Answered: Player 2 W y a 2,7 1,4 1,3 5,6 b 1,1…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Consider the infinitely repeated version of the symmetric two-player stage
game in the following figure. The first number in a cell is player 1’s singleperiod payoff. Assume that past actions are common knowledge. Each player’s payoff is the present value of the stream of single-period payoffs, where the discount factor is δ_i for player i.
a. Define a grim-trigger strategy profile.
b. Derive conditions whereby the strategy profile in (a) is a SPNE.

Player 2
W
y
a 2,7
1,4
1,3
5,6
b
1,1
2,2
0,4
3,3
Player 1
3,2| 4,3
3,1
8,0
d
4,0
3,1
5,1
2,3
O m

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