Use the following information for questions 1-4.

Consider Hardin’s (1968) model of rational herders’ problem. You and your neighbors are both herders and you share a common pasture where your cattles can graze. Each of you receive a direct benefit from your animals (more you can graze them, the better it is for your personal profit), but both of you also suffer from delayed cost due to deterioration of the common pasture when yours’ or your neighbor’s cattles overgraze.

There are two strategies you and your neighbor can choose – i) “cooperate strategy” labeled as “C” (where you can your neighbor equally share resources) and ii) defect strategy “D” (This is when the player grazes as many cattle as she can for her self interest, not really caring about her neighbor).

Here is how the payoffs are designed.

If you and your neighbor both cooperate, both of you get 10 profit points. 

If one of you cooperate and the other defects, then the one who cooperates will get -1 profit point and the one who defects will get 11 profit points.

If both of you choose to defect (overgrazing), this depletes the resource quick enough such that you get a profit of 0 points.

 

  1. Given that your neighbor plays defect strategy, you would play ______________ and given that your neighbor plays coperate you would play ______________.
  1. defect; coperate
  2. coperate; coperate
  3. defect; defect
  4. coperate; defect
  1. Given that you play your dominant strategy (from question 1), your neighbor plays her dominant strategy. Your neighbor’s dominant strategy is to play _____________ .
  1. defect, no matter what you play.
  2. coperate, no matter what you play.
  3. either defect or coperate depending on what you play.
  4. both a and c.
  1. Given that both of you play your dominant strategy (which is usally what happens under the assumption that you are solely driven by self-interest), what is the equilibrium outcome?
  1. you coperate; your neighbor defects
  2. both play defect
  3. both play coperate
  4. you defect; your neighbor coperates
  1. Is the equlibrium outcome in question 3 pareto optimal?
  1. Yes it is, since it is the equilibrium.
  2. Yes it is, since both parties are playing their dominant strategy.
  3. No it is not since at least one party can benefit from another outcome without hurting the other party.
  4. No, since there is another outcome that dominates the equilibrium outcome in question 3.
  5. both c and d

Consider the following adjustment for questions 5-8. Now consider a social planner (say, the government) who is well aware of the mechanism that drives the dilemma in questions 1-4, and the social planner can also accurately observe who is overgrazing and who is not with full information. The social planned then comes up with a “punishment” scheme such that if any player is over grazing, she is fined 2 profit points.

  1. What is your dominant strategy after the fine is implemented?
  1. defect, no matter what your neighbor plays.
  2. either defect or coperate depending on what your neighbor plays.
  3. coperate, no matter what your neighbor play.
  4. both a and c.
  1. What is your neighbors dominant strategy once the fine is put in place?
  1. defect, no matter what you play.
  2. either defect or coperate depending on what you play.
  3. coperate, no matter what you play.
  4. both a and c.
  1. What is the new equlibrium outcome in the case when the fine is at place?
  1. you coperate; your neighbor defects
  2. both play defect
  3. both play coperate
  4. you defect; your neighbor coperates
  1. Is the equilibrium outcome pareto optimal?
  1. Yes it is as moving to a different outcome will hurt at least one player.
  2. Yes it is, since both parties are playing their dominant strategy.
  3. No it is not since at least one party can benefit from another outcome without hurting the other party.
  4. No, since there is another outcome that dominates the equilibrium outcome in question 3.
  5. both c and d

\(~\) Next, use the following information for questions 9-12.

Consider the following game between Bala and Anil, where they produce rice and potatoes. This problem is extracted from section 4.13 of the Core Project book.

Figure 2.

Figure 2.

  1. What is the best response of Anil if Bala produces rice?
  1. Anil is better off producing rice
  2. Anil is better off producing potatoes
  1. What is the best response of Anil if Bala produces potatoes?
  1. Anil is better off producing rice
  2. Anil is better off producing potatoes
  1. Given your answers from 9. and 10. Does Anil have a dominant strategy?
  1. Yes, as no matter what Bala does Anil is better off producing rice.
  2. Yes, as no matter what Bala does Anil is better off producing potatoes.
  3. No, as Anil is better off not producing anything.
  4. No, as Anil’s better response varies depending on what Bala does.
  1. What are the Nash equlibrium in this case?
  1. Anil produces potatoes, Bala produces rice.
  2. Anil produces rice, Bala produces potatoes.
  3. Anil produces potatoes, Bala produces potatoes.
  4. both a and b.
  5. both a and c.

