1. Learning by Doing Part II:
Short Answer
May 1, 2013

2. Announcements
• Denise will go over “old exam 1 -4” in her
section tonight
• Jake will do a midterm review Wed night and
go over other 4 documents ``efficiency”-
``externalities.’’
– Wednesday, May 1, WLH 2005, 7-8:50 pm
• Myungkyu still has regulary scheduled section
Friday, and I have office hours. See syllabus.

3. Midterm Specifics
Warnings (3rdannouncement):
(1) You must be on-time to exam. Friday, May 3,
3pm sharp.
-10% Deduction if you are 1 second late.
-100% deduction if you arrive after someone
else finishes and leaves room.
(2) No leaving room during exam (it’s less than an
hour).

4. Teaching Reviews
• If you haven’t filled them out yet, take a
minute to after class today, or this weekend
• They’re due Sunday, so I’ll send out a
reminder that morning.
• Remember, I’m a really great guy.

5. Last Class
• Worked through some multiple choice
questions together.
• The areas we found the class had weaknesses
on were
– Extensive form of game
– Legal remedies of externalities
• There’s some more multiple choice questions
on those slides we didn’t get to if you want
practice.

6. Today
• Will do short answer questions together
• Two goals:
– Understand what is and what is not a complete
answer
– Separate the wheat from the chaff in longer
questions

7. ``Externalities’’ question 3.
Suppose that The Lakeside Café and Camp Canoe are both
situated along the banks of Lake Dreary. Unfortunately,
for the campers at Camp Canoe, The Lakeside Café
regularly dumps garbage into Lake Dreary, and this makes
the lake smelly and dirty and negatively impacts Camp
Canoe’s profits because parents don’t want to send their
kids to a camp on a dirty, smelly lake. The table below
shows the daily profits for The Lakeside Café and Camp
Canoe when the Lakeside Café does and does not dump
its garbage in the lake.
No Garbage in
Lake
Garbage in
Lake
Lakeside Café 1000 1100
Camp Canoe 600 400

8. ``Externalities’’ question 3.
(a)Is it socially efficient for The Lakeside Café to
dump their garbage into Lake Dreary? Explain.
No Garbage in
Lake
Garbage in
Lake
Lakeside Café 1000 1100
Camp Canoe 600 400

9. ``Externalities’’ question 3.
(b)If the The Lakeside Café and Camp Canoe
cannot negotiate with each other, and if The
Lakeside Café has the right to dump garbage
into the lake, then what will be the likely
outcome?
No Garbage in
Lake
Garbage in
Lake
Lakeside Café 1000 1100
Camp Canoe 600 400

10. ``Externalities’’ question 3.
(c)If the Lakeside Café and Camp Canoe can
costlessly negotiate with each other, then
what will be the likely outcome? That is, will
The Lakeside Café dump their garbage into the
lake?
No Garbage in
Lake
Garbage in
Lake
Lakeside Café 1000 1100
Camp Canoe 600 400

11. ``Externalities’’ question 3.
(d)How might this agreement be reached if The
Lakeside Café has the right to dump garbage
into the lake?
No Garbage in
Lake
Garbage in
Lake
Lakeside Café 1000 1100
Camp Canoe 600 400

12. ``Externalities’’ question 3.
(e)How might this agreement be reached if
Camp Canoe has the right to decide whether
The Lakeside Café can dump garbage into the
lake?
No Garbage in
Lake
Garbage in
Lake
Lakeside Café 1000 1100
Camp Canoe 600 400

13. ``Externalities’’ question 3.
(f)Should it matter to an economist who is only
interested in economic efficiency whether The
Lakeside Café has the right to dump garbage
or whether Camp Canoe has the right to stop
The Lakeside Café from dumping garbage?
Explain.
No Garbage in
Lake
Garbage in
Lake
Lakeside Café 1000 1100
Camp Canoe 600 400

14. ``Externalities’’ question 3.
(g)Should it matter to Camp Canoe whether The
Lakeside Café has the right to dump garbage
or whether Camp Canoe has the right to stop
The Lakeside Café from dumping garbage?
Explain.
No Garbage in
Lake
Garbage in
Lake
Lakeside Café 1000 1100
Camp Canoe 600 400

15. ``Games’’ question 2.
Goggle
Yoohoo
Not Invest
Invest
Stay OutStay
Out
Enter
Enter
Yoohoo
3 (G)
-2 (Y)
5 (G)
0 (Y)
4 (G)
1 (Y)
6 (G)
0 (Y)
Suppose that Goggle is the only firm that provides
internet search services, but a second firm, Yoohoo, is
considering entering the market. Prior to Yoohoo’s
decision about whether to enter the market, suppose
Goggle must decide whether to make a costly
investment to improve the quality of its own product.
Suppose the decision tree for this game can be written
as follows:

16. ``Games’’ question 2.
Goggle
Yoohoo
Not Invest
Invest
Stay OutStay
Out
Enter
Enter
Yoohoo
3 (G)
-2 (Y)
5 (G)
0 (Y)
4 (G)
1 (Y)
6 (G)
0 (Y)
(a) If Yoohoo enters the market what will its
payoff be if Goggle invests? What if Goggle
doesn’t invest? If Yoohoo enters the market,
why might its profits be lower when Goggle
invests?

17. ``Games’’ question 2.
Goggle
Yoohoo
Not Invest
Invest
Stay OutStay
Out
Enter
Enter
Yoohoo
3 (G)
-2 (Y)
5 (G)
0 (Y)
4 (G)
1 (Y)
6 (G)
0 (Y)
(b)What is the (subgame perfect) Nash
equilibrium of this game?
Say what?
Let’s find the equilibrium which is sequentially
rational.

18. ``Games’’ question 2.
(c)In this example, will Goggle be able to deter
Yoohoo’s entry into the market?
Goggle
Yoohoo
Not Invest
Invest
Stay OutStay
Out
Enter
Enter
Yoohoo
3 (G)
-2 (Y)
5 (G)
0 (Y)
4 (G)
1 (Y)
6 (G)
0 (Y)