Agricultural Production Quiz Questions

1. Considering the payoff matrix for Airbus above, which of the following options is a Nash equilibrium?

Boeing produces and Airbus does not produce

Boeing does not produce and Airbus produces

Boeing does not produce and Airbus does not produce

Boing produces and Airbus does not produces; Boing does not produce and Airbus produces

None of the above

The given answer is a Nash equilibrium because in this scenario, neither Boeing nor Airbus has an incentive to change their strategy. If Boeing produces and Airbus does not produce, Boeing earns a payoff of 5, which is the highest possible payoff for Boeing given Airbus's strategy. Similarly, if Boeing does not produce and Airbus produces, Airbus earns a payoff of 4, which is the highest possible payoff for Airbus given Boeing's strategy. Therefore, both Boeing and Airbus are playing their best response strategies, resulting in a Nash equilibrium.

Explanation

The given answer is a Nash equilibrium because in this scenario, neither Boeing nor Airbus has an incentive to change their strategy. If Boeing produces and Airbus does not produce, Boeing earns a payoff of 5, which is the highest possible payoff for Boeing given Airbus's strategy. Similarly, if Boeing does not produce and Airbus produces, Airbus earns a payoff of 4, which is the highest possible payoff for Airbus given Boeing's strategy. Therefore, both Boeing and Airbus are playing their best response strategies, resulting in a Nash equilibrium.

2. One could use game theory to analyze government subsidies. Given the supplied payoff matrix, what will each nation do if it is a 50-50 guess what the other side will do?

Europe will subsidize Airbus and the United States will subsidize Boeing

Europe will not subsidize Airbus and the United States will not subsidize Boeing.

Europe will subsidize Airbus and the United States will not subsidize Boeing.

Europe will not subsidize Airbus and the United States will subsidize Boeing.

None of the above

Game theory is a branch of mathematics that studies strategic decision-making. In this scenario, each nation has two options: to subsidize or not to subsidize their respective aircraft manufacturers. If it is a 50-50 guess what the other side will do, both Europe and the United States would choose to subsidize their own manufacturers. This is because if one side chooses to subsidize and the other does not, the subsidized manufacturer would have a competitive advantage, leading to higher profits. Therefore, to avoid losing out, both nations would choose to subsidize their manufacturers, resulting in Europe subsidizing Airbus and the United States subsidizing Boeing.

Explanation

Game theory is a branch of mathematics that studies strategic decision-making. In this scenario, each nation has two options: to subsidize or not to subsidize their respective aircraft manufacturers. If it is a 50-50 guess what the other side will do, both Europe and the United States would choose to subsidize their own manufacturers. This is because if one side chooses to subsidize and the other does not, the subsidized manufacturer would have a competitive advantage, leading to higher profits. Therefore, to avoid losing out, both nations would choose to subsidize their manufacturers, resulting in Europe subsidizing Airbus and the United States subsidizing Boeing.

3. One could use game theory to analyze government subsidies. Given the supplied payoff matrix, what will each nation do if it is a 50-50 guess what the other side will do?

Europe will subsidize Airbus and the United States will subsidize Boeing

Europe will not subsidize Airbus and the United States will not subsidize Boeing.

Europe will subsidize Airbus and the United States will not subsidize Boeing.

Europe will not subsidize Airbus and the United States will subsidize Boeing.

None of the above

In game theory, the concept of a dominant strategy suggests that each player will choose the strategy that is best for them regardless of what the other player does. In this scenario, both Europe and the United States have a dominant strategy to subsidize their respective aircraft manufacturers. This is because regardless of what the other side does, each country will benefit more by providing subsidies to their own manufacturer. Therefore, Europe will subsidize Airbus and the United States will subsidize Boeing.

Explanation

In game theory, the concept of a dominant strategy suggests that each player will choose the strategy that is best for them regardless of what the other player does. In this scenario, both Europe and the United States have a dominant strategy to subsidize their respective aircraft manufacturers. This is because regardless of what the other side does, each country will benefit more by providing subsidies to their own manufacturer. Therefore, Europe will subsidize Airbus and the United States will subsidize Boeing.

