Problem Set 7 Sol

# Problem Set 7 Sol - Problem Set 7 Econ 115a 1 Define(a...

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Problem Set 7 Econ 115a November 14, 2007 1. Define (a) Prisoners’ Dilemma A non-zero sum game wherein each player must choose between a strategy to (a) “cooperate” or (b) “defect”. In this game, if both players cooperate they both benefit. However if one player cooperates and the other defects, the defecting player gains more than he would in the scenario where both players cooperate and the cooperating player loses. If both players defect, both players lose, but not as much as they would have lost if they had cooperated and the other player had defected. Thus, in the Prisoners’ Dilemma, there is a Nash Equilibrium at the point where both players defect (even though it is a Pareto-suboptimal solution). (b) Grim Strategy A “trigger strategy” for multi-period games wherein one player decides to cooperate up until a single defection by the opposing player. Upon that single defection, the player employing the Grim Strategy will then defect forever. (c) Free Rider Problem The Free Rider Problem questions how to address the existence of free riders in a market wherein goods are not fully excludable. Free riders consume more than their fair share of a public (or quasi-public) good or pay less than their fair share of the costs for those goods. 2. Consider a Cournot duopoly with identical firms. Say that in this market monopoply profits

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Problem Set 7 Sol - Problem Set 7 Econ 115a 1 Define(a...

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