Use the following information for questions 13-16. The topic of menstruation is surrounded by social stigma in many developing countries. In countries such as Nepal, India and several South African countries, menstruation is often stigmatized. For instance, many women in Nepal are restricted from entering kitchen or visiting holy shrines during the time of menstruation and a tradition called Chaupadi confines a menstruating girl or woman in a shed (where livestocks are kept). Given such barriers created due to social norms, importance of menstrual health and hygiene (MHH) is not as publicly discussed as in developed countries. In many situations, women in developing countries (Nepal, India) still use cloths or rags during menstruation.

In such cases, adoption of technologically advanced menstrual health product such as sanitary pads presents a unique challenge – in process of purchasing sanitary pads a girl or a woman needs to interact with several members of the society, which given the restrictive norms against menstruation, might make her uncomfortable. For instance, she would need to interact with a male shopkeeper of the pharmacy. Hence, this nature of “shame” due to existing social norm creates an additional cost or hinderance in purchasing more technologically advanced menstrual health products, which we refer to as “shame cost.”

Say, there are two females (players of the game) – i) Shanti, and ii) Pooja, who are considering whether to purchase sanitary pads. They can either choose to adapt the menstrual health product by purchasing or refrain from adapting the product.

Using sanitary pads during menstruation gives an additional boost in promoting menstrual health.

However, there exists "shame cost" when purchasing sanitary pads due to social stigma. This "shame cost" is higher for Shanti than Pooja.

The "shame cost" is extremely high for the purchaser if only one player decides to purchase. 

If both players decide to purchase, players receive moral support from each other, which lowers the "shame cost."

Consider the following set up.

Figure 3.

Figure 3.

  1. What is Shanti’s dominant strategy?
  1. adapt
  2. refrain
  1. What is Pooja’s dominant strategy? Explain.
  1. refrain
  2. Pooja’s pick depends on what Shanti chooses. For example, if Shanti chooses adapt, Pooja is better off picking adapt.
  3. adapt
  4. Given the payoff matrix, Pooja is always better off from adapting.
  1. If both Pooja and Shanti are allowed to converse, what is the likely equilibrium?
  1. both players adapt.
  2. both players refrain.
  3. Pooja adapts, whereas Shanti refrains.
  4. Pooja refrains, whereas Shanti adapts.
  1. Is the equilibrium from 15 pareto optimal?
  1. No, because there is another outcome that makes at least one party better off without hurting the other.
  2. Yes, because there is no other alternative outcome that makes at least one party better off without hurting the other.

Use Figure 4 for questions 17-19.

  1. Let’s take Anil’s and Bala’s example from Lecture 4. Recall that each is deciding whether to use an insecticide called terminator (T) or Integrated Pest Control (I).
    Figure 4.

    Figure 4.

    Based on Figure 4, you know that

  1. Figure 4 also says that

  1. Outcomes (I,T), (I,I), and (T,I) are all pareto optimal outcomes as there is no other outcome that makes atleast one party better off without hurting the other.

  1. Which of the following statements about the outcome of an economic interaction is correct?

  1. Angela is a farmer, who produces a crop. Bruno then comes along and forces Angela to work for him. In this case, Bruno is ethically worse than a dictator. Angela needs to do what Bruno says (say Bruno is using a gun).

This resembles case 2 in the lecture. Consider the following figure.

Figure 5.

Figure 5.

According to the model set up, are points to the left to Angela’s biological survival constraint feasible?

