1. Practice Questions

2. __b__The adverse selection process is prevalent in the used car market because: a.only poorer people are likely to purchase used cars. b.sellers know more about the vehicles being sold than do potential buyers. c.the price of the car sends a signal about its quality. d.so many consumers are adverse to buying used cars.

3. __b__When do insurance companies encounter the problem of moral hazard? a.When they do not have enough information to distinguish between people who are "good risks" and those who are "bad risks.“ b.When simply having insurance causes people to take more risks than they would otherwise. c.When the price of insurance premiums fully reflects all available information. d.When the insurance company suffers large losses because a major catastrophe has affected a large number of people simultaneously.

4. Each firm has a choice of advertising, ads, or not advertising, no ad. The profits each gets depend upon which it chooses. Firm A ads-Firm B ads. A gets 300, B gets 300 Firm A no ads-Firm B no ads. A gets 500 B gets 500 Firm A no ads-Firm B ads. A gets 100 B gets 900 Firm A ads-Firm B no ads. A gets 400 B gets 100 __c__1-In this game, a.Firm A's dominant strategy is to advertise. b.Firm A's dominant strategy is no to advertise. c.Firm B's dominant strategy is to advertise. d.Firm B has no dominant strategy. __d__2.The Nash equilibrium is to be found where a.neither firm advertises. b.Firm A advertises, Firm B does not. C Firm A does not advertise but Firm B does. d.both firms choose to advertise. Note that this is a NE and an equilibrium in iterative elimination of dominated strategies.

5. War Game Two countries are deciding whether to spend their budget on health or defense. 2- If both countries spend their budget on health they both have an utility of $100. If they both spend their budget on defense they get an utility of $1. If one country spends the budget on health and the other one spends on defense, both countries have a payoff of zero. A)- Who are the players. Two countries B)- What are their strategies. Health or defense C)- Is there an equilibrium in strictly dominated strategies. No D)- Is there an equilibrium in weakly dominated strategies. No E)- Is there a Nash Equilibrium. Two Nash equilibria (D,D) and (H,H)

6. Dynamic games 1- Suppose that the battle of the sexes is played sequentially. The wife plays first. What is the equilibrium. 2- Suppose now that the husband plays first. What is the equilibrium. 3- Suppose that two friends go to a restaurant but one orders first. What is the equilibrium of the game.

7. Note that d (and not a) is the correct answer to Q13 in the word file (monopoly).