Practice 3

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Apr 3, 2024

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Problem Set 3 ECO 230 I. True / False / Uncertain - Explain your answer in a sentence when necessary 1. We find evidence in support of per-capita income convergence. 2. Prebisch-Singer hypothesis claims that workers from developing country will migrate to developed country in search of higher wage. II. Definition. Keep your answers to 2 or 3 sentences and feel free to use graphs and formulas if applicable. 1. Coordination failure 2. O ring theory 3. Big push 4. Asymmetric Information 5. Forward Linkage 6. Dominant Strategy III. Short Answer - The following questions require either brief lists or 3 or 4 sentence answers at most. 1. What is the main difference between Romer’s endogenous growth model and the Solow’s exogenous growth model? 2. Using the S-curve coordination failure graph discussed in class, clearly explain why a one-time push by the developing country government might not solve the low-equilibrium trap problem. 3. What is a Nash equilibrium? Why would strategies that do not constitute a Nash equilibrium be an unlikely outcome of a game? IV. Essay Questions. Be concise and clear. 1. Explain the big push hypothesis. Why can’t a super-entrepreneur solve the big push problem? 2. Albert and Victoria are roommates. Each of them prefers a clean room to a dirty room, but neither likes housecleaning. If both clean the room, they each get a payoff of 5. If one cleans and the other doesn’t clean, the person who does the cleaning has a utility of 2, and the person who doesn’t clean has a utility of 6. If neither cleans, the room stays a mess and each has a utility of 3. What would the ”Nash” equilibrium? How is this similar to / different from the multiple equilibrium where some countries might find themselves trapped in a low level equilibrium. 3. Does either player in the following game have a dominant strategy? If so, identify it. Does either player have a dominated strategy? If so, identify it. What is the Nash equilibrium in this game? ( Hint: Will a player ever play a strictly dominated strategy? In that case you can safely eliminate that action and proceed as if that action doesn’t exist ).

4. Asahi and Kirin are the two largest sellers of beer in Japan. These two firms compete head to head in the dry beer category in Japan. The following table shows the profit (in millions of yen) that each firm earns when it charges different prices for its beer: Kirin ¥630 ¥660 ¥690 ¥720 Asahi ¥630 180, 180 184, 178 185, 175 186, 173 ¥660 178, 184 183, 183 192, 182 194, 180 ¥690 175, 185 182, 192 191, 191 198, 190 ¥720 173, 186 180, 194 190, 198 196, 196 a) Does Asahi have a dominant strategy? Does Kirin? b) Both Asahi and Kirin have a dominated strategy: Find and identify it. c) Assume that Asahi and Kirin will not play the dominated strategy you identified in part (b) (i.e., cross out the dominated strategy for each firm in the table). Having eliminated the dominated strategy, show that Asahi and Kirin now have another dominated strategy. d) Assume that Asahi and Kirin will not play the dominated strategy you identified in part (c). Having eliminated this dominated strategy, determine whether Asahi and Kirin now have a dominant strategy. e) What is the Nash equilibrium in this game? 5. With the help of a simple diagram, explain what is the golden rule in Solow growth model?

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