1. Using a prisoner's dilemma game such as the "wedding game." explain how a positional arms race can occur. In your answer be sure to explain positional arms races, the nature of the wedding game, etc.
5. Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the Super America Mini Mart and together they are the only gas stations in town. At the current price of $3 per gallon both receive total revenues of $1,000. Joe is considering cutting his price to $2.90, which would increase his total revenue to $1,350 if Sam continues to charge $3. If Sam's price remains $3 after Joe cuts his price, Sam will collect $500 in revenues. If Sam cuts his price to $2.90, his total revenues would also rise to $1,350 if Joe continues to charge $3. Joe will collect $500 in revenues if he keeps his price at $3 while Sam lowers his to$2.90. Joe and Sam will receive $900 each in total revenue if they both lower their price to $2.90. You may find it easier to answer the following questions if you fill in the payoff matrix below.
a) Fill out the payoff matrix
b) To Sam, cutting his price to $2.90 is a
A. revenue maximizing strategy.
B. dominant strategy.
C. dominated strategy.
D. profit maximizing strategy
c) The clear outcome of this game is that
A. Joe will cut his price and Sam won't.
B. both will cut price to $2.90.
C. Sam will cut his price and Joe won't.
D. neither Joe nor Sam will cut their price.
d) To both Joe and Sam, __________ is a __________.
A. cutting price to $2.90; disequilibrium.
B. leaving price at $3; Nash equilibrium.
C. leaving price at $3; dominant strategy.
D. cutting price to $2.90; Nash equilibrium.
3. In the "Drilling for Water" game, the final result is the lowering of the water table. Explain how the lack of property rights influences this outcome.4. You own an apple orchard and raise and sell apples at your own fruit stand. The neighbor next door to your orchard is a beekeeper. She keeps bees to make and sell honey. This year, the neighbor is considering getting rid of her bees because her honey business loses money. If she doesn't raise her bees, your apple production will fall without the bees to pollinate the trees. The following payoff matrix shows the returns to you and your neighbor with and without the bees.
a. If your neighbor makes her decision without considering your orchard, will she keep the bees? Why or why not?
b. Is it socially optimal for your neighbor to keep the bees? Explain.
c. If your neighbor consults with you, will she decide to keep the bees? What would you suggest to your neighbor if she consults you?
d. 5. You are at the company convention and your CEO gives a rousing motivational speech about how the company wants its employees to become leaders.
The CEO suggests that short-term thinking is important and urgent, whereas long-term thinking is important but not so urgent. The CEO, however, suggests that leaders engage in long-term thinking and offers the following payoffs for you: If you are involved in important and urgent work (short term thinking), the payoff is $300. If you are involved in important but not urgent work (long term thinking), the payoff for you is $500.
When you go back to the home office, however, you realize that the company culture is such that if you do long term thinking, you look like you are slacking off as long as there are other managers who are doing the urgent short term work. And so there is a loss of social standing for you worth $250. On the other hand, if you do short term work while the other managers are thinking long term, you appear to be working harder than the others and your social standing gain is worth $250.
Given the mixed messages of the CEO's speech and the home office corporate culture, does the company produce managers or leaders? Show your work using game theory.
6. A profit maximizing firm in perfect competition produces no dead weight loss but a profit maximizing firm in a monopoly market does produce deadweight loss.
a) Show a constant cost monopoly firm maximizing its profit but producing a deadweight loss.
b) If the firm in the monopoly can charge only one price, what would this price be in order to eliminate the deadweight loss. Show and explain.
c) Why would the monopoly not charge this price? Show and explain.
10.a) The perfectly competitive market for corn is in equilibrium at $10 per bushel of corn. All firms are breaking even. But now suppose that there is a successful advertisement campaign against the consumption of corn and some firms end up leaving the market. Using the demand and supply diagram for the corn market, explain why this might happen.
(b) Next, using the cost diagram of the firm, show and explain why this might happen.
(c) Next, using another demand and supply diagram, show and explain the long terms effects of this advertising campaign on the corn market.
8. In the kingdom of Spamalot, only a few people eat spam. You own the patent on Spam production and enjoy exclusive rights for the production of this delicacy. Yet your company does not make any profits.
a) Why does your company not make any profits? Show graphically and explain.
