101_PS11_ans_03 - Answers to Problem Set 11 Answers to...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Answers to Problem Set 11 Answers to Review Questions 1. Each contestant in a military arms race faces a choice between maintaining the current level of weaponry or spending more to increase it. In this situation, each side seems to view military superiority as the best possible outcome. The worst possible outcome from each side’s point of view is military inferiority. The other two combinations—both sides maintaining their current spending or both sides spending more—each nation would prefer the former, since both result in military parity. Assuming the contestants are the USA and the former USSR, these rankings give rise to the following payoff matrix. Each side’s dominant strategy is to spend more on weapons, yet the result when each side spends more is less attractive than if each side had held spending at current levels. USSR USA Spend more on weapons Spend the same on weapons Second best for each Third best for each Best for USSR Worst for USA Best for USA Worst for USSR Spend the same on weapons Spend more on weapons 2. By waiting, Warner Brothers put itself in the position of having to reshoot many scenes if they use any other singer than Bennett. Warner Brothers would have done better to negotiate with Bennett before filming, when the reservation price for his services was much lower (because at that point, the film could more easily have been adapted). 3. Once the firm buys the specialized capital equipment, it becomes a sunk cost, since it cannot be used to serve any buyer other than GM. With no prior agreement about the price of the door handles, GM would then be in a position to offer a price greater than the marginal cost of making the door handles, but too low to enable the firm to recover its capital costs. At that point, after all, GM knows that the firm would be better off accepting the offer than refusing it. To guard against this possibility, the firm will want to sign a long-term contract specifying the price of the door handles before it invests in specialized capital equipment. 4. If you were going to play the prisoner’s dilemma game indefinitely many times with the same partner, you and your partner have a strong incentive to cooperate, because you each know that each can punish the other for defecting. 5. Because the waiter in this situation knows that a selfish diner would have no incentive to tip at the end of
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

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).

Page1 / 5

101_PS11_ans_03 - Answers to Problem Set 11 Answers to...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online