This is a short-answer question. For a successful attempt to a question, please show your reasoning and related calculation clearly.

2. Suppose a society has two individuals, Ana and Bill. In the first period, Ana and Bill decide whether to study for an university degree at the same time. If one decides to attend university, his/her payoff in the first period is 10. If one decides not to attend university, his payoff in the first period is zero. In the second period, Ana and Bill's earnings are not only determined by their own education level, but also by the education level of the other as well. Let (A, B) denotes the earnings of Ana and Bill respectively in the second period. The following table lists the second period earnings (excluding first period payoffs) in four different scenarios: ' Bill attended univ. Bill did not attend univ. Ana attended univ. (30, 30) (10, 8) Ana did not attend univ. (8, 10) (5, 5) Assume that neither Ana nor Bill discounts second period payoffs, namely their dis- count factors are both 1. Their education decisions in the first period are only deter- mined by the sum of their own payoffs from the two periods. Moreover, they decide whether to go to university in the first period simultaneously. 4 (a) Does education have externality in the example above? If so, is it positive or negative externality? (10 marks) (b) If Ana knows that Bill would not attend university, would Ana attend univer sity? Is the case that neither Ana nor Bill attends university a Nash equilibrium? (10 marks. Hint: in a Nash equilibrium, no one finds it profitable to deviate from their choice unilaterally.) (c) If Ana knows that Bill would attend university, would Ana attend university? Is the case that both Ana and Bill attend university a Nash equilibrium? (10 marks)