Suppose that two players are playing the following game. Player A can choose either Top or Bottom, and Player B can choose either Left or Right. The payoffs are given in the following table where the number on the left is the payoff to Player A, and the number on the right is the payoff to Player B.
Does Player A have a dominant strategy? If so, what is it?
Does Player B have a dominant strategy? If so, what is it?
For the next four questions, you’ll be asked whether a strategy combination is a Nash equilibrium or not. Player A plays Top and Player B plays Left
Player A plays Bottom and Player B plays Left
Player A plays Top and Player B plays Right
Player A plays Bottom and Player B plays Right
If each player plays her maximin strategy, what will be the outcome of the game?
Now suppose the same game is played with the exception that Player A moves first and Player B moves second. Using the backward induction method discussed in the online class notes, what will be the outcome of the game?
For the next five questions, consider a monopolist. Suppose the monopolist faces the following demand curve: P = 100 – 3Q. Marginal cost of production is constant and equal to $10, and there are no fixed costs. What is the monopolist’s profit maximizing level of output?
What price will the profit maximizing monopolist charge?
How much profit will the monopolist make if she maximizes her profit?
What is the value of consumer surplus?
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What is the value of the deadweight loss created by this monopoly?
These next five problems consider tax incidence. Suppose the market supply and demand for guitars in Happy Valley are given by:
Demand: P = 300 – (1/2)Q
Supply: P = 100 + (1/3)Q
What is the equilibrium price and quantity of the product?
What is the price elasticity of demand at the equilibrium price?
For the next three questions, assume there is $20 per unit tax levied on the consumers of guitars. What price will buyers pay after the tax is imposed?
What is the quantity of the good that will be sold after the tax is imposed?
What is the deadweight loss created by the tax?
For the next nine questions, refer to the table above. Nebraska and Virginia each have 100 acres of farmland. The table gives the hypothetical figures for yield per acre in the two states. Who has the absolute advantage in the production of wheat?
Who has the absolute advantage in the production of cotton?
Who has the comparative advantage in the production of wheat?
Who has the comparative advantage in the production of cotton?
For the next four problems, you will find actual points on the combined PPC of the two states. You will be given a value of one good, and you must calculate the maximum amount of the other good that the two states could produce working together.
In Virginia, what is the marginal rate of transformation between wheat and cotton? (Assume wheat is graphed on the vertical axis.)
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