(BUS5POE): La Trobe University Problem Sets on Principles of Economics

In this Problem Set we will discuss about Principles of Economics. The below description is the overview of that problem set. Part A: Assumptions in economics and their purpose. Explanation of George Box's quote "All models are wrong but some are useful." Definition and explanation of opportunity cost. Correct interpretation of the statement "There is no such thing as a free lunch." Definition and comparison of market economies with alternative types of economies. Part B: Explanation and evaluation of different scenarios related to opportunity cost, including the impact of having a better second-best alternative and the importance of only considering the immediate alternatives. Explanation of dominant strategies and their elimination to simplify games.

Part A
1. What are 'assumptions'? Why do economists make them? Give an example. George Box
once said that: 'All models are wrong but some are useful. Explain what he meant.
Assumptions are assertions that are all taken for granted as true without examining their
veracity. And in whatever context or condition, it is considered to be accurate. Nonetheless,
any rule may be exceptions, or these hypotheses may occasionally be incorrect. Even so,
assumptions are generally accepted at current valuations and are believed to be correct.
Economic assumptions are predictions made by economists regarding persons, society, or
enterprises. These assumptions are used to assist the actions of financial players and how
various they use resources (Economists' Assumptions in Their Economic Models). To generate
predictions, economists need to make assumptions. It can assist in the simplification of
economic processes for analysis and comprehension. Furthermore, assumptions demolish
complicated processes. As a result, economists can quickly extend hypotheses and
understandings. For instance, assume that the intricate process of international trade needs to
be comprehended. Economists can think of a situation in which only two nations specialize in a
single product. As a result, each country exclusively exports the commodity in which it
concentrates. Because of these assumptions, the circumstance is straightforward to
comprehend and envision.
According to George Box, "All models are wrong, but some are useful". This sentence can be
separated to 2 parts to analyze. First, "All models are incorrect" which means models are
reality's simplification. Other priorities can be overlooked. As a result, models are not perfectly
accurate. The second part, "However, some are useful" means the simplification can still be
pretty beneficial. Models may assist people in predicting, understanding, and explaining certain
elements without having to analyze complex reality.
2. Explain the concept of opportunity cost
When a decision is made, the opportunity cost is the price of the next-best alternative. It is
what people sacrifice (Andrea J., 2019). For instance, with the decision to study bachelor's
degree abroad for a brighter future, the cost is not just the tuition fees and daily expenses that
parents have to spend for their child. The total cost needs to include the time the student will
spend throughout the learning period hearing the lectures and doing exercises,… Furthermore,
instead of studying abroad, the student stays at their hometown to inherit and operate their
family business; or they can develop well their ability in other fields which do not need to go to
university. The cost of studying abroad will be higher than normal. So that when making
decisions, people need to be aware of the opportunity costs to make correct decisions.
3. The statement "There is no such thing as a free lunch" expresses that people do not
value things that are given for free.
The answer is "e". According to economic theory and popular belief, whatever commodities
and services are offered must have been paid for by someone. You do not get anything for free.
The payment can be money, time, or opportunities for doing other things,… [FALSE]
The right answer is “d”: If people choose to do one thing they give up the doing something else.

4. What is a market economy? Compare and contrast it with some alternative types of
economies.
A market economy is a combination of businesses and people that utilize the resources only
through the independent choices of numerous enterprises and individuals as they participate in
marketplaces for merchandise. Alternatives can be "centrally planned" economies or "mixed
economies." Almost all economies are transitioning to a mixed economy this day, which
combines market and command economies. A mixed economy may profit from both the free
market and government involvement. (Kramer, 2020)
Part B
5.
a. Assuming I could not get the Justin Bieber ticket for free, the opportunity cost of
seeing ABBA's concert is time-consuming for doing the things I don't really care
about. [FALSE]
$80
b. Assume I could get the Justin Bieber ticket for free, the opportunity cost of
seeing ABBA will be $280. Although I do not have to pay any money for the
concert, but this case demonstrates that the better my second-best alternative
is, the bigger my opportunity cost.
c. Assume I could get the Justin Bieber ticket for free, the opportunity cost of
seeing ABBA will be $280, and I can re-sell the free Justin Bieber ticket for its face
value of $200. So the opportunity cost will be $80 = $280 - $200
d. Suppose my third best alternative is to watch an ABBA DVD at home, to which
you place a monetary value of $30, and the DVD rental is $3. This is not affect my
above answer because the opportunity cost only the second option relate and
affect to the first option, not the third.
e. For example, when I am doing my part-time job, although I earn money, my cost
opportunity still high. They are $40/week that I need to pay for the
transportation fee, 20 hours/week that I can do many things like studying,
reading, playing instead of working.