Now, using your considerable influence, you convince the king that it is the patriotic duty of every citizen to eat more spam.
b) Using the same graph as in part a. above, show and explain why your company is now making profits.
13. After much deliberation, you and your client approach the bank with your proposal for a new movie theatre. The bank is satisfied that you are a reputable client and is willing to lend you money provided they feel that the business would be successful. They wonder if you have done the proper market research based on the experiences of similar products in other cities. Specifically, they wish to know how your advertising expenditure will affect ticket sales, and, given that you will have some control over the price, how a change in price will affect ticket sales. In addition, you might also wish to look at the effect of temperature on ticket sales. You say that you have not done this research yet, but are willing to go over to the nearest computer lab, do the research, and come back with answers to their questions. Describe in detail how you would conduct this research!
15. Fresh from a successful marketing and financing campaign, you suggest that your client think about charging different prices to different customers. Why might your client wish to do that? Explain in detail.
19. You are on the road and stop at a restaurant where you have never eaten before and will never eat again. The waiter also knows that you are a complete stranger and will never see you again after this meal. Both of you only care about yourselves and not the other. You and the waiter both know that you will not tip him if the service is bad.
The waiter has the first move; should he provide you with good service or not. You have the second move; if the waiter provides you with good service, will you tip him or not. The payoffs at the end of this "Timing Game" are: 20 each for you and the waiter if the service is good and you tip. 30 for you and -5 for the waiter if the service is good but you don't tip. And 10 for the waiter and only 5 for you if the service is bad.
(a) Explain why the waiter will provide bad service.
(b) Since you are interested in good service, can you convince the waiter, in a binding/credible manner that you will tip him?
(c) If you both live in a "moral" society where everyone is ethical, how does that make your decision easier?
23. Denver is the owner of the 7-11 Mini Mart, Dallas is the owner of the Super America Mini Mart and together they are the only gas stations in town. At the current price of $3 per gallon both receive total revenues of $1,000. Denver is considering cutting his price to $2.90, which would increase his total revenue to $1,350 if Dallas continues to charge $3. If Dallas' price remains $3 after Denver cuts his price, Dallas will collect $500 in revenues. If Dallas cuts his price to $2.90, his total revenues would also rise to $1,350 if Denver continues to charge $3. Denver will collect $500 in revenues if he keeps his price at $3 while Dallas lowers his to $2.90. Denver and Dallas will receive $900 each in total revenue if they both lower their price to $2.90. What will Denver and Dallas end up doing? Why?
27. Bob lives in a residential neighborhood that prides itself on well groomed lawns. Bob's neighbors find that the marginal benefit of someone else's well groomed lawn is $10. Bob, however, receives the same net benefit from an unkempt lawn as a well groomed lawn: zero (an unkept lawn looks bad but costs nothing; a well groomed lawn looks nice but is costly).
a. The issue of Bob, his neighbors, and the state of his lawn is an example of a(n)
A) positive externality. D) positional externality
B) commitment problem. E) prisoner's dilemma.
C) negative externality.
b. If Bob acts independently, he will have a(n) __________ and total economic surplus to the neighborhood will be __________.
A) well groomed lawn; 0 D) unkempt lawn; $5
B) well groomed lawn; $5 E) unkempt lawn; $10
C) unkempt lawn; 0
c. One possible solution is suggested by the following: suggests that
A) the rest of the neighborhood will have to live with Bob.
B) Bob's neighbors should pass a law requiring well groomed lawns.
C )Bob's neighbors could pay Bob to have a well groomed lawn and be better off.
D) Bob's neighbors could pay Bob to have a well groomed lawn and be no better off.
E) Bob has undervalued a well groomed law
28. Adam Smith made an "ethical" case for the virtues of the free market. What did he say and how is his claim depicted in the demand and supply model? - Add new information to support/refute Adam Smith's claim.
33. Suppose you are a monopolist in the market for a specific computer game. Your demand curve is given by P = 80 - Q/2; your marginal cost curve is MC = Q. Your fixed cost is equal to $300.
a) Graph the demand and marginal cost curves
b) Calculate and indicate on the graph the equilibrium price and quantity (please note that the MR = 80 - Q