4. The table above represents a demand and supply schedule for a small-country producer of iron ore. It sells output in its home market and on the world market at the world price of $70 per ton. i) At the world price of $70, how many units will be sold domestically?__; ii) At the world price of $70, how many units will the country export?__; iii) Suppose that the country's government offers its iron ore producers an export subsidy of $10 per ton. How many tons will the country now export?__; iv) How many tons will be sold domestically when exporters receive a $10-per-ton export subsidy?__; v) What price will domestic iron ore consumers pay for their iron ore purchases when there is a $10-per-ton export subsidy?__; vi) What is the total value of the export subsidy that exporters receive?__; and vii) if the government offered a $10/ton production subsidy instead of a $10/ton export subsidy, how much revenue will producers receive?__

None of the above

At the world price of $70 per ton, the domestic demand for iron ore is 40 tons (i) and the domestic supply is 30 tons (ii). This means that the country will export the excess supply, which is 10 tons (ii - i). If the government offers an export subsidy of $10 per ton, the country will export 50 tons (iii), as the subsidy makes exporting more profitable. With the export subsidy, the domestic supply decreases to 20 tons (iv), as producers are incentivized to export more. The price paid by domestic consumers with the export subsidy is $80 per ton (v), as the subsidy increases the price. The total value of the export subsidy received by exporters is $500 (vi), calculated by multiplying the subsidy per ton by the quantity exported. If the government offered a $10 per ton production subsidy instead, producers would receive $800 in revenue (vii), calculated by multiplying the subsidy per ton by the quantity produced domestically.

Explanation

At the world price of $70 per ton, the domestic demand for iron ore is 40 tons (i) and the domestic supply is 30 tons (ii). This means that the country will export the excess supply, which is 10 tons (ii - i). If the government offers an export subsidy of $10 per ton, the country will export 50 tons (iii), as the subsidy makes exporting more profitable. With the export subsidy, the domestic supply decreases to 20 tons (iv), as producers are incentivized to export more. The price paid by domestic consumers with the export subsidy is $80 per ton (v), as the subsidy increases the price. The total value of the export subsidy received by exporters is $500 (vi), calculated by multiplying the subsidy per ton by the quantity exported. If the government offered a $10 per ton production subsidy instead, producers would receive $800 in revenue (vii), calculated by multiplying the subsidy per ton by the quantity produced domestically.

5. For a small nation employing a production subsidy, domestic producers get a payment for every good produced, and domestic consumers:

Get to purchase the product at the world price the same as before the subsidy.

Have to pay a higher price for the product

Get a reduced price for the product

Purchase more of the product

None of the above

When a small nation employs a production subsidy, domestic producers receive a payment for every good they produce. However, domestic consumers are not directly affected by the subsidy and continue to purchase the product at the world price, which remains the same as before the subsidy was implemented. Therefore, the correct answer is that domestic consumers get to purchase the product at the world price the same as before the subsidy.

Explanation

When a small nation employs a production subsidy, domestic producers receive a payment for every good they produce. However, domestic consumers are not directly affected by the subsidy and continue to purchase the product at the world price, which remains the same as before the subsidy was implemented. Therefore, the correct answer is that domestic consumers get to purchase the product at the world price the same as before the subsidy.

6. Firms A and B can conduct research and development (R&D) or not conduct it. R&D is costly but can increase the quality of the product and increase sales. The payoff matrix is the economic profits of the two firms and is given above, where the numbers are millions of dollars. i) A's best strategy is to__ and ii) the Nash equilibrium occurs when__

I) conduct R&D regardless of what B does and ii) both A and B conduct R&D

I) not conduct R&D regardless of what B does and ii) only A conducts R&D

I) conduct R&D only if B conducts R&D and ii) only B conducts R&D

I) conduct R&D only if B does not conduction R&D and ii) neither A nor B conduct R&D

None of the above

The correct answer is i) conduct R&D regardless of what B does and ii) both A and B conduct R&D. In this scenario, A's best strategy is to conduct R&D regardless of what B does because conducting R&D can increase the quality of the product and increase sales. Additionally, the Nash equilibrium occurs when both A and B conduct R&D because if only one firm conducts R&D while the other does not, the firm conducting R&D will have a competitive advantage and potentially higher profits. Therefore, both firms have an incentive to conduct R&D to maximize their profits.

