Exam #2, Prof. Hanson, Spring 2001. 23 points total.

1. (3pt) Consider the two-player game matrix below.

a. What is the pure strategy equilibrium of this game?

b. Which other possible game outcomes Pareto dominate it?

(3,-3)	(1,1)	(0,0)
(-1,-2)	(0,0)	(2,2)
(-3,5)	(-2,1)	(3,3)

2. (5pt) The following table describes the costs of some firm.

a. Fill in the three missing table entries.

b. If the firm is competitive and faces a price of 10, how much will it supply?

c. If the firm is competitive and faces a price of 5, how much will it supply?

Q	TC	MC	AC
0	10	-	-
1	12	2	12
2	15	3	7.5
3	19	4	6.33
4	24	5
5	30	6	6
6	37	7	6.17
7	45	8	6.43
8	54	9
9		10	7.11
10	75	11	7.5

3. (4pt) The following table describes the demand curve and cost curve facing a firm. If this firm acts as a monopolist, what will be its price and quantity?

P	Q	TC
100	0	0
95	1	12
90	2	23.5
85	3	34.5
80	4	45
75	5	55
70	6	64.5
65	7	73.5
60	8	82
55	9	90

4. (3pt) Which of the following externalities are likely to lead to a market failure requiring the intervention of the federal government:

a. Ugly fans show up in nationally televised broadcasts of sporting events.

b. Korean-made cars displace U.S. made cars so that U.S. workers lose jobs.

c. A new particle accelerator might possibly destroy the known universe.

5. (4pt) Make up a signaling story to explain the following behavior. For each, say what hidden characteristic is signaled, what cost-benefit assumption is required, and what we might expect to get too much of:

a. People buy each other birthday presents, even though the people who get the presents typically prefer cash.

b. Some people often challenge others saying, “Wanna fight?” even though they don’t enjoy fighting.

6. (4pt) The interest rate is 10%, and someone offers you an investment that costs $10,000 today (in April 2001), and will pay you $10,000 in 2011, $10,000 in 2012, and $10,000 in 2013 (always in April). Is this a good deal? (Show your reasoning.)