Question 2 [Word limit: 500] Consider the following game, called a voluntary contribution mechanism (VCM), as we discussed in the lecture. In this game, n players are each given an endowment y. Each player simultaneously selects an amount, ci, to contribute to provision of a public good, and 0 ≤ c < y; i = 1, 2, n. Each player's payoff is: n ♫₁ = y − C₁ + mΣ cj, where m indicates the marginal return from the public good j=1 The game may be one-shot or repeated. We shall assume the following parameters for the game: n = 8; m = 0.4; y $15. = a. Why, assuming rational self-interested preferences, is the best response to contribute nothing and for all players not to contribute? Explain your answer with numerical numbers, given the parameter values, and intuitively. b. Why are payoffs maximized if all players (1 to n) contribute? Explain your answer with numerical numbers given the parameter values. c. Given your explanations to a. and b. above, why, then do we call this a public goods game and what other kind of game does it resemble?

Question 2 [Word limit: 500] Consider the following game, called a voluntary contribution mechanism (VCM), as we discussed in the lecture. In this game, n players are each given an endowment y. Each player simultaneously selects an amount, ci, to contribute to provision of a public good, and 0 ≤ c < y; i = 1, 2, n. Each player's payoff is: n ♫₁ = y − C₁ + mΣ cj, where m indicates the marginal return from the public good j=1 The game may be one-shot or repeated. We shall assume the following parameters for the game: n = 8; m = 0.4; y $15. = a. Why, assuming rational self-interested preferences, is the best response to contribute nothing and for all players not to contribute? Explain your answer with numerical numbers, given the parameter values, and intuitively. b. Why are payoffs maximized if all players (1 to n) contribute? Explain your answer with numerical numbers given the parameter values. c. Given your explanations to a. and b. above, why, then do we call this a public goods game and what other kind of game does it resemble?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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