Explanation

The correct answer is i) conduct R&D regardless of what B does and ii) both A and B conduct R&D. In this scenario, A's best strategy is to conduct R&D regardless of what B does because conducting R&D can increase the quality of the product and increase sales. Additionally, the Nash equilibrium occurs when both A and B conduct R&D because if only one firm conducts R&D while the other does not, the firm conducting R&D will have a competitive advantage and potentially higher profits. Therefore, both firms have an incentive to conduct R&D to maximize their profits.

7. Why do some say U.S. food aid actually hurts recipient nations?

Their farmers are put out of business and food production is decreased

It makes them to depend on foreign food aid

B and C

The correct answer states that U.S. food aid actually hurts recipient nations because it leads to several negative consequences. Firstly, it puts local farmers out of business and decreases food production. Additionally, it raises the price of food in recipient nations, making it difficult for the population to afford food, which in turn decreases demand. This decrease in demand causes local farmers to go out of business. Lastly, it causes food shortages in the long run as these nations become dependent on food aid.

Explanation

The correct answer states that U.S. food aid actually hurts recipient nations because it leads to several negative consequences. Firstly, it puts local farmers out of business and decreases food production. Additionally, it raises the price of food in recipient nations, making it difficult for the population to afford food, which in turn decreases demand. This decrease in demand causes local farmers to go out of business. Lastly, it causes food shortages in the long run as these nations become dependent on food aid.

8. Suppose that the world price of sugar is $100 per ton. If a small country gives its sugar exporters a subsidy of $50 per ton, i) What will the world price of sugar be?__; ii) what will the country's exporters receive?__; iii) what will the domestic price of sugar be?__; and iv) how will the subsidy affect domestic consumption of sugar?__

I) remain at $100 per ton; ii) at $150 per ton; iii) remain at $100 per ton; and iv) rise

I) remain at $100 per ton; ii) $150 per ton; iii) rise by $50 per ton and iv) fall

None of the above

The correct answer is i) remain at $100 per ton; ii) $150 per ton; iii) rise by $50 per ton and iv) fall. This is because the world price of sugar is determined by global supply and demand factors and is not affected by the subsidy given by the small country. The country's exporters will receive the world price of sugar plus the subsidy, which totals $150 per ton. The domestic price of sugar will rise by the amount of the subsidy, which is $50 per ton. The subsidy will lead to a decrease in domestic consumption of sugar, causing it to fall.

Explanation

The correct answer is i) remain at $100 per ton; ii) $150 per ton; iii) rise by $50 per ton and iv) fall. This is because the world price of sugar is determined by global supply and demand factors and is not affected by the subsidy given by the small country. The country's exporters will receive the world price of sugar plus the subsidy, which totals $150 per ton. The domestic price of sugar will rise by the amount of the subsidy, which is $50 per ton. The subsidy will lead to a decrease in domestic consumption of sugar, causing it to fall.

9. Development assistance in the form of food aid is best administered by which of the following?

Through subsidies to home-country farmers which encourage them to produce more food to distribute around the world

By restricting imports from countries

By giving united cash contributions, which will be used to purchase food for as assistance

By providing cheap loans to poor countries to purchase home-country food

None of the above

The best way to administer development assistance in the form of food aid is by giving united cash contributions, which will be used to purchase food for assistance. This approach allows for flexibility and efficiency in the distribution process, as cash contributions can be used to buy food from various sources, including local markets, ensuring that the aid reaches those in need quickly and effectively. It also supports local economies and farmers by stimulating demand for their products. By providing cash contributions, the aid can be tailored to the specific needs and preferences of the recipients, promoting self-sufficiency and sustainability.