  1. As Bruno has the ultimate bargaining power in Figure 5, he gets to assign what Angela gets. His pick is such that

  1. If Bruno picks a point such that Angela has less than 13 hours of free time, MRS>MRT.

  1. Consider the next case for which the rule of law replaces the rule of force. Think of its Bruno’s land, but Bruno can no longer force Angela to work. Bruno can put forth an offer (part of the harvest needs to come to him). But Angela gets to decide whether she wants to work for him. The set up of this situation is given by the figure below.
Figure 6.

Figure 6.

This figure has Angela’s reservation IC. Which of the following is FALSE?

  1. Although Angela can refuse Bruno’s offer, Bruno still gets to pick the offer. In this sense, Bruno is similar to the proposer in the ultimatum game. Consider the following figure.
Figure 7.

Figure 7.

According to Figure 7, Bruno picks

  1. Comparing the two cases (Angela has no right to refuse vs. she has a right to refuse to work for Bruno), given that Angela has a right to refuse Bruno’s offer, she will end up with higher hours of free time and more bushels of grain compared to the case when Bruno applies force.

  1. Which of the following statements is true?
  1. A labour contract transfers ownership of the employee from the employee to the employer.
  2. The office where the employee works is a relation-specific asset, because the employee cannot use it after leaving the firm.
  3. In a labour contract, one side of the contract has the power to issue orders to the other side, but this power is absent from a sale contract.
  4. A firm is a structure that involves decentralization of power to the employees.

  1. Which of the following statements about the separation of ownership and control is true?
  1. When the ownership and control of a firm is separated, the managers become the residual claimants.
  2. Managers always work to maximize the firm’s profit.
  3. One way to address the problem associated with the separation of ownership and control is to pay the managers a salary that depends on the performance of the firm’s share price.
  4. It is effective for shareholders to monitor the performance of the management, in a firm owned by a large number of shareholders.

  1. Which of the following are reasons why employment contracts are incomplete?
  1. The firm cannot contract an employee not to leave.
  2. The firm cannot specify every eventuality in a contract.
  3. The firm is unable to observe exactly how an employee is fulfilling the contract.
  4. all of the above

  1. Consider Figure 8 for Maria and calcuate her employment rent per week (she works 35 hours a week).
    Figure 8. Shows employment rent (per week)

    Figure 8. Shows employment rent (per week)

  1. $350
  2. $450
  3. $550
  4. $650

  1. Now say Maria’s reservation wage is $6. Calculate her weekly employment rent.
  1. $140
  2. $240
  3. $340
  4. $440

  1. Maria earns $12 per hour in her current job and works 35 hours a week. Her disutility of effort is equivalent to a cost of $2 per hour of work. If she loses her job, she will receive unemployment benefit equivalent to $6 per hour. Additionally, being unemployed has psychological and social costs equivalent to $1 per hour. Then:
  1. The employment rent per hour is $3.
  2. Maria’s reservation wage is $6 per hour.
  3. Maria’s employment rent if she can get another job with the same wage rate after 44 weeks of being unemployed is $6,160.
  4. Maria’s employment rent after 44 weeks of being unemployed is $7,700.

  1. Consider the best response function for this question. Which of the following statements is correct?
    Figure 9. Maria's best response

    Figure 9. Maria’s best response

  1. If the expected unemployment duration increased to 50 weeks, Maria’s best response to a wage of $12 would be an effort level above 0.5.
  2. If the unemployment benefit was reduced, then Maria’s reservation wage would be higher than $6.
  3. Over the range of wages shown in the figure, there is a point such that Maria exerts the maximum possible effort per hour (effort = 1).
  4. Increasing effort from 0.5 to 0.6 requires a bigger wage increase than increasing effort from 0.8 to 0.9.

  1. The figure below puts the employer’s isocost curve and Maria’s best response curve together. The figure states that
    Figure 10. The isocost line and Maria's best response curve together

    Figure 10. The isocost line and Maria’s best response curve together

  1. The equlibrium point is A, where the wage offer is $12 and effort exerted by Maria is 0.5
  2. The ratio if \(e/w\), efficiency per dollor, is constant over the isocost line.
  3. The ratio if \(e/w\), efficiency per dollor, increases as the wage offer increase over the isocost line.
  4. both a and b