Microeconomics
Problem Set #10
Public Goods
Use the following information to answer questions 1 through 3:
Consider the following prisoner's dilemma with the payoff matrix (Numbers represents
years in prison):
Person B Person B
Do not contribute Contribute
Person A Do not contribute A pays $0, receives
$0, net gain $0
B pays $0, receives
$0, net gain $0
A pays $0, receives
$21, net gain
$21
B pays $28, receives
$21, net gain $-
7
Person A Contribute A pays $28, receives
$21, net gain $-
7
B pays $0, receives
$21, net gain
$21
A pays $28, receives
$42, net gain
$14
B pays $28, receives
$42, net gain
$14
1. What is the dominant strategy for player A?
a. Contribute.
. Do not contribute.
c. There is no dominant strategy.
2. What is the dominant strategy for player B?
a. Contribute.
. Do not contribute.
c. There is no dominant strategy.
3. What is the Nash Equili
ium?
a. $0, $0
. $-7, $21
c. $14, $14
d. $21, $-7
e. There is no Nash Equili
ium.
Use the following information to answer questions 4 through 9:
Suppose that there is a positive externality in the market for pizza rolls. The graph below
shows the supply and demand curves for pizza rolls.
4. What is the market equili
ium?
5. What is the market price?
6. What is the optimal quantity?
7. What should the government do in order to ensure the market produces optimal (efficient)
quantity?
a. Impose co
ective taxes (Pigovian taxes)
. Do nothing.
c. Impose co
ective subsidies (Pigovian subsidies).
8. How big should the government's co
ective taxes or subsidies be in this case?
9. As a result of the positive externality, this market
a. over produces.
. produces the optimal (efficient) amount.
c. under produces.
Use the following information to answer questions 10 through 15:
Suppose that there is a negative externality in the market for pizza rolls. The graph below
shows the supply and demand curves for pizza rolls.
10. What is the market equili
ium?
11. What is the market price?
12. What is the optimal (efficient) quantity?
13. What should the government do in order to ensure the market produces optimal (efficient)
quantity?
a. Impose co
ective taxes (Pigovian taxes)
. Do nothing.
c. Impose co
ective subsidies (Pigovian subsidies).
14. How big should the government's co
ective taxes or subsidies be in this case?
15. As a result of this negative externality, the market
a. over produces.
. produces optimal (efficient) amount.
c. under produces.