Explanation

The best way to administer development assistance in the form of food aid is by giving united cash contributions, which will be used to purchase food for assistance. This approach allows for flexibility and efficiency in the distribution process, as cash contributions can be used to buy food from various sources, including local markets, ensuring that the aid reaches those in need quickly and effectively. It also supports local economies and farmers by stimulating demand for their products. By providing cash contributions, the aid can be tailored to the specific needs and preferences of the recipients, promoting self-sufficiency and sustainability.

10. The payoff matrix above are profits in millions of dollars for two software firms that have developed an identically new software application. They are debating whether to give the new application away free and then sell add-ons or sell the application at $30 a copy. i) What is Firm 1's best strategy?__ and ii) What is the Nash equilibrium of the game?__

None of the above

Firm 1's best strategy is to give away the application regardless of what Firm 2 does because this will result in the highest profit for Firm 1. The Nash equilibrium of the game is when both Firm 1 and Firm 2 give the software application away for free. This is because neither firm has an incentive to deviate from this strategy as it maximizes their profits.

Explanation

Firm 1's best strategy is to give away the application regardless of what Firm 2 does because this will result in the highest profit for Firm 1. The Nash equilibrium of the game is when both Firm 1 and Firm 2 give the software application away for free. This is because neither firm has an incentive to deviate from this strategy as it maximizes their profits.

11. Boeing and Airbus are the world's only major producers of large, wide-bodied aircrafts. But with the cost of fuel increasing and changing demand in the airline industry, the need for smaller regional jets has increased. Suppose that both firms must decide whether they will produce a smaller plane. We will assume that Boeing has a slight cost advantage over Airbus in both large and small planes, as shown in the payoff matrix (in millions of U.S. dollars) above. Assume that each producer chooses to either produce only large, only small, or no planes at all. What is the Nash equilibrium of this game?

When Boeing produces small planes/Airbus produces small planes and when Boeing produces large planes/Airbus produces large planes.

When Boeing produces no planes/Airbus produces large planes and when Boeing produces large planes/Airbus produces small planes

When Airbus produces small planes/Boeing produce large planes and when Airbus produces large planes/Boeing produce small planes

When Boeing produces small planes/Airbus produces large planes and when Boeing produces large planes/Airbus produces no planes

None of the above

The Nash equilibrium of this game is when Airbus produces small planes and Boeing produces large planes, and when Airbus produces large planes and Boeing produces small planes. This is because both firms have a slight cost advantage in their respective planes, so it is in their best interest to produce the type of plane that they have a cost advantage in. If one firm deviates from this strategy and produces the same type of plane as the other firm, they will not be maximizing their profits. Therefore, the Nash equilibrium occurs when both firms produce different types of planes.

Explanation

The Nash equilibrium of this game is when Airbus produces small planes and Boeing produces large planes, and when Airbus produces large planes and Boeing produces small planes. This is because both firms have a slight cost advantage in their respective planes, so it is in their best interest to produce the type of plane that they have a cost advantage in. If one firm deviates from this strategy and produces the same type of plane as the other firm, they will not be maximizing their profits. Therefore, the Nash equilibrium occurs when both firms produce different types of planes.

12. According to the figure, if the world price of the product is $100, i) the home demand for the product is __ and the exports are __; ii) if the home country provides a subsidy of $100, the large country will cause the world price to__; iii) According to the figure, due to the subsidy, the consumer surplus __ by __iv) due to the subsidy, the revenue cost for the government is__; v) According to the figure, the deadweight loss due to the subsidy is__; vi) According to the figure, the subsidy in the large-country case causes a deadweight loss. It can be avoided by__:

I) 50, 75; ii) decreases by $50; iii) decrease, $1,875; iv) $12,500; v)7.600; and vi) providing cash subsidy to consumer

According to the figure, if the world price of the product is $100, the home demand for the product is 50 and the exports are 75. If the home country provides a subsidy of $100, the large country will cause the world price to decrease by $50. Due to the subsidy, the consumer surplus decreases by $1,875. The revenue cost for the government is $12,500. The deadweight loss due to the subsidy is $7,600. The subsidy in the large-country case causes a deadweight loss, which can be avoided by providing cash subsidy to consumers.

