Question 1

Which of the following investments is part of a positional arms race?

Accepted Answer

Trying to improve your position when relative performance counts is an investment in a positional arms race.

Question 2

When Brady is driving he throws his cigarette butts out the window, reasoning that other people will clean up the litter on the side of the road. By throwing his cigarette butts out the window, Brady is:

Accepted Answer

By throwing his cigarette butts out the window, Brady is imposing a cost on others.

Question 3

Suppose that in most car collisions between cars of unequal size, the smaller car sustains the most damage and its occupants suffer the most injury. In answering the following question, assume that, on average, smaller cars generate less air pollution than larger cars and that every person in the economy drives at least one car. Suppose the size of all cars increased by 25 percent. Collisions between two cars would cause ________ and air pollution would ________.

Accepted Answer

Since the relative size of the cars has not changed, collision outcomes will not change, but the environmental costs will increase.

Question 4

Suppose that in most car collisions between cars of unequal size, the smaller car sustains the most damage and its occupants suffer the most injury. In answering the following question, assume that, on average, smaller cars generate less air pollution than larger cars and that every person in the economy drives at least one car. As the average size of cars increases, an individual's incentive to buy a smaller car:

Accepted Answer

The outcome of a collision is determined by relative size. As more people buy larger cars, those with smaller cars expect even worse outcomes in the event of a collision.

Question 5

When one's performance is judged relative to others' performance and not by an absolute standard:

Accepted Answer

When the reward is based on doing better than others, there is incentive to take steps to surpass others.

Question 6

The following payoff matrix shows the outcomes for the United States and Russia from relying on conventional weapons versus atomic weapons in a military conflict. The percentages refer to the fraction of the population that would die.  For the US, the dominant strategy is to have ________, and for Russia, the dominant strategy is to have ________.

Accepted Answer

For each country, having atomic weapons is a dominant strategy.

Question 7

A positional externality:

Accepted Answer

Positional externalities can arise whenever rewards are based on relative rather than absolute performance.

Question 8

Suppose that in most car collisions between cars of unequal size, the smaller car sustains the most damage and its occupants suffer the most injury. In answering the following question, assume that, on average, smaller cars generate less air pollution than larger cars and that every person in the economy drives at least one car. In deciding what kind of car to buy, individuals:

Accepted Answer

Everyone faces an individual incentive to increase car size to improve his or her odds in the event of a collision.

Question 9

According to the textbook, social norms:

Accepted Answer

Social norms can stigmatize efforts to participate in positional arms races.

Question 10

According to the textbook, if students are graded on a curve so that each student's grade depends upon their performance relative to other students, the resulting positional arms race are partially offset by social norms that:

Accepted Answer

If academic success depends on relative performance, an anti-nerd norm will serve to reduce the incentive to study.

Question 11

Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon, the buffet is picked over, and by 12:30, there are very few popular items left. The garbage bins, though, are full of food. Over time, you would expect that students would:

Accepted Answer

Private incentives encourage students to over-graze at the buffet. Coming earlier means there is more to choose from.

Question 12

Which of the following is an example of a positional arms control agreement?

Accepted Answer

Because elections are determined by relative votes, there is an incentive for candidates to spend ever-increasing amounts of money on campaigns. Spending limits can keep that tendency in check.

Question 13

Suppose that in most car collisions between cars of unequal size, the smaller car sustains the most damage and its occupants suffer the most injury. In answering the following question, assume that, on average, smaller cars generate less air pollution than larger cars and that every person in the economy drives at least one car. Relative to driving an average car, driving a larger-than-average car generates:

Accepted Answer

A larger-than-average car imposes costs on the owners of smaller cars and on the environment.

Question 14

Shel and Fran are neighbors. They work at the same firm and hold the same title. Shel finds that when Fran's consumption rises, Shel feels worse off. Fran feels the same way about Shel's consumption. Suppose the firm that employs both Fran and Shel begins to offer one hour of overtime at 1.5 times their base hourly wage. It is likely that:

Accepted Answer

Fran and Shel base their happiness on their relative position and each prefers to have more things than the other. If one observes the other working more and earning more money, the other will feel compelled to do the same.

Question 15

Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon, the buffet is picked over, and by 12:30, there are very few popular items left. The garbage bins, though, are full of food. If the cafeteria changed its policy so that students had to pay for each item chosen, students would:

Accepted Answer

Students face private incentives to choose food so long as the marginal benefit is greater than or equal to the marginal cost. If items are priced, the marginal cost is positive.

Question 16

The following payoff matrix shows the outcomes for the United States and Russia from relying on conventional weapons versus atomic weapons in a military conflict. The percentages refer to the fraction of the population that would die.  This situation above illustrates a positional externality because:

Accepted Answer

A positional externality arises in situation in which reward depends on relative performance so that an increase in one person's (or country's)performance reduces the expected reward of another's.

Question 17

Shel and Fran are neighbors. They work at the same firm and hold the same title. Shel finds that when Fran's consumption rises, Shel feels worse off. Fran feels the same way about Shel's consumption. Fran has bought a new Jaguar (a luxury car), and shortly thereafter, Shel bought a new Mercedes (also a luxury car). Shel and Fran seem to be:

Accepted Answer

Fran and Shel base their happiness on their relative position and each prefers to have more things than the other. When one buys a nice new car, the other one wants a nice new car.

Question 18

The town of Pleasantville has two local TV stations. If one of them invests in the newest weather forecasting technology, one can predict that:

Accepted Answer

If one TV station starts using new weather forecasting technology, the other station will also have a strong incentive to adopt the new technology in order to maintain its relative standing.

Question 19

The following payoff matrix shows the outcomes for the United States and Russia from relying on conventional weapons versus atomic weapons in a military conflict. The percentages refer to the fraction of the population that would die.  The Nash equilibrium outcome of this game is for:

Accepted Answer