midterm2 2008 solutions

# In the ght mode according to the strategy prole both

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Unformatted text preview: iate. In the ﬁght mode, according to the strategy proﬁle both players play Lion and get 0 and then go back to the cooperation mode where they both get 3 forever. This yields present value of 0 + 3δ/(1 − δ ) to each player. If a player deviates in the ﬁght mode and plays chicken, his payoﬀ is 1 in period t and then they will still go back to the cooperation in period t+1 and obtain 3 forever. This yields a higher present value of 1 + 3/(1 − δ ). b) (15 points) There are three modes: Cooperation, P1 and P2. The game starts in the Cooperation mode. In the Cooperation mode, each player plays Chicken. If they play (Chicken, Chicken) or (Lion, Lion), then they remain in the Cooperation mode in the next period. If player i plays Lion while the other player plays Chicken, then in the next period they go to Pi mode. In Pi mode player i plays Chicken while the other player plays Lion; they then go back to Cooperation mode (regardless of the actions). ANSWER: We use the single­deviation princ...
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