References
Andrea J. Caceres-Santamaria, 2019, Money and Missed Opportunities [online]. Available at:
https://research.stlouisfed.org/publications/page1-econ/2019/10/01/money-and-missed-
opportunities [Accessed 25 July 2022].
Sean Ross, 2021, Economists' Assumptions in Their Economic Models [online]. Available at:
https://www.investopedia.com/ask/answers/032515/why-do-economists-build-assumptions-
their-economic-models.asp#:~:text=What%20Are%20Economic%20Assumptions%3F,different
%20players%20use%20scarce%20resources. [Accessed 25 July 2022].
Kramer, L., 2020. Market Economy vs. Command Economy: What's the difference?. [online]
Investopedia. Available at: https://www.investopedia.com/ask/answers/100314/whats-
difference-between-market-economy-and-command-economy.asp [Accessed 25 July 2022].
PRINCIPLES OF ECONOMICS _ BUS5POE
PROBLEM SET NO 2

Part A
1) If strategy A is clearly superior to strategy B, then playing A always has a better reward
for any opponent play than playing B. In this case, we may also state the opposite: A
completely dominates B. It is the exact opposite notion. The benefit of playing A does
not necessarily have to be larger; it might occasionally be the same. This makes weak
dominance distinct but it is never lower than the value of playing B.
2) To simplify games, dominant strategies are eliminated. We will delete a tactic once it has
gained dominance. We remove every "unreasonable" plan for each participant in the
game one by one. We shall continue till we can no longer delete any more.
3) The statement “All games can be solved by elimination of dominated strategies” is false.
Eliminating dominated strategy can not solve games that do not have dominated strategy.
Furthermore, after employing the removal of dominated technique, numerous distinct
options remain open in various games for consideration. The absence of dominated
strategy will not solve those games entirely.
4) The answer is d: “All of the above”. Because 4 from action C is not the best reward,
decision A is accurate. The outcome of action C is worse than the outcomes of actions B
and D. (4 is smaller than 10). Choices B and C are correct since Helena receives her
greatest reward of 10 from actions B and D. They are both equal. The best reaction does
not have to be the only one.
Part B
5)
a. There are no dominated strategies for both James and Buzz.
As seen in the table above, James's outcome while selecting Chicken (3) is lower than when selecting
Rooster (20). However, James's result when selecting Chicken (-10) is similarly greater than when
selecting Rooster (-50). It means that, regardless of what Buzz chooses, James' options are not
necessarily worse than one another. For Buzz, the result in selecting chicken (3) is less than that of
selecting Rooster (20). However, the consequence of picking Chicken (-10) is likewise greater than that
of choosing Rooster (-50). Buzz's selections are not always worse than the other options available.
b.
Because there is no dominated strategy in the game, we cannot resolve it by eliminating dominated
strategies. As a result, the results of equilibrium through dominance do not appear in the game of James
and Buzz.
Buzz
Chicken Rooster
James Chicken 3, 3 -10, 20
Rooster 20, -10 -50, -50

c.
James' rooster play is the finest retort to Buzz's chicken play. James playing chicken is the finest retort to
Buzz's rooster act. As a result, the game's two pure Nash equilibria are [Rooster, Chicken] and [Chicken,
Rooster].
6)
a.
"Offer discount" strikes me as the finest move in the position of firm 1. If I select "Advertising
campaign," neither the outcome for firm 2 in "Advertising campaign" nor the outcome for "Doing
nothing" will change, and I won't always be the winner for whatever firm 2 selects. If I opt to "Do
nothing," my outcome will always be inferior to firm 2. Therefore, the best option is "Offer discount."
I'll select "Advertising campaign" for firm 2's viewpoint. Although Firm 1 has more possibilities, whatever
they produce is inferior than my selection of "Advertising campaign".
b.
Firm 1's dominant tactic is "Offer discount." When business 2 chooses an advertising plan, the outcome
is worse than doing nothing (6–7). And if company 2 selects "Do nothing," the outcome of selecting
"Offer discount" by firm 1 is the same as selecting "Do nothing" (9=9). As a result, it has weak
dominance. When we take away the "Offer discount" tactic from firm 1, we can see that firm 2's
"Advertising campaign" dominates. Do nothing (8=8 and 1012) has a marginal lead over it.
c.
Firm 2's only remaining option after removing "Advertising campaign" from section B is "Do nothing." In
lieu of "Do nothing," the firm 1 will select "Advertising campaign" (20>9). As a result, [Advertising
Campaign, Do Nothing] represents the balance.
d.
This game has a specific equilibrium accessible, hence there is no Nash equilibrium.
e.
While [Offer discount, Advertising campaign] is selected for “a”, [Advertising Campaign, Do nothing] is
selected for “c”. It is different since in part A, I only take each firm's best alternative into consideration.
In component c, I don't delete and take into account for both firms at once.