(See Problem 3

question 12

Multiple Choice

(See Problem 3.) Two players are engaged in a game of "chicken." There are two possible strategies, Swerve and Drive Straight. A player who chooses to Swerve is called "chicken" and gets a payoff of zero, regardless of what the other player does. A player who chooses to Drive Straight gets a payoff of 84 if the other player Swerves and a payoff of -36 if the other player also chooses to Drive Straight. This game has two pure strategy equilibria and

• A) a mixed strategy equilibrium in which each player swerves with probability 0.30 and drives straight with probability 0.70.
• B) two mixed strategies in which players alternate between swerving and driving straight.
• C) a mixed strategy equilibrium in which one player swerves with probability 0.30 and the other swerves with probability 0.70.
• D) a mixed strategy in which each player swerves with probability 0.15 and drives straight with probability 0.85.
• E) no mixed strategies.

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Definitions:

Negative Externality

A cost experienced by a third party not involved in the economic transaction, such as pollution affecting residents near a factory.

Spillover Cost

A cost incurred by someone who did not choose to incur that cost.

Allocative Efficiency

A state of the market where resources are allocated in a way that maximizes the net benefit to society.

Productive Efficiency

Productive efficiency occurs when an economy is operating at its maximum capacity, producing goods and services at the lowest possible cost per unit.