Chapter 15

1. Market for PC chips = natural oligopoly - - > 2 firms in the market = Intel and AMD; no legal
barriers to entry to limit number of firms to 2. Other firms count enter the market but do no
because industry is a natural oligopoly.

4. a) 4 payoffs: both answer honestly, receive $100 each; both lying and receiving $50 each; A
lying, B being honest, A receiving $500 and B receiving $0; B lying and A answering and A
receiving $0 and B receiving $500.

c) Equilibrium of game is both A and B lie and earn $50 each.

d) Game is similar to prison’s dilemma. Both players get the worse outcome because they cannot
be certain of the other players co-operation.

5. a) Each firm has two options: comply with or cheat on the argument. Pay off matrix has the
following cells: both comply (sopay makes $1 mill. profit, Suddies makes $1 mill. profit), both cheat
(both make $0 profit), Soapy cheats and Suddies complies (Soapy makes $1.5 mill. profit, Suddies
incurs $0.5 mill. loss), Suddies cheats and Soapy complies (Suddies makes $1.5 mill. profit,
Soapies incurs $0.5 mill. loss).

Chapter 17

1. Smoking cigarettes in a confined area, firms polluting rivers with chemicals and other waste,
littering.

2. Public health, education

4. Tax = marginal external cost at the efficient quantity at the efficient quantity (#37.50 per ton of
cotton) - - > efficient quantity produced = 300 tons.
Town gets $37.50 per ton x 300 tons = $11,250.
Quantity of waste = not zero - - > 300 tons of quantity produced. Quantity produced is efficient
amount - - > marginal social benefit from the last ton of cotton produced = MSC = external cost.

5. a) when market is unregulated - - > quantity of fish caught and price determined by supply and
demand equilibrium.
Demand curve = MSB curve - - > equilibrium quantity of tuna = 80 tons; equilibrium price = $100
per ton.
Tuna stock not being used efficiently - - > efficient quantity determined where MSC and MSB
intersect - - > efficient quantity = 40 tons.
Tuna = common resources = overfished

b) Efficient use of tuna - - > 40 tons per month caught and $150 per ton.

6. Quota of 40 tons per month - - > quantity of tuna caught = 40 tons, price = $150 per ton - - >
quota enforced; no cheating - - > quota = efficient - - > tuna not overfished

7. Efficient number of students = 50,000 - - > where MSB = MSC. If all colleges = private - - >
30,000 students enrol in college - - > MSB = MSC

8. Tuition = $2,000 - - > 50,000 students will enrol. Tax payers pay $4,000 per student ($6,000
(MC) - $2,000 (tuition)) for $50,000 students = $200,000,000 total

9. Efficient quantity of students = 50,000. Value of voucher = $4,000 per student. Private college
tuition - $6,000 per student - - > students pay $2,000 - - > 50,000 students enrol.