w, x Bottom Player Based upon the arrows illustrating the best replies, it appears as if A. neither player has a dominant strategy. B. Player 1 has a dominant strategy but Player 2 does not. C. Player 2 has a dominant strategy but Player 1 does not. D. both players have a dominant strategy. Right 33. This game fits the definition of a Prisoners Dilemma so long as A. y is greater than w and z is greater than x. B. w is greater than y and x is greater than z. C. y is greater than z and w is greater than x. D. None of the above answers are correct (since this game is not a Prisoners Dilemma for any values of w, x, y, and z ). y, z

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