Scenario: Consider the Tragedy of the Commons Problem

question 8

Multiple Choice

Scenario: Consider the tragedy of the commons problem. Suppose two firms (Row Inc. and Colm Inc.) are involved in a production process that exploits a natural resource. Each firm has two options: 1 and 2. The matrix below shows the game matrix for these two firms. The first number listed in each cell is the payoff to Row Inc., and the second number listed is the payoff to Colm Inc.

-Refer to the scenario above.Considering the tragedy of the commons that these two firms are involved in,Strategy 1 is ________,and Strategy 2 is ________.

• A) to pollute the natural resource; not to pollute the natural resource
• B) not to pollute the natural resource; to pollute the natural resource
• C) pay a low fee to use the natural resource; pay a high fee to use the natural resource
• D) pay a high fee to use the natural resource; pay a low fee to use the natural resource

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Definitions:

Competitive Economy

An economic system where many firms compete to sell their goods and services, with minimal barriers to entry and exit.

Elasticity Of Demand

An indicator of the sensitivity of demand for a product to fluctuations in its price.

Marginal Cost

The additional total expense that results from the creation of one more unit of a product or service.

Monopoly Power

The ability of a single seller to control prices and total market supply in an industry.