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econ1001_endofchapter10

# econ1001_endofchapter10 - Chapter 10 Strategic Choice in...

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Chapter 10 Strategic Choice in Oligopoly, Monopolistic Competition, and Everyday Life

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Problem #1, Chapter 10 In studying for his economics final, Sam is concerned about only two things: his grade and the amount of time he spends studying. A good grade will give him a benefit of 20; an average grade, a benefit of 5; and a poor grade, a benefit of 0. By studying a lot, Sam will incur a cost of 10; by studying a little, a cost of 6. Moreover, if Sam studies a lot and all other students study a little, he will get a good grade and they will get poor ones. But if they study a lot and he studies a little, they will get good grades and he will get a poor one. Finally, if he and all other students study the same amount of time, everyone will get average grades. Other students share Sam’s preferences regarding grades and study time.
Solution to Problem #1 (1) A) Model this situation as a two-person prisoner’s dilemma in which the strategies are to study a little and to study lot, and the players are Sam and all other students. Include the payoffs in the matrix Payoff = benefit - cost Think of all possible combinations of outcomes Sam studies a lot while all others also study a lot Sam’s payoff: 5-10 =-5; all others’ payoff: 5-10=-5 Sam studies a lot but all others study a little Sam’s payoff: 20-10 =10; all others’ payoff: 0 – 6 = -6

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Solution to Problem #1 (2) Sam studies a little but all others study a lot Sam’s payoff: 0-6 = -6; all others’ payoff: 20-10= 10 Sam studies a little while all others also study a little Sam’s payoff: 5-6= -1; all others’ payoff: 5-6= -1 Put all these possible combinations into a payoff matrix
Solution to Problem #1 (3) All others Study a lot Study little Sam Study a lot -5 for Sam; -5 for others 10 for Sam; -6 for others Study a little -6 for Sam; 10 for others -1 for Sam; -1 for others

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Solution to Problem #1 (4) B) What is the equilibrium outcome in this game? From the students’ perspective, is it the best outcome? To find the equilibrium outcome, we first need to find out how will each player behave in the preparation for final The dominant strategy refers to the best strategy for an individual player regardless of what all players do The dominated strategy refers to the strategy that is always inferior to the dominant strategy In this question, both Sam and all others have a dominant strategy of studying a lot
Solution to Problem #1 (5) Therefore, each will follow the best strategy by studying a lot for preparation for final Equilibrium outcome: both studying a lot As a result, both Sam and all others will end up with an average grade of 5 or a payoff of -5 However, this is actually not a best outcome From the students’ perspective, for everyone to study a little would turn out to better than the equilibrium outcome

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Chapter 10, Problem 2 Consider the following “dating game”, which has two players, A and B, and two strategies, to buy a movie ticket or a baseball ticket. The payoffs, given in points, are as shown in the matrix below.
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econ1001_endofchapter10 - Chapter 10 Strategic Choice in...

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