Quiz #2 on Smith and Game Theory -- Answers

I.  Circle T or F depending on whether the following sentence is true or false (5 points each).

T                      1.  Smith believes that the division of labor is both a cause of differences in individual skills and an effect of them.

            F            2.  Smith identifies the wealth of a nation with the quantity of gold and silver it possesses.

T                      3.  Smith believes that at least with respect to market behavior people generally act in whatever way they think will be to their material advantage.

T                      4.  Smith believes that the division of labor is limited by the extent of the market.

            F            5.  Smith believes that the market price of any commodity is identical to that commodity's "natural price".

T                      6.  Smith believes that market price is determined by supply and demand.

            F            7.  Smith maintains that actions with unintended consequences are unintentional and hence not rational.

This is an important question.  It is crucial to Smith that entirely rational, conscious, and intentional behavior can have unintended consequences.

            F            8.  In every game in which the same moves are open to every player, whatever one player wins the others must lose.  Think about coordination games, such as deciding what side of the road to drive on.

            F            9.  In a Nash equilibrium in a two-person game the outcome is best for both players.  False, as the prisoner's dilemma and lots of other games illustrate.  In a Nash equilibrium, each player makes the best reply, but the crucial point is that does not imply that the outcome is best for either or both of the players.

            F            10.  The prisoner's dilemma game shows that self-interested individual rational choice is always socially disadvantageous.  It only shows that self-interested rational choice is sometimes socially disadvantageous.

            F            11.  Game theory explains how the preferences of players depends on features of outcomes of games.  Game theory takes preferences as givens.

T                      12.  In a strategic situation the outcome depends on the choices of two or more agents.

Please turn over for Part II

Part II:  Answer each of the following two questions briefly (in no more than two or three sentences).  (20 points each)

1. Does Smith explain the origins of the division of labor and its increasing extent in terms of the social benefits of the division of labor?  Explain your answer.

No.  Although he emphasizes the social benefits, what explains the division of labor are the expected benefits to individuals who seek to benefit themselves. 

2. How according to Smith did towns contribute to the improvement and cultivation of the countryside?

three ways:

by providing a market

by providing buyers of land who farmed rationally

by bringing about good order in the countryside by undermining feudalism, which came about through the desire of feudal lords for luxuries and the efforts of merchants to make those luxuries available for purchase.