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Principles of Economics- Mankiw (5th) 355

Principles of Economics- Mankiw (5th) 355 - CHAPTER 16 O L...

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CHAPTER 16 OLIGOPOLY 365 CASE STUDY THE PRISONERS’ DILEMMA TOURNAMENT Imagine that you are playing a game of prisoners’ dilemma with a person being “questioned” in a separate room. Moreover, imagine that you are going to play not once but many times. Your score at the end of the game is the total number of years in jail. You would like to make this score as small as possible. What strategy would you play? Would you begin by confessing or remaining silent? them to an equilibrium in which each produces 40 gallons. Figure 16-7 shows the game they play. Producing 40 gallons is a dominant strategy for each player in this game. Imagine that Jack and Jill try to form a cartel. To maximize total profit, they would agree to the cooperative outcome in which each produces 30 gallons. Yet, if Jack and Jill are to play this game only once, neither has any incentive to live up to this agreement. Self-interest drives each of them to renege and produce 40 gallons.
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