answerkey ch9 3ed - Answers to Text Questions and Problems...

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Answers to Text Questions and Problems Chapter 9 Answers to Review Questions 1. Each contestant in a military arms race faces a choice between maintaining the current level of weaponry and spending more to increase it. In this situation, each side views military superiority as the best possible outcome, and military inferiority as the worst possible outcome. Of the other two combinations—both maintaining current spending or both 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. 2. By waiting, Warner Brothers put itself in the position of having to reshoot many scenes if they used 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 ultimatum bargaining game many times with the same partner, your refusal of a one-sided offer in an early game could be rational, because it might discourage your partner from making similar offers in later games. 5. Because the waiter in this situation knows that a selfish diner would have no incentive to tip at the end of the meal, he would not bother providing good service, even though his cost of providing good service is less than the diner would be willing to pay for it. That most diners do in fact leave tips in restaurants located on interstate highways suggests that people are not always selfish in the narrowest sense of the term. 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
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Answers to Problems 1a . b.
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This note was uploaded on 07/30/2011 for the course ECON 1101 taught by Professor Julia during the Three '08 term at University of New South Wales.

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answerkey ch9 3ed - Answers to Text Questions and Problems...

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