Microeconomics: Theory and Applications with Calculus, 4e

Chapter 13

1. 1.1 The payoff matrix in this prisoners’ dilemma game is

   

   If Duncan stays silent, Larry gets 0 if he squeals and $-1$[&|minus|1&] (a year in jail) if he stays silent. If Duncan confesses, Larry gets $-2$[&|minus|2&] if he squeals and $-5$[&|minus|5&] if he does not. Thus, Larry is better off squealing in either case, so squealing is his dominant strategy. By the same reasoning, squealing is also Duncan’s dominant strategy. As a result, the Nash equilibrium is for both to confess.

2. 1.3 No strategies are dominant, so we use the best-response approach to determine the pure-strategy Nash equilibria. First, identify each firm’s best responses given ...