Question Two (worth ten points) Assume Lonnie and Maria each own half of a duplex and there is a playground that they share Both of them have young children and they would benefit from putting up lights so that their children could use the playground in the evening Assume that the cost of putting up the lights is equal to $40,000 If both agree to pay then the cost is shared equally If one agrees to pay and the other does not then the person agreeing to pay must pay the entire $40,000 If neither agrees to pay there is no cost and no benefit Scenario One Assume that Lonnie and Maria each receive a benefit of $30,000 from the lights being put up 1 Fill in the matrix 2 Define equilibrium, and then prove that the equilibrium occurs when neither pay for putting up the lights Maria Agrees to Pay Doesn't Pay Lonnie Agrees to Pay Doesn't Pay Scenario Two Assume that Lonnie has three children and he receives a benefit of $70,000 by having lights put up Assume Maria has one child and she receives a benefit of $25,000 from the lights 1 Fill in the numbers in the matrix 2 Find the equilibrium (hint, see if one of the two has a dominant strategy and use that to determine equilibrium) 3 Economists predict that finding equilibrium will is helpful because it predicts how people will behave Tell stories as to why if this occurred in the real world that Lonnie and Maria might behave differently that the behavior predicted by equilibrium Maria Agrees to Pay Doesn't Pay Lonnie Agrees to Pay Doesn't Pay

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Question Two (worth ten points) Assume Lonnie and Maria each own half of a duplex and there is a playground that they share. Both of

Question Two (worth ten points)

Assume Lonnie and Maria each own half of a duplex and there is a playground that they share. Both of them have young children and they would benefit from putting up lights so that their children could use the playground in the evening.

Assume that the cost of putting up the lights is equal to $40,000. If both agree to pay then the cost is shared equally. If one agrees to pay and the other does not then the person agreeing to pay must pay the entire $40,000. If neither agrees to pay there is no cost and no benefit.

Scenario One: Assume that Lonnie and Maria each receive a benefit of $30,000 from the lights being put up.

1. Fill in the matrix.

2. Define equilibrium, and then prove that the equilibrium occurs when neither pay for putting up the lights.

		Maria
		Agrees to Pay	Doesn't Pay
Lonnie	Agrees to Pay
	Doesn't Pay

Scenario Two:Assume that Lonnie has three children and he receives a benefit of $70,000 by having lights put up. Assume Maria has one child and she receives a benefit of $25,000 from the lights.

1. Fill in the numbers in the matrix.

2. Find the equilibrium (hint, see if one of the two has a dominant strategy and use that to determine equilibrium).

3. Economists predict that finding equilibrium will is helpful because it predicts how people will behave. Tell stories as to why if this occurred in the real world that Lonnie and Maria might behave differently that the behavior predicted by equilibrium.