PS1_answers - if firm A chooses H, the worst payoff would...

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Legal Studies 145 - Law and Economics I Answers to P ROBLEM S ET #1 1. A dominant strategy is one that is best no matter what action another party takes. When both parties have dominant strategies, the outcome, defined by each party's choice, is stable because neither party has an incentive to change. 2. Developing a reputation for making random responses to an opponent's actions (i.e., being unpredictable) eliminates the other party's advantage in being able to fully predict your response to every possible situation. This may sacrifice something in the short-run, but can lead to long-run gains. 3a. A maximin strategy maximizes the minimum possible outcome, assuming the other player might do anything. It operates as follows: (i) Assume that the other player is irrational. (ii) Ask what is the worst possible outcome if you play strategy 1? Strategy 2? (iii) Choose the greater of the two options. This is your maximin strategy. Here,
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Unformatted text preview: if firm A chooses H, the worst payoff would occur if firm B also chooses H, and A's payoff is 30. If A chooses L, the worst payoff would occur if B also chooses L, and the payoff is 20. With a maximin strategy, firm A chooses H because its worst payoff is greater than the payoff if it chooses L, and the payoff is 30. If B chooses L, the worst payoff would occur if A also chooses L, and the payoff is 20. With a maximin strategy, B chooses H because its worst payoff is greater than the payoff if it chooses L. So, under the maximin, both A and B produce a high-quality system. 3b. If A chooses first, it will choose its maximin strategy of H. Now B will rationally choose L, since it prefers 35 to 30. The outcome is (H, L), with A getting a payoff of 50. If B chooses first, it will choose the maximin strategy of H. Now A will choose Low because it prefers 40 to 30. The outcome is (L,H), which gives B a payoff of 60....
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This note was uploaded on 04/16/2008 for the course LEGALST 145 taught by Professor Rubenfield during the Spring '08 term at University of California, Berkeley.

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