Explanation

According to the figure, if the world price of the product is $100, the home demand for the product is 50 and the exports are 75. If the home country provides a subsidy of $100, the large country will cause the world price to decrease by $50. Due to the subsidy, the consumer surplus decreases by $1,875. The revenue cost for the government is $12,500. The deadweight loss due to the subsidy is $7,600. The subsidy in the large-country case causes a deadweight loss, which can be avoided by providing cash subsidy to consumers.

13. Suppose that the world price of sugar is $100 per ton. If a small country gives its sugar exporters a subsidy of $50 per ton, then i) the world price of sugar will___; ii) its importers will receive __; iii) its domestic price of sugar will be ___ by ___; and iv) domestic consumption of sugar will___.

I) increase by $50 per ton; ii) $150 per ton ; iii) rise by $50 per ton; and iv) fall

I) remain at $100 per ton; ii) $150 per ton ; iii) rise by $50 per ton; and iv) rise

I) remain at $100 per ton; ii) $150 per ton; iii)rise by $150 per ton; and iv) fall.

I) decrease by $50 per ton; ii) $150 per ton ; iii) rise by $50 per ton; and iv) fall.

I) remain at $100 per ton; ii) $150 per ton; iii) fall by $50 per ton; and iv) fall.

If a small country gives its sugar exporters a subsidy of $50 per ton, the world price of sugar will remain at $100 per ton because the subsidy does not affect the global market. Importers will receive $150 per ton because they pay the world price plus the subsidy. The domestic price of sugar will rise by $150 per ton, as domestic producers can sell their sugar at the higher world price. However, domestic consumption of sugar will fall because the higher price makes it less affordable for consumers.

Explanation

If a small country gives its sugar exporters a subsidy of $50 per ton, the world price of sugar will remain at $100 per ton because the subsidy does not affect the global market. Importers will receive $150 per ton because they pay the world price plus the subsidy. The domestic price of sugar will rise by $150 per ton, as domestic producers can sell their sugar at the higher world price. However, domestic consumption of sugar will fall because the higher price makes it less affordable for consumers.

14. The payoff matrix above shows the outcomes of various strategies that Airbus and Boeing might follow in response to action on the part of the other company. This payoff matrix describes actions in developing so-called super-jumbo jets that can carry 600 or more passengers. In each element, the lower left value gives the outcome for Boeing based on the action of Airbus and the upper right value gives the outcome for Airbus based on the action of Boeing. For example, in element A, each company will lose $10 million if they both decide to produce super-jumbo jets. i) Which element(s) is a (are) Nash equilibrium (equilibria)?__; ii) Boeing has decided not to produce super-jumbo jets. Instead, it will continue to market its 450-passenger 747s. Which elements represent this decision?__; iii) If Boeing decide not to produce super-jumbo jets. Instead, it will continue to market its 450-passenger 747s. However, Airbus will produce super-jumbo jets. Which element represents their joint decisions?__; and iv) Boeing has decided not to produce super-jumbo jets. Instead, it will continue to market its 450-passenger 747s. However, Airbus will produce super-jumbo jets. Is Boeing's decision correct?__

None of the above

The Nash equilibrium occurs when both players have chosen a strategy and neither has an incentive to deviate from their choice. In this case, the Nash equilibria are elements B and C, where both Airbus and Boeing have chosen to produce super-jumbo jets.

To represent Boeing's decision not to produce super-jumbo jets and continue marketing its 450-passenger 747s, we look at elements C and D.

If Boeing decides not to produce super-jumbo jets but Airbus does, their joint decision is represented by element C.

