• Malthus wrote ‘[I]t is not to be supposed that the physical laws to which [humankind]
is subjected should be essentially different from those, which are observed to prevail
in other parts of the animated nature.’ Do you agree? Why or why not
• Imagine that the population growth curve in the right panel of Figure 2.16 shifted to
the left (with fewer people being born, or more people dying, at any level of wages).
Explain what would happen to living standards describing the transition to the new
equilibrium.
Problem 2 (2 marks) CRITICAL THINKING
• The British government introduced legislation in 2012 that gave universities the option
to raise their tuition fees. Most chose to increase annual tuition fees for students from
£3,000 to £9,000. Does this mean that the cost of going to university has tripled?
(Think about how an accountant and an economist might answer this question. To
simplify, assume that the tuition fee is an ‘out of pocket’ cost. Ignore student loans.)
• The New Zealand government has announced details of its fees-free policy for
students who are new to tertiary education since October 2017. The investment in
student support will cost \$270m per year, and the first year of three years’ free postschool education, which we are bringing forward, will cost \$340m. Do you think this
policy will help reverse the worrying decline in tertiary participation seen under the
previous Government? (Think about an increasing number of first year students and
giving up part-time jobs. Students may concentrate more on study or may enjoy a free
tuition fee)
Problem 3 (3 marks) STRATEGY ANALYSIS
You are the Responder in an ultimatum game. The social norm is a (100 – x)/ x split,
meaning the Proposer keeps 100 – x* and the Responder receives x. Let R represent the strength of your private reciprocity motive. Based on this information, we can conclude (Select one answer and explain it) that: a. A higher R implies that you are less likely to accept a particular offer. b. If R = 1, then you would reject any offers of less than x.
c. If R = 1, then you would reject any offers of less than half of x*.
d. If R = 0, then you would reject all offers of less than 100.
2
Problem 4 (3 marks) STRATEGY ANALYSIS
The following diagram shows Anil’s preferences when he is either completely selfish
or somewhat altruistic, when he and Bala participate in the prisoners’ dilemma game
with the payoffs shown below. Based on the graph 1, which of the following
statements are correct? Select all correct answers & explain.
a. The outcome (I, T) is attained as the dominant strategy equilibrium if Anil is
completely selfish and Bala is somewhat altruistic.
b. The outcome (I, T) is attained as the dominant strategy equilibrium if Anil is
somewhat altruistic and Bala is completely selfish.
c. The outcome (I, T) cannot be attained as the dominant strategy.
d. The outcome (I, I) is attained as the dominant strategy equilibrium only if both Anil
and Bala are somewhat altruistic.
Graph 1
3
Problem 5 (3 marks) STRATEGY ANALYSIS
The figure below shows Angela and Bruno’s feasible frontier, Angela’s biological
survival constraint, and her reservation indifference curve. The total amount of grain
produced is 8 bushels if Angela works for 8 hours, and 10 bushels if she works for 11
hours. From this information, we can conclude (Select one answer & explain) that:
a. Bruno can devise a take-it-or-leave-it offer under voluntary exchange such that he is
just as well off as the best outcome under coercion.
b. Under Bruno’s best voluntary exchange outcome, he can claim an economic rent of 5
out of the total surplus of 6.
c. Under voluntary exchange, Angela will choose not to work if she is offered 2 bushels
of grain for 16 hours of free time.
d. Bruno can increase his share by 2 bushels if he could coerce Angela to work 11
hours, compared to under the voluntary exchange outcome.
4
Problem 6 (4 marks) STRATEGY ANALYSIS
Which of the following statements best describes the game played by the employer and the
employee in the labour discipline model? Select one answer and explain.
a. The game is a simultaneous game where the employer chooses the wage level and the
employee chooses the effort level simultaneously.
b. The game is a one-off game where the wage and effort levels are determined once and for
all.
c. The worker selects the effort level that balances his desire to keep his job with his desire to
not exhaust himself on the job.
d. The employer will attempt to maximize the firm’s profits by offering a wage equal to the
worker’s reservation wage.
Problem 7 (3 marks) CONFLICT IN BUSINESS
In the 1990s, Microsoft battled Netscape over market share for their web browsers, called
Internet Explorer and Navigator. In the 2000s, Google and Yahoo fought over which company’s
search engine would be more popular. In the entertainment industry, a battle called the ‘format
wars’ played out between Blu-Ray and HD-DVD. Use one of these examples to analyse whether there
are multiple equilibria and, if so, why one equilibrium might emerge in preference to the others.
Problem 8: presentation (15 marks)
In 2007, Steven Levitt and John List published a paper called ‘What Do Laboratory
Experiments Measuring Social Preferences Reveal about the Real World?’. Read this paper to answer
these two questions.
a. According to their paper, why and how might people’s behaviour in real life vary from what
has been observed in laboratory experiments?
b. Using the example of the public goods experiment in this section, explain why you might
observe systematic differences between the observations recorded in Figures 4.9a and 4.9b,
and what might happen in real life.
Reference Steven D. Levitt, and John A. List. 2007. ‘What Do Laboratory Experiments
Measuring Social Preferences Reveal About the Real World?’ Journal of Economic
Perspectives 21 (2): pp. 153–174.

Sample Solution