101-19_07 - Econ 101 Lecture 19 Games and Strategic...

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Econ 101 Lecture 19 Games and Strategic Behavior Thus far, we have viewed economic decision makers as confronting an environment that is essentially passive. But there exist many cases in which relevant costs and benefits depend not only on the behavior of the decision makers themselves but also on the behavior of others. Example 19.1. Should the prisoners confess? Two prisoners, X and Y, are held in separate cells for a serious crime that they did, in fact, commit. The prosecutor, however, has only enough hard evidence to convict them of a minor offense, for which the penalty is, say, a year in jail. Each prisoner is told that if one confesses while the other remains silent, the confessor will go scot free while the other spends 20 years in prison. If both confess, they will get an intermediate sentence, say five years. These payoffs are summarized in the payoff matrix below. The two prisoners are not allowed to communicate with one another. If the prisoners are rational and narrowly self-interested, what will they do? Prisoner Y Prisoner X Confess Remain Silent Remain Silent Confess 5 years for each 1 year for each 0 years for X 20 years for Y 20 years for X 0 years for Y Their dominant strategy is to confess. No matter what Y does, X gets a lighter sentence by speaking out-- if Y too confesses, X gets five years instead of 20; and if Y remains silent, X goes free instead of spending a year in jail. The payoffs are perfectly symmetric, so Y also does better to confess, no matter what X does. The difficulty is that when each behaves in a self-interested way, both do worse than if each had shown restraint. Thus, when both confess, they get five years, instead of the one year they could have gotten by remaining silent. And hence the name of this game, prisoner's dilemma . Example 19.2. Why do students have to wait in line overnight to buy Cornell hockey tickets? Each year Cornell announces a time at which its ticket window will open for the sale of a limited number of hockey tickets for students. Students show up more than 24 hours in advance to wait in line for these tickets, even though no more tickets are available that way than if everyone had shown up only 1 hour in advance. Suppose that if everyone shows up one hour in advance, everyone has a 50-50 chance of getting a ticket, and that the odds of getting a ticket are the same if everyone shows up 24 hours in advance. If you show up 24 hours in advance and everyone else shows up one hour in advance, you are sure to get a ticket. But if you show up 1 hour in advance and others show up 24 hours in advance, you have no chance to get a ticket. The same applies to other students. Waiting only one hour has no cost to you. But you would be willing to pay $40 to avoid having to wait 24 hours. A 50-50 chance of getting a ticket is worth $50 to you and a 100 percent chance of getting a ticket is
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This note was uploaded on 03/27/2008 for the course ECON 1110 taught by Professor Wissink during the Spring '06 term at Cornell University (Engineering School).

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101-19_07 - Econ 101 Lecture 19 Games and Strategic...

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