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Game Theory and Welfare

Description: This quiz assesses your understanding of the concepts and applications of game theory in welfare economics.
Number of Questions: 15
Created by:
Tags: game theory welfare economics strategic interaction nash equilibrium social welfare
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In a game theory context, what is the primary objective of players?

  1. To maximize their individual welfare.

  2. To cooperate with other players to achieve a collective goal.

  3. To minimize their losses.

  4. To act randomly and unpredictably.

Show answer
Correct Option: A
Explanation:

In game theory, players are assumed to be rational and self-interested, seeking to maximize their own welfare or utility.

What is a Nash Equilibrium in game theory?

  1. A set of strategies where no player can improve their outcome by unilaterally changing their strategy.

  2. A set of strategies where all players cooperate to achieve a mutually beneficial outcome.

  3. A set of strategies where one player dominates all others.

  4. A set of strategies where players take turns making moves.

Show answer
Correct Option: A
Explanation:

A Nash Equilibrium is a crucial concept in game theory, describing a situation where no player has an incentive to deviate from their current strategy given the strategies of other players.

In a Prisoner's Dilemma game, what is the dominant strategy for each player?

  1. To cooperate.

  2. To defect.

  3. To randomly choose between cooperation and defection.

  4. To communicate with the other player to reach an agreement.

Show answer
Correct Option: B
Explanation:

In a Prisoner's Dilemma game, the dominant strategy for each player is to defect, regardless of the other player's strategy. This is because defecting always leads to a better outcome for the individual player, even though mutual cooperation would yield a higher collective payoff.

What is the concept of Pareto Efficiency in welfare economics?

  1. A state where it is impossible to make one person better off without making someone else worse off.

  2. A state where everyone's welfare is maximized.

  3. A state where the total welfare of society is maximized.

  4. A state where the distribution of welfare is equal among all individuals.

Show answer
Correct Option: A
Explanation:

Pareto Efficiency is a fundamental concept in welfare economics, describing a state where no further improvement in social welfare is possible without making someone worse off.

In a game theory context, what is the concept of a tragedy of the commons?

  1. A situation where individuals acting in their own self-interest lead to a collectively undesirable outcome.

  2. A situation where individuals cooperate to achieve a mutually beneficial outcome.

  3. A situation where one player dominates all others.

  4. A situation where players take turns making moves.

Show answer
Correct Option: A
Explanation:

The tragedy of the commons is a classic example in game theory, illustrating how individual rational choices can lead to a collectively undesirable outcome. In such situations, each individual's pursuit of their own self-interest leads to the depletion or degradation of a shared resource.

What is the role of government intervention in addressing market failures?

  1. To regulate markets and ensure fair competition.

  2. To provide public goods and services.

  3. To redistribute income and wealth.

  4. All of the above.

Show answer
Correct Option: D
Explanation:

Government intervention in addressing market failures can involve a combination of regulating markets, providing public goods and services, and redistributing income and wealth. The specific approach depends on the nature of the market failure and the policy objectives.

What is the Coase Theorem in game theory?

  1. A theorem stating that externalities can be internalized through bargaining between affected parties.

  2. A theorem stating that Nash Equilibrium is always Pareto Efficient.

  3. A theorem stating that the tragedy of the commons can be avoided through government intervention.

  4. A theorem stating that social welfare is maximized when markets are perfectly competitive.

Show answer
Correct Option: A
Explanation:

The Coase Theorem states that, under certain conditions, externalities can be internalized through bargaining between the affected parties, leading to an efficient outcome. This highlights the importance of property rights and transaction costs in addressing externalities.

What is the concept of a public good in welfare economics?

  1. A good that is non-rivalrous and non-excludable.

  2. A good that is rivalrous and excludable.

  3. A good that is non-rivalrous but excludable.

  4. A good that is rivalrous but non-excludable.

Show answer
Correct Option: A
Explanation:

A public good is characterized by non-rivalrous consumption (i.e., one person's consumption does not diminish the availability for others) and non-excludability (i.e., it is difficult or impossible to prevent people from consuming the good).

What is the concept of a negative externality in welfare economics?

  1. A cost or harm imposed on a third party as a result of an economic activity.

  2. A benefit or positive effect conferred on a third party as a result of an economic activity.

  3. A cost or harm imposed on the producer of a good or service.

  4. A benefit or positive effect conferred on the producer of a good or service.

Show answer
Correct Option: A
Explanation:

A negative externality occurs when an economic activity generates costs or harms that are borne by third parties who are not directly involved in the activity.

What is the concept of a positive externality in welfare economics?

  1. A cost or harm imposed on a third party as a result of an economic activity.

  2. A benefit or positive effect conferred on a third party as a result of an economic activity.

  3. A cost or harm imposed on the producer of a good or service.

  4. A benefit or positive effect conferred on the producer of a good or service.

Show answer
Correct Option: B
Explanation:

A positive externality occurs when an economic activity generates benefits or positive effects that are enjoyed by third parties who are not directly involved in the activity.

What is the concept of a market failure in welfare economics?

  1. A situation where the market does not allocate resources efficiently.

  2. A situation where the market allocates resources efficiently.

  3. A situation where the government intervenes in the market.

  4. A situation where the market is perfectly competitive.

Show answer
Correct Option: A
Explanation:

A market failure occurs when the market mechanism fails to allocate resources efficiently, leading to an outcome that is not Pareto Efficient.

What is the concept of social welfare in welfare economics?

  1. The aggregate welfare of all individuals in a society.

  2. The welfare of the richest individual in a society.

  3. The welfare of the poorest individual in a society.

  4. The average welfare of all individuals in a society.

Show answer
Correct Option: A
Explanation:

Social welfare refers to the overall well-being and happiness of all individuals in a society, taking into account their individual preferences and utilities.

What is the concept of a utilitarian social welfare function?

  1. A social welfare function that maximizes the sum of individual utilities.

  2. A social welfare function that maximizes the utility of the richest individual.

  3. A social welfare function that maximizes the utility of the poorest individual.

  4. A social welfare function that maximizes the average utility of all individuals.

Show answer
Correct Option: A
Explanation:

A utilitarian social welfare function is a type of social welfare function that aims to maximize the aggregate welfare of all individuals in a society, as measured by the sum of their individual utilities.

What is the concept of a Rawlsian social welfare function?

  1. A social welfare function that maximizes the welfare of the worst-off individual.

  2. A social welfare function that maximizes the welfare of the richest individual.

  3. A social welfare function that maximizes the average welfare of all individuals.

  4. A social welfare function that maximizes the sum of individual utilities.

Show answer
Correct Option: A
Explanation:

A Rawlsian social welfare function is a type of social welfare function that aims to maximize the welfare of the worst-off individual in a society, reflecting the principle of maximizing the minimum level of welfare.

What is the concept of a compensation test in welfare economics?

  1. A test to determine whether a policy change makes everyone better off.

  2. A test to determine whether a policy change makes everyone worse off.

  3. A test to determine whether a policy change makes some people better off and some people worse off.

  4. A test to determine whether a policy change has no effect on anyone's welfare.

Show answer
Correct Option: A
Explanation:

A compensation test is a method used in welfare economics to determine whether a policy change makes everyone better off. It involves identifying a hypothetical compensation scheme that would make everyone at least as well off as they were before the policy change.

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