Boeing's decision not to produce super-jumbo jets, while Airbus does, is not correct because Boeing would lose profits if it produced a super-jumbo jet.

Explanation

The Nash equilibrium occurs when both players have chosen a strategy and neither has an incentive to deviate from their choice. In this case, the Nash equilibria are elements B and C, where both Airbus and Boeing have chosen to produce super-jumbo jets.

To represent Boeing's decision not to produce super-jumbo jets and continue marketing its 450-passenger 747s, we look at elements C and D.

If Boeing decides not to produce super-jumbo jets but Airbus does, their joint decision is represented by element C.

Boeing's decision not to produce super-jumbo jets, while Airbus does, is not correct because Boeing would lose profits if it produced a super-jumbo jet.

15. What is the difference between an agricultural export subsidy and an agricultural production subsidy?

There is no difference between an agricultural export subsidy and an agricultural production subsidy.

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Explanation

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16. Arrange the following trade policies in order of their effectiveness to help producers in a country and consistent with the targeting principle. I) Production subsidy Large Country II) Export Subsidy Large country III) Cash assistance IV) Import Tariff Large Country

III > I = II > IV

I >III > IV >II

III > 1 > IV > II

I > III =II > IV

None of the above

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Explanation

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17. Analyze the impact of the following trade policies in order of their negative impact on the home economy I) Production Subsidy Small Country Case II) Production Subsidy Large Country Case III) Export Subsidy Small Country Case IV) Export Subsidy Large Country Case V) Import tariff Small Country Case VI) Import Tariff Large Country Case

I > IV > III= V > II > IV

VI > I > III= V > II > IV

VI > I > II >III= V > IV

None of the above

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Explanation

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18. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy of $50 per ton, then the world price of sugar will__; ii) then its exporters will receive__; iii) domestic price of sugar will:__; iv) then domestic consumption of sugar will:__; and v) what will happen to consumer surplus?__

None of the above

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Explanation

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19. According to the figure above, if the world price of the product is $125, i) then the domestic demand is__; ii) at the world price there is a __ of __ in the home market, which is __; iii) According to the figure, the home country provides a subsidy of __, which results in an increase in exports of __; iv) According to the figure, the subsidy results in a __ of government revenue by the amount of __; v) According to the figure, the subsidy results in __ in producer surplus by the amount of __; and vi) According to the figure, the deadweight loss because of the subsidy is__:

I) 40; ii) shortage, 60, exported; iii) $50, 40; iv) Decrease, $7,500; v) An increase; vi) $5,500; $1,000

I) 40; ii) surplus, 60, exported; iii) $50, 40; iv) Decrease, $5,000; v) An increase; vi) $5,000; $1,000

I) 20; ii) surplus, 60, imported; iii) $50, 40; iv) Decrease, $5,000; v) An increase; vi) $1,500; $1,000

I) 40; ii) surplus, 60, exported; iii) $50, 40; iv) Decrease, $7,500; v) An increase; vi) $1,500; $1,000

None of the above

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Explanation

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20. The payoff matrix above shows the outcomes of various strategies that Airbus and Boeing might follow in response to action on the part of the other company. This payoff matrix describes actions in developing so-called super-jumbo jets that can carry 600 or more passengers. In each element, the lower left value gives the outcome for Boeing based on the action of Airbus and the upper right value gives the outcome for Airbus based on the action of Boeing. For example, in element A, each company will lose $10 million if they both decide to produce super-jumbo jets. i) Now suppose that the U.S. government decides to provide a $50 million subsidy to Boeing in order to encourage Boeing to produce super-jumbo jets. Boeing decides to take the subsidy. What is Airbus's best strategy?__ and ii) Which quadrant in the payoff matrix describes the best choices of Airbus and Boeing when Boeing receives a $50 million subsidy?__

I) continue to produce super-jumbo jets because its profits will not be affected and ii) quadrant A

I) continue to produce super-jumbo jets even though its profits will fall and ii) quadrant B

None of the above

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Explanation

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