Principles of Economics- Mankiw (5th) 350

Principles of Economics- Mankiw (5th) 350 - 360 PA R T F I...

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360 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY still to confess, since then I’ll spend 8 years in jail rather than 20. So, regardless of what Clyde does, I am better off confessing.” In the language of game theory, a strategy is called a dominant strategy if it is the best strategy for a player to follow regardless of the strategies pursued by other players. In this case, confessing is a dominant strategy for Bonnie. She spends less time in jail if she confesses, regardless of whether Clyde confesses or remains silent. Now consider Clyde’s decision. He faces exactly the same choices as Bonnie, and he reasons in much the same way. Regardless of what Bonnie does, Clyde can reduce his time in jail by confessing. In other words, confessing is also a dominant strategy for Clyde. In the end, both Bonnie and Clyde confess, and both spend 8 years in jail. Yet, from their standpoint, this is a terrible outcome. If they had both remained silent, both of them would have been better off, spending only 1 year in jail on the gun
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