050113

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050113

  1. 1. Learning by Doing Part II:Short AnswerMay 1, 2013
  2. 2. Announcements• Denise will go over “old exam 1 -4” in hersection tonight• Jake will do a midterm review Wed night andgo over other 4 documents ``efficiency”-``externalities.’’– Wednesday, May 1, WLH 2005, 7-8:50 pm• Myungkyu still has regulary scheduled sectionFriday, and I have office hours. See syllabus.
  3. 3. Midterm SpecificsWarnings (3rdannouncement):(1) You must be on-time to exam. Friday, May 3,3pm sharp.-10% Deduction if you are 1 second late.-100% deduction if you arrive after someoneelse finishes and leaves room.(2) No leaving room during exam (it’s less than anhour).
  4. 4. Teaching Reviews• If you haven’t filled them out yet, take aminute to after class today, or this weekend• They’re due Sunday, so I’ll send out areminder that morning.• Remember, I’m a really great guy.
  5. 5. Last Class• Worked through some multiple choicequestions together.• The areas we found the class had weaknesseson were– Extensive form of game– Legal remedies of externalities• There’s some more multiple choice questionson those slides we didn’t get to if you wantpractice.
  6. 6. Today• Will do short answer questions together• Two goals:– Understand what is and what is not a completeanswer– Separate the wheat from the chaff in longerquestions
  7. 7. ``Externalities’’ question 3.Suppose that The Lakeside Café and Camp Canoe are bothsituated along the banks of Lake Dreary. Unfortunately,for the campers at Camp Canoe, The Lakeside Caféregularly dumps garbage into Lake Dreary, and this makesthe lake smelly and dirty and negatively impacts CampCanoe’s profits because parents don’t want to send theirkids to a camp on a dirty, smelly lake. The table belowshows the daily profits for The Lakeside Café and CampCanoe when the Lakeside Café does and does not dumpits garbage in the lake.No Garbage inLakeGarbage inLakeLakeside Café 1000 1100Camp Canoe 600 400
  8. 8. ``Externalities’’ question 3.(a)Is it socially efficient for The Lakeside Café todump their garbage into Lake Dreary? Explain.No Garbage inLakeGarbage inLakeLakeside Café 1000 1100Camp Canoe 600 400
  9. 9. ``Externalities’’ question 3.(b)If the The Lakeside Café and Camp Canoecannot negotiate with each other, and if TheLakeside Café has the right to dump garbageinto the lake, then what will be the likelyoutcome?No Garbage inLakeGarbage inLakeLakeside Café 1000 1100Camp Canoe 600 400
  10. 10. ``Externalities’’ question 3.(c)If the Lakeside Café and Camp Canoe cancostlessly negotiate with each other, thenwhat will be the likely outcome? That is, willThe Lakeside Café dump their garbage into thelake?No Garbage inLakeGarbage inLakeLakeside Café 1000 1100Camp Canoe 600 400
  11. 11. ``Externalities’’ question 3.(d)How might this agreement be reached if TheLakeside Café has the right to dump garbageinto the lake?No Garbage inLakeGarbage inLakeLakeside Café 1000 1100Camp Canoe 600 400
  12. 12. ``Externalities’’ question 3.(e)How might this agreement be reached ifCamp Canoe has the right to decide whetherThe Lakeside Café can dump garbage into thelake?No Garbage inLakeGarbage inLakeLakeside Café 1000 1100Camp Canoe 600 400
  13. 13. ``Externalities’’ question 3.(f)Should it matter to an economist who is onlyinterested in economic efficiency whether TheLakeside Café has the right to dump garbageor whether Camp Canoe has the right to stopThe Lakeside Café from dumping garbage?Explain.No Garbage inLakeGarbage inLakeLakeside Café 1000 1100Camp Canoe 600 400
  14. 14. ``Externalities’’ question 3.(g)Should it matter to Camp Canoe whether TheLakeside Café has the right to dump garbageor whether Camp Canoe has the right to stopThe Lakeside Café from dumping garbage?Explain.No Garbage inLakeGarbage inLakeLakeside Café 1000 1100Camp Canoe 600 400
  15. 15. ``Games’’ question 2.GoggleYoohooNot InvestInvestStay OutStayOutEnterEnterYoohoo3 (G)-2 (Y)5 (G)0 (Y)4 (G)1 (Y)6 (G)0 (Y)Suppose that Goggle is the only firm that providesinternet search services, but a second firm, Yoohoo, isconsidering entering the market. Prior to Yoohoo’sdecision about whether to enter the market, supposeGoggle must decide whether to make a costlyinvestment to improve the quality of its own product.Suppose the decision tree for this game can be writtenas follows:
  16. 16. ``Games’’ question 2.GoggleYoohooNot InvestInvestStay OutStayOutEnterEnterYoohoo3 (G)-2 (Y)5 (G)0 (Y)4 (G)1 (Y)6 (G)0 (Y)(a) If Yoohoo enters the market what will itspayoff be if Goggle invests? What if Goggledoesn’t invest? If Yoohoo enters the market,why might its profits be lower when Goggleinvests?
  17. 17. ``Games’’ question 2.GoggleYoohooNot InvestInvestStay OutStayOutEnterEnterYoohoo3 (G)-2 (Y)5 (G)0 (Y)4 (G)1 (Y)6 (G)0 (Y)(b)What is the (subgame perfect) Nashequilibrium of this game?Say what?Let’s find the equilibrium which is sequentiallyrational.
  18. 18. ``Games’’ question 2.(c)In this example, will Goggle be able to deterYoohoo’s entry into the market?GoggleYoohooNot InvestInvestStay OutStayOutEnterEnterYoohoo3 (G)-2 (Y)5 (G)0 (Y)4 (G)1 (Y)6 (G)0 (Y)

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