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Chapter 10: Q. 20 (page 253)

Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn \(100. If they decide to work together and both lower their output, they can each earn \)150. If one person lowers output and the other does not, the person who lowers output will earn \(0and the other person will capture the entire market and will earn \)200. Table 10.6represents the choices available to Mary and Raj. What is the best choice for Raj if he is sure that Mary will cooperate? If Mary thinks Raj will cheat, what should Mary do and why? What is the prisoner鈥檚 dilemma result? What is the preferred choice if they could ensure cooperation? A = Work independently; B = Cooperate and Lower Output. (Each results entry lists Raj鈥檚 earnings first, and Mary's earnings second.)

RAJ MARY
(A) (B)
(\(100,\)100) (\(200,\)0)
(\(0,\)200) (\(150,\)150)

Short Answer

Expert verified
  • If Raj is sure that Mary will cooperate, the best choice for Raj is that he will cheat and earn$100
  • If Mary thinks Raj will cheat, Mary should cheat and earn
  • The result of the prisoner's dilemma is that both will cheat and left with an earing of $100each.
  • If they could ensure cooperation, the preferred choice will be($150,$150).

Step by step solution

01

Step 1. Definition

A scenario in game theory where individuals can get beter payoff through cooperating rather than following self-interest is known as prisoner's dilemma.

02

Step 2. Answer of the 1st question

If Raj is sure that Mary will not cheat, Raj will have two choices - 1. Raj will not cheat and earn$150(in this case both will earn $150), 2. Raj will cheat and earn (in this case Raj will earn $200and Mary will earn $0).

Raj will prefer to cheat and earn $200and this is the best choice for him if he is sure that Mary will not cheat.

03

Step 3. Answer of the 2nd question

If Mary is sure Raj will cheat, Marry will have two choices - 1. Mary will not cooperate and earn $0(in this case Raj will earn $200), 2. Raj will cheat and earn $100(in this case both will earn$100).

Mary should choose to cheat and earn $100otherwise he will be left with $0earning as Raj will get the share of the whole market.

04

Step 4. Result of the prisoner's dilemma

The result of the prisoner's dilemma is that both will cheat and left with an earing of $100each.

05

Step 5. Answer of the 4th question

If they could ensure cooperation, the preferred choice will be ($150,$150) which means both will earn$150each.

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Most popular questions from this chapter

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

Andrea鈥檚 Day Spa began to offer a relaxing

aromatherapy treatment. The firm asks you how much to charge to maximize profits. The first two columns in Table 10.5provide the price and quantity for the demand curve for treatments. The third column shows its total costs. For each level of output, calculate total revenue, marginal revenue, average cost, and marginal cost. What is the profit-maximizing level of output for the treatments and how much will the firm earn in profits?

Price Quantity TC
\(25.00 0 \)130
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Consider the curve in the figure below, which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs.

a. Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel

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c. Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.

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Would you rather have efficiency or variety? That is, one opportunity cost of the variety of products we have is that each product costs more per unit than if there were only one kind of product of a given type, like shoes. Perhaps a better question is, 鈥淲hat is the right amount of variety? Can there be too many varieties of shoes, for example?鈥�
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