Solution to Questions_Chap 19_2011

Solution to Questions_Chap 19_2011 - Lahore School of...

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Lahore School of Economics Macroeconomics II In Class Assessed Questions Chapter 19 – Problems and Applications 3. a. Figure 19–1 shows the payoffs from this game. If they both work hard, they each get  $100 of profit less $20 in effort for a total of $80 each. If only one of them works hard,  the hard worker gets $70 in profit minus $20 in effort while the other enjoys the entire  $70 in profit with no cost in terms of effort. Finally, if neither of them works, they each  get $60. b. Andy and Ben would prefer that both work hard so they each get the maximum payoff,  $80. c. If Andy expects Ben to work hard, he has a choice of also working hard and earning  $80, or of slacking off and getting $70. As a result he will choose to work hard also. Ben  faces   the   same   options   and   would   make   the   same   decision.   Working   hard   is   an  equilibrium: if both Andy and Ben expect the other to work hard, then they will both  work hard and satisfy each other’s expectations.
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