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Ch010_4e - Answers to Text Questions and Problems Answers...

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Answers to Text Questions and Problems Answers to Review Questions 1. Each contestant in a military arms race faces a choice between maintaining the current level of spending on weaponry or spending more on weapons. Further, each side views military superiority as the best possible outcome and each side views military inferiority as the worst possible outcome. The other two possible combinations are for both sides to maintain their current spending or for both sides to spend. 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. 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 LO: 4 AACSB: Analytical Skills Bloom’s: Analysis 2. By waiting, Warner Brothers put itself in the position of having to reshoot many scenes if they use a singer other than Tony Bennett. Warner Brothers would have done better to negotiate with Bennett before filming, when the reservation price for his services would have been much lower (because at that point, the film could more easily have been adapted). LO: 5 AACSB: Analytical Skills Bloom’s: Analysis 3. Once the firm buys the specialized capital equipment, it becomes a sunk cost since it cannot be used to serve any buyer besides 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.
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LO: 6 AACSB: Analytical Skills Bloom’s: Analysis 4. If you were going to play the prisoner’s dilemma game indefinitely many times with the same partner, you and your partner have a strong incentive to cooperate, because you each know that each can punish the other for defecting. LO: 4 AACSB: Analytical Skills Bloom’s: Analysis 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.
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