midterm 1 practice4

# midterm 1 practice4 - ECON 398 Fall 2006 Midterm 1 Practice...

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ECON 398 Fall 2006 Midterm 1 Practice Exam 4 Professor Ozdenoren INSTRUCTIONS You have 80 minutes to complete the exam. There are 16 questions.

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Elbonia and Sylvonia are two neighboring countries where Elbonia is much larger in size and it is more influential globally. Elbonia is increasingly becoming aware of prolific nuclear program activities in Sylvonia. Elbonia can either ignore such activities, negotiate with Sylvonia or go to direct war against Sylvonia. If Elbonia ignores growing nuclear activities in Sylvonia the payoff of (Elbonia, Sylvonia) is given by (50,250). If Elbonia decides to go through a negotiation process, then Sylvonia can either agree or disagree. If Sylvonia agrees the payoff is (210,150), but if it disagrees the payoffs are (150,180). If Elbonia decides to wage a war Sylvonia can either retaliate or not retaliate. If Sylvonia retaliates, Elbonia can employ more troops there which results in payoffs (200,120) or due to increasing defense cost may decide to carry on the war with the existing troops which results in payoffs (150,140). Even if Sylvonia does not retaliate Elbonia can employ more troops there to increase security resulting in payoffs (230,130) or it may just keep existing number of troops with payoffs (240,130). 1. How many strategies does Elbonia have? a) 4 b) 6 c) 8 d) 12 e) 16 2. The equilibrium outcome (payoff) of the game is
3. The equilibrium strategy of Elbonia is, Suppose that countries A and B engage in large amounts of trade. When country A sets its tariffs to x percent and country B to y percent the payoff to country A from trade is 800 + 60x – xy – x 2 and the payoff to country B is 800 + 60y – xy – y 2 .

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