ECON1040 Principles of Economics– Tutorial 2 – S1 2022
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ECON1040 Principles of Economics– Tutorial 2 – S1 2022
Tutorial 2, Week 3.
1. Strategic Interactions and Game Theory
Social interactions are often modelled using game theory. Why might the decision to get a vaccination be considered a social interaction?
2. Social interactions and inefficient outcomes (sec. 4.3)
Assume that two communities, Tempe and Marrickville can decide to preserve the Cooks River which runs through both communities. Preservation is costly and the payoffs associated with preserving or not preserving are shown below (note that a negative number refers to a cost and a positive number refers to a benefit).
|
Preserve Marrickville Not preserve |
|
Tempe |
|
|
Preserve (100, 100) (200, -25) |
|
Not preserve (-100, 200) (0, 0) |
• Why might the payoffs take the values they do?
• Identify the best responses of Tempe and Marrickville.
• Do the communities have a dominant strategy? If so, what is that strategy? Does this lead to a good outcome? Why or why not?
3. Public Goods and Social Interaction (sec 4.6)
Read the following story which concerns the National Broadband Network (NBN) and the
experience of customers who are trying to connect to it:
https://www.abc.net.au/news/2018-08-11/people-inadvertently-paying-for-neighbours-faster- nbn/10104778
Describe how the situation in the article is similar to the problem faced by irrigators (such as Kim) described in section 4.6 of the text.
What do the neighbours of people like Charmian (her story is described in the article) have an incentive to do? What might be the result of such an interaction? Why does this outcome occur?
4. Nash Equilibrium (sec 4.13)
a) Define Nash equilibrium.
b) Consider the following game played between two parties who are considering opening a BBQ chicken shop. Gordon and Huey can choose to open in one of two locations, West Street or Goodacre Avenue. The payoffs to Gordon and Huey are presented in the payoff matrix below with Gordon’s payoff (the row player) being shown first, followed by Huey’s payoff (the column player). Identify the best responses and the Nash Equilibrium. Where do you think Gordon and Huey will set up shop?
|
Gordon |
Goodacre West |
|
Huey |
|
Goodacre (-10, -10) (40, 50) |
West (50, 25) (-5, -5) |
c) Answer exercise 4.14 (points 1 & 2) in section 4.13 of the textbook.
5. Pareto Efficiency (sec. 5.2)
Consider a bag of twelve chocolates to be divided between Stephen and Wendy. Some possible allocations are listed below:
• Stephen 12 chocolates; Wendy 0 chocolates.
• Stephen 10 chocolates; Wendy 0 chocolates.
• Stephen 6 chocolates; Wendy 6 chocolates.
• Stephen 0 chocolates; Wendy 12 chocolates.
What is meant if an allocation is Pareto efficient? Which of the allocations is Pareto efficient?
6. Answer Exercise 5.7 in section 5.7 of the text
Key Terms
Note that at the end of each tutorial I will identify terms or concepts that you should be familiar with and are examinable:
• Social dilemma
• Strategic interactions
• Best response
• Dominant strategy
• Altruism
• Public goods
• Nash equilibria
• Pareto efficiency
2022-05-27