Introductory Economics
Eco 108
HW 8
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Suppose we have a duopoly. These two firms can form a cartel and charge the monopoly price of 8, or cheat and charge a price of 6. The table below gives each firm's payoffs, in profits, given the two possible strategies.
Table 1: Duopoly
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| Firm 2, p=8 | Firm 2, p=6
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Firm 1, p=8 | 10,8 | 2,10
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Firm 1, p=6 | 20,-2 | 6,5 |
- [a.]
Define Nash Equilibrium.
- [b.]
What is the Nash Equilibrium for this game? Why?
- Negative production externalities
- [a.]
What is a negative production externality? Give an example.
- [b.]
Is the equilibrium outcome efficient in this case? If not, is too much being produced or too little? Illustrate this graphically.
- [c.]
Suppose that the transaction costs of side payments are high enough not to guarantee an efficient outcome, what can the government do here? Illustrate this situation graphically.
- Suppose your roommate smokes. Each cigarette she smokes in your apartment costs you $2.00 in damages. If she continues to smoke in the apartment you can buy a room deodorizer for $1.00/cigarette. If she were to smoke outside it costs her $1.50/cigarette.
- [a.]
What is the efficient outcome?
- [b.]
If your roommate has property rights to your apartment, what is an equilibrium outcome? In other words, where does your roommate smoke, and if there are any side payments who's paying, and how much are they paying? Is this efficient?
- [b.]
If you have property rights, what is an equilibrium outcome? In other words, where does your roommate smoke, and if there are any side payments who's paying, and how much are they paying? Is this efficient?
- Public Goods
- [a.]
Give an example of a public good.
- [b.]
What two characteristics do public goods satisfy? How are these two characteristics satisfied by you example given in part a?
- [c.]
Why is it hard to provide public goods privately?
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