Running head: Economics 1

Economics

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Economics 2

Choose only 2 questions to answer from these three questions. If more than 2 questions have
been answered, only the first two will be marked. Each question is worth 50%. Word limit per
question is 500 words. QUESTION 1 Explain the game theoretic concepts of dominant strategy
and Prisoner’s Dilemma. How can these concepts allow us to analyse the problem of climate
change? QUESTION 2 Define the Lorenz Curve and the Gini coefficient, and explain how they
are calculated. The diagram below shows the Gini coefficients for market income and disposable
income for a range of different countries. Is redistribution via the tax and benefits system an
effective way of addressing inequality?

QUESTION 3 Examine the key assumptions and predictions of the models of perfect and
imperfect competition. Does perfect competition exist in the real world
Economics 3

Economics

QUESTION 1

Explain the game-theoretic concepts of dominant strategy and Prisoner’s Dilemma. How

can these concepts allow us to analyze the problem of climate change?

When players of the two-game have different but dominant strategies and the outcome is

the intersection of these two dominant theories according to the Nash equilibrium. In the

prisoner’s dilemma the confession of these two strategies for each of the prisoners, Nash

equilibrium happens when both of the players confess their strategies. The different kinds of

difficulties between the non-cooperative prisoner variable arise and it is considered as the

prisoner’s dilemma (Khan, 2020) (Aklin, 2020). This concept was introduced by the American

mathematicians. If two prisoners are involved in the robbery or any crime they are isolated at

different places and crime is investigated with the same question and scenario to collect their

responses until they confess their crime. Every prisoner is concerned with the period he would be

punished and locked up in jail. The prisoner decides to decide whether he wants to confess the

crime with or without knowing the decision of the second prisoner involved with him. Their

confession and decision decide their future. If both of them confess the crime then they would be

sent to jail for five years. If none of the prisoners confess the crime they would be sent to jail for

carrying weapons along. If one confesses the crime and the other does not then the confessor

would be released and the one who did not confess would be sent to jail for twenty years. The

prisoner dilemma is a very serious problem in the game theory. It describes how the

communication between the different participants of the game can drastically change the

effectiveness of their strategies. The prisoner tries to understand the decision of the other person

before confessing the crime. If one prisoner has confessed then the other would also confess the
Economics 4

crime for going to jail for five years. If one does not confess then another prisoner also tries to

remain silent for one year in jail of weapon. When two prisoners do not care about the decision

of others they start to behave selfishly and create the worst situations for each of them. The

dominant theories and the prisoner’s dilemma help to understand the strategies related to climate

(Lu, 2020). It involves the five important considerations related to the climate and these

considerations are 1) environmental resource value 2) cost of climate change 3) the effect of

emission policies on the climate cost 4) cost of these policies and 5) cost required for adopting

new technologies. The analysis has shown that the dominant theories and the prisoner dilemma

had no significant impact on climate change. The strategies to prevent the climate require many

costs and resources with the maximum amount of efficiency. Game theory plays a very

important role in the understanding of climate change. These theories help to understand the

game of climate change between the US and China. It is important for understanding the global

policies and to implement the required strategies for the considerations and inputs required for

the particular scenario. The dominant theories and the prisoner’s dilemma help to analyze the

classical game changes of the climate.

QUESTION 2

Examine the key assumptions and predictions of the models of perfect and imperfect

competition. Does perfect competition exist in the real world?

Perfect competition is the absence of rivalry in the individual firm of structured markets.

The term of perfect competition is entirely different from the concept used in daily life. In the

business field, it is assumed that perfect competition is equal to rivalry (Gretsky, 2020). The

perfect competition model is based on seven assumptions which are following:

1- A large number of sellers and buyers

Economics 5

The markets have a large number of buyers for individual firms and they supply very little

amount of the total quantity in the market. The buyers are in large number in the market and they

cannot affect the price in the market.

2- Product Homogeneity

The industry is known as the firm which produces a large number of homogenous products.

The technical aspects of the product related to the delivery and services are assumed to be

identical. If the products are different then the market would change the price of the product. The

assumption of the price and seller creates homogeneity in the market.

3- Free entry and exit of Firms

There is no restriction to enter or exit the firm. The exit may be time taking but the firm and

industries have freedom of movement to move in and out of the market.

4- Profit maximization

The main goal of the market is to increase the profit of the market. No other goals are

analyzed for the market.

5- No government regulations

The government had no contribution and no intervention in the market of the business and

the market has a complete command to be the price taker and to generate the demand curve

according to the needs of the market.

6- Mobility factors of the production

The production of different companies is free to move from one place to another and affect

the economical circle.

7- Perfect knowledge
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It is assumed that the sellers and buyers are completely aware of the required k knowledge

for the market.

Assumptions of imperfect competition

Imperfect competition in the market assumes that there are many buyers in the industry.

The buyers are unable to change the price in the market at the individual level. They cannot

change the prices on their own. It is also assumed that there are many kinds of sellers in the

industry as well. The seller has the liberty to change the price of goods sold in the market and the

individual seller has a significant role in the change of prices.

Perfect completion existence in the world

It has been observed that perfect competition cannot exist in the real world. The perfect

competition requires a theoretical construct that is not possible that’s why perfect competition

does not possibly exist. The real-life examples of the perfect competition are very difficult to

find in the market. The society produces a large number of variants every day that’s the existence

of perfect completion is nearly impossible. The requirements of the market are necessary to exit

in one industry for the perfect competition which is not possible that’s why it is found to be rare

in the modern world. For example, the differentiation of the products does not cause perfect

competition in the market (Vegari, 2020).

Economics 7

References
Aklin, M. &. (2020). Prisoners of the wrong dilemma: why distributive conflict, not collective
action, characterizes the politics of climate change. Global Environmental Politics, 20.
Retrieved from https://direct.mit.edu/glep/article-abstract/20/4/4/95068
Gretsky, N. E. (2020). An application of measure theory to perfect competition. Stochastic
processes and functional analysis, 113. Retrieved from
https://www.taylorfrancis.com/chapters/edit/10.1201/9781003067597-9/application-
measure-theory-perfect-competition-neil-gretsky-joseph-ostroy-william-zame
Khan, S. &. (2020). The Dynamics of Nash Equilibrium under Non-Markovian Classical Noise
in Quantum Prisoners' Dilemma. Reports on Mathematical Physics, 8. Retrieved from
https://www.sciencedirect.com/science/article/pii/S0034487718300569
Lu, F. T. (2020). Cooperative advertising: A way escaping from the prisoner’s dilemma in a
supply chain with sticky price. Omega, 86. Retrieved from
https://www.sciencedirect.com/science/article/pii/S0305048317305236
Vegari, M. J. (2020). Perfect Competition. Sewanee Review, 130. Retrieved from
https://muse.jhu.edu/article/842651/summary