Question 1

Consider the following game with two players A and B. Player A has three actions: Top, middle and bottom. Player B has two actions left and right. The payoffs are shown in the following payoff matrix:

Player B

Left Right

Player A Top (1,2) (2,3)

Middle (0,1) (1,4)

Bottom (3,0) (1,2)

A) Does either player have a dominant strategy? Explain.

B) Find all the Nash Equilibria to the game.

Question 2

Use an economic model to explain whether the following statement is true or false.

"A market with a positive production externality has a deadweight loss created by too much production relative to the social optimal production."