GAMES AND STRATEGIC BEHAVIOR 260 CHAPTER 9 new planes. The payoff matrix is as follows (payoff val. 4. In studying for his economics final, Sam is concerned about only two things: his grade and the amount of time he spends studying. A good grade will give him a ben- efit of 20; an average grade, a benefit of 5; and a poor grade, a benefit of 0. By studying a lot. Sam will incur a cost of 10; by studying a little, a cost of 6. Moreover, if Sam studies a lot and all other students study a little, he will get a good grade and they will get poor ones. But if they study a lot and he studies a little, they will get good grades and he will get a poor one. Finally, if he and all other students study the same amount of time, everyone will get average grades. Other students share Sam's preferences regarding grades and study time. (LO2) a. Model this situation as a two-person prisoner's dilemma in which the strategies are to study a little and to study a lot, and the players are Sam and all other students. Construct a payoff matrix in which the payoffs account for both the cost and benefit of studying. b. What is the equilibrium outcome in this game? Which outcome would everyone (both the other stu- dents and Sam) prefer? ues are in millions of dollars ): Airbus Don't produce Produce 100 for Boeing -5 for each O for Airbus Produce Boeing O for Boeing O for each Don't produce 100 for Airbus The implication of these payoffs is that the market demand is large enough to support only one manufac- turer. If both firms enter, both will sustain a loss. (LO2) a. Identify two possible equilibrium outcomes in this 5. Newfoundland's fishing industry has recently declined sharply due to overfishing, even though fishing compa- nies were supposedly bound by a quota agreement. If all fishermen had abided by the agreement, yields could have been maintained at high levels. (LO2) a. Model this situation as a prisoner's dilemma in which the players are Company A and Company B, and the strategies are to keep the quota and break the quota. Suppose that if both companies keep the quota, then each receives a payoff of $100, and if both break the quota, then each receives a payoff of $0. On the other hand, if one company breaks the quota and the other keeps the quota, then the company that breaks the quota receives a payoff of $150 and the company that keeps the quota receives a payoff of -$50. Construct the corresponding overfishing is inevitable in the absence of effective enforcement of the quota agreement. b.Provide another environmental example of a prison- er's dilemma c. In many potential prisoner's dilemmas, a way out of the dilemma for a would-be cooperator is to make reliable character judgments about the trustworthi- ness of potential partners. Explain why this solution is not available in many situations involving degra- dation of the environment. game. b. Consider the effect of a subsidy. Suppose the Euro- pean Union decides to subsidize the European pro- ducer, Airbus, with a check for $25 million if it enters the market. Revise the payoff matrix to account for this subsidy. What is the new equilibrium outcome? c. Compare the two outcomes (pre- and post-subsidy). What qualitative effect does the subsidy have? 7. Jill and Jack both have two pails that can be used to carry water down from a hill. Each makes only one trip down the hill, and each pail of water can be sold for $5. Carrying the pails of water down requires consider- able effort. Both Jill and Jack would be willing to pay $2 each to avoid carrying one pail down the hill and an additional $3 to avoid carrying a second pail down the hill. (LO2) payoff matrix, and explain why a. Given market prices, how many pails of water will each child fetch from the top of the hill? b. Jill and Jack's parents are worried that the two chil- dren don't cooperate enough with one another. Sup pose they make Jill and Jack share equally their revenues from selling the water. Given that both are self-interested, construct the payoff matrix for the decisions Jill and Jack face regarding the number of pails of water each should carry. What is the equi- librium outcome? 6. Two airplane manufacturers are considering the produc- tion of a new product, a 150-passenger jet. Both are deciding whether to enter the market and produce the 8. The owner of a thriving business wants to open a new office in a distant city. If he can hire someone who will manage the new office honestly. he can afford to