Where is the Nash Equilbrium? * Marvel Comics MARVE Mandarin Jarvis $300 $100 $200 $80 $50 $300 $500 $800 DC. O DC chooses Alfred, Marvel chooses Jarvis O DC chooses Alfred, Marvel chooses Mandarin O DC chooses Joker, Marvel chooses Jarvis O DC chooses Joker, Marvel chooses Mandarin DC Comics Joker Alfred

Where is the Nash Equilbrium? * Marvel Comics MARVE Mandarin Jarvis $300 $100 $200 $80 $50 $300 $500 $800 DC. O DC chooses Alfred, Marvel chooses Jarvis O DC chooses Alfred, Marvel chooses Mandarin O DC chooses Joker, Marvel chooses Jarvis O DC chooses Joker, Marvel chooses Mandarin DC Comics Joker Alfred

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter8: Market Failure

Section: Chapter Questions

Problem 10P

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The conventional wisdom for urban economic development is: “Don’t put all your eggs in one basket. Diversify the economy.” To explain the idea of diversification, consider old McDonald, who must carry a dozen eggs from the barn to the house. The ground between the barn and the house is slippery, so there is a 50 percent chance that McDonald will slip on a given trip and break all the eggs in his basket. Consider two strategies: a one-basket strategy (a single trip with all 12 eggs) and a two-basket strategy (two trips, with 6 eggs per trip). INDEPTH ANSWERS. Questions= (1.)List all of the possible outcomes under each of the strategies. Question (2.)What is the expected number of delivered (unbroken) eggs under each strategy ? Question (3.)What are the trade-offs between the two strategies? If you were McDonald, which strategy would you adopt? Question (4.)What are the lessons for economic development strategies?
Give an example, real or imaginary, of an adverse selection problem. Your example must clearly point out: what information is private/asymmetric (is it an attribute or an action?) which party has the private information when does the information asymmetry arise (before or after the contract/transaction?) what is the likely outcome and in which way it can be inefficient
Give an example, real or imaginary, of a moral hazard problem. Again, your example must clearly point out: what information is private/asymmetric (is it an attribute or an action?) which party has the private information when does the information asymmetry arise (before or after the contract/transaction?) what is the likely outcome and in which way it can be inefficient
Jamal has a utility function U= W1/2 where Wis his wealth in millions of 'dollars and Uis the utility he obtains from that wealth. In the final stage of a game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1million with a probability of 0.6 and $9 million with a probability of 0.4. a. Graph Jamal's utility function. Is he risk-averse? Explain. b. Does A or B offer, Jamal, a higher expected price? Explain your reasoning with appropriate calculations. (Hint: The expected value of a random variable is the weighted average of the possible outcomes, where the probabilities are the weights.) c. Does A or B offer Jamal a higher expected utility? Again, show your calculations. d. Should Jamal pick A or B? Why?
Used cars are either lemons or peaches, and only owners know the type, buyers do not. Buyers value a peach at $4000 and a lemon at $200, and owners value a peach at $3000 and a lemon at $100. A) If there were perfect information (both sides know the type), would we have mutually beneficial transactions? If so, what is the range of prices? B) Without perfect information, and a 50% chance of a peach or lemon would there be mutually beneficial transactions? C) If owners could have the car verified as peach or lemon for $100, which owners would get the certificate? Show why.
If a risk-averse individual owns a home worth $100,000, and that individual is willing to pay $1,000 for an annual fire insurance policy that covers the entire loss in the event of a fire, then we know that?
Consider the St. Petersburg Paradox problem first discussed by Daniel Bernoulli in 1738. The game consists of tossing a coin. The player gets a payoff of 2^n where n is the number of times the coin is tossed to get the first head. So, if the sequence of tosses yields TTTH, you get a payoff of 2^4 this payoff occurs with probability (1/2^4). Compute the expected value of playing this game. Next, assume that utility U is a function of wealth X given by U = X.5 and that X = $1,000,000. In this part of the question, assume that the game ends if the first head has not occurred after 40 tosses of the coin. In that case, the payoff is 240 and the game is over. What is the expected payout of this game? Finally, what is the most you would pay to play the game if you require that your expected utility after playing the game must be equal to your utility before playing the game? Use the Goal Seek function (found in Data, What-If Analysis) in Excel.
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The blue curve on the following graph shows the tradeoff between security and tourism; that is, combinations of security and tourism above the blue curve are not possible, and those on or below the curve are possible. The vertical axis measures security, defined as the probability that a terrorist is intercepted before entering the country. The horizontal axis measures the number of yearly visitors to the United States, in millions. Suppose that before 9/11, there were 55 million visitors per year, and the probability of intercepting any particular terrorist at customs and immigration was 10%, as indicated by the purple point (diamond symbol). After the 9/11 attacks, a debate is held in Congress. Members of both parties agree that security measures need to be improved. However, there is some disagreement as to how much additional security is needed. Suppose the first bill that is introduced mandates that security be improved so that the probability of catching a terrorist at the border…
At a company, 20 employees are making contributions for a retirement gift.Each person is choosing how many dollars to contribute from the interval[0,10]. The payoff to person i is bi X xi - xi, where bi > 0 is the “warm glow”he receives from each dollar he contributes, and he incurs a personal cost of 1.a. Assume bi < 1 for all i. Find all Nash equilibria. How much is collected?b. Assume bi > 1 for all i. Find all Nash equilibria. How much is collected?c. Assume bi = 1 for all i. Find all Nash equilibria. How much is collected?Now suppose the manager of these 20 employees has announced that shewill contribute d > 0 dollars for each dollar that an employee contributes.The warm glow effect to employee i from contributing a dollar is now bi X(1 + d) because each dollar contributed actually results in a total contribution of 1 + d. Assume bi = 0.1 for i = 1, . . . , 5; bi = 0.2 for i = 6, . . . , 10; bi = 0.25 for i = 11, . . . , 15; and bi = 0.5 for i = 16, . . . , 20.d. What…
(a) Discuss how asymmetric information can influence decision-making:(i) In game theory, regarding competitors’ pricing.(ii) Between insurance companies and their clients.(b) Two hotels, Hotel Sandy and Hotel Magda, are competing for a limited number of tourists. The hotels have approval to either expand hotel operations, or add recreational water sports to their offerings. No one hotel has approval do both of these changes. A research company has determined that the following outcomes are likely:If Hotel Sandy expands, and Hotel Magda adds water sports, Hotel Sandy will increase its market share by 1%, and Hotel Magda will increase its market share by 3%.If Hotel Sandy adds water sports, and Hotel Magda expands, Hotel Sandy will decrease its market share by 5%, and Hotel Magda will increase its market share by 2%.If both hotels add water sports, Hotel Sandy will increase its market share by 4%, and Hotel Magda will increase its market share by 5%.If both hotels expand, Hotel Sandy…
Consider a medieval Italian merchant who is a risk averse expected utility maximiser. Their wealth will beequal to y if their ship returns safely from Asia loaded with the finest silk. If the ship sinks, their incomewill be y − L. The chance of a safe return is 50%.(i) Draw and carefully label the merchant’s endowment point, their expected income, and their certainty equivalent income in a 2-dimensional state-contingent consumption space. Use the diagram to illustrate and explain how the merchant would benefit from buying insurancein a competitive insurance market. At which point a risk-neutral insurance firm would maximisetheir profits by offering the merchant full insurance?