Answers to Odd-Numbered Problems 17- a. There are two equilibria: firm J develops E and firm K develops D,
and vice versa. Thus, one cannot make a confident prediction as to
which outcome will occur.
b. If firm J moves first, it should choose E, knowing firm K will then
choose D.
c. Similarly, firm K’s first move should be to choose E. - a. The unique equilibrium outcome has firm A choosing High and firm
B choosing Medium. (Use the method of “circles and squares” to
confirm this.)
b. The firms should coordinate their R&D strategies by selecting
Medium and Low, respectively. Here the firms achieve maximum total
profit, and each firm’s profit is greater than it was in the
noncooperative equilibrium of part (a). - a. Applying the method of “circles and squares” to the payoff table, we
see that there are two Nash equilibria: (i) Both superpowers Escalate
their weapons buildup, or (ii) Both Stop. Strictly speaking this is not a
prisoner’s dilemma. (It is not the case that the play of dominant
strategies leads to an inferior outcome for both sides.)
b. Yes, with the fall of the former Soviet Union, it appears that the
superpowers have switched (at least for the time being) to the
Stop–Stop equilibrium. - a. There are no dominant or dominated strategies for either player.
b. The equilibrium strategies are R1 and C3; the equilibrium outcome is
- a. The town’s dominant strategy is nonenforcement. Anticipating this, the
typical motorist chooses to disobey the law. The outcome is (5, 10).
b. If the town can make the “first move” by committing to 100 percent
enforcement, the situation changes. The typical motorist’s best
response is to obey, leading to the outcome (0, 15). Note, however,
that enforcement (because of its high cost) is still not in the best
interest of the town (15 is worse than 10).
c. Now the town enforces the law with probability p. The typical motorist
will obey the law if and only if his expected payoff from doing so (0)
exceeds the payoff if he doesn’t, 20p 5(1 p). Setting these
payoffs equal to one another implies p .2. As long as the
enforcement probability is slightly greater than 20 percent, motorists
will obey the law. The town’s enforcement cost is (.2)(15) 3.
Probabilistic enforcement, which successfully deters, is the town’s least
costly strategy. - a. The buyer does not have a dominant strategy. She buys 2 units at P
$9, 4 units at P $8, and 6 units at P $6. Anticipating this behavior,
the seller should set P $8.
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