Econ 98 – Salazar Final Review Session Problems – Part II Fall 04Name: ______________________________SID: _______________________________GAME THEORYEXTERNALITIESINTERNATIONAL TRADEGame Theory• What is a prisoner’s dilemma?• Dominant Strategy• Nash EquilibriumExternalities• Positive externalities – extra marginal benefit to society• Negative externailities – extra marginal cost to society• How to correct externalities – Positive -> subisidy, Negative -> tax• Where is the DWL on the graphInternational Trade• What a PPC looks like, and what a CPC looks like• How to calculate opportunity cost• How to determine comparative advantage• How to determine absolute advantage• How to determine if there will be trade• How to determine the acceptable prices of trade1 of 6Econ 98 – Salazar Final Review Session Problems – Part II Fall 04Name: ______________________________SID: _______________________________Game TheoryOur favorite plumber brothers are faced with a classic dilemma. Go for the coins,or save the princess. Both face a simultaneous move decision. The payoffs are givenbelow and the standard game theory assumptions apply.LuigiMarioSave the Princess Get the Most CoinsSave the Princess(6,6) (2,4)Get the Most Coins(4,2) (1,1)A) Name any dominant strategies Mario or Luigi might have.B) Is there a unique Nash equilibrium?C) Is this game representative of a prisoner’s dilemma? Why or why not?2 of 6Econ 98 – Salazar Final Review Session Problems – Part II Fall 04Name: ______________________________SID: _______________________________ExternalitiesMatt is considering how many CD’s to buy. Matt likes to play his music very loud.Luckily for Matt, his neighbors share his taste in music and like it when Matt plays hismusic loud. Matt’s neighbors get an increasing marginal benefit for each CD Matt buys.A) Show this on a graph making sure to label the market price and quantity.B) Is the current outcome at socially optimum? Why or why not?C) Let us assume Matt’s neighbors can only give a per unit subsidy. Will this affectthe possibility of reaching the socially optimal outcome? If they are able to use a per unitsubsidy to their advantage, how exactly do they use it?3 of 6Econ 98 – Salazar Final Review Session Problems – Part II Fall 04Name: ______________________________SID: _______________________________International Trade1. Consider the following world with only two countries, the United States and thePhilippines. There are only two goods in the world, mangos and Xbox’s. The values inthe matrix below are how many hours it takes to produce a unit of the particular good.For simplification, both countries face the same labor constraint.Labor Hours = 1000 for both CountriesUnited States PhilippinesMangos.2 .4Xbox’s.4 .8A) Calculate the opportunity cost of an Xbox in terms of mangoes for each county.B) Does any county have an absolute advantage?C) Will there be trade between the two countries? Why or why not?D) Suppose the US becomes more efficient in producing Xboxes so the time it takesto produce a single Xbox is reduced to .2. How does this change affect the determinantsof trade between the US and the Philippines?4 of 6Econ 98 – Salazar Final Review Session Problems – Part II Fall 04Name: ______________________________SID: _______________________________E) What is the lower and upper bound of a price of an Xbox in terms of mangos forboth countries to agree to trade?***F) (This is a challenging question that will not be covered within the regular timeframe of the review session. For a solution, see Matt after for details.) Assume the priceof an Xbox is in the middle of the bargaining range. Draw the PPC and the CPC for theUnited States.5 of 6Econ 98 – Salazar Final Review Session Problems – Part II Fall 04Name: ______________________________SID: _______________________________2. Consider the following market for chocolate. The world price for chocolate is belowthe domestic price for chocolate here at homeA) Draw a diagram for the domestic economy under closed trade and under freetrade. B) Suppose domestic chocolate producers lobby for a tariff on chocolate imports.Show the effect on the domestic market for chocolate.C) A quota can be used to achieve the same domestic quantity and price. Showthis on a diagram. Which would you rather choose to use, a tariff or a quota?Why?6 of
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