Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter16: Information, Risk, And Insurance
Section: Chapter Questions
Problem 13RQ: How can moral hazard lead to more costly insurance premiums than one was expected?
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Question
Suppose that Teresa and Caroline are both in the public eye. They get offers to sell secrets of the other to tabloids. If both keep the secrets, they are both better off than if they get exposed. If only one is exposed, the other person is better off than if no one was exposed. Their payoffs from each option are given in the payoff matrix.
Suppose that Caroline and Teresa play the game over four television seasons, where each season is a new game. Consider the scenarios. Remember, a tit‑for‑tat strategy is one where the person starts by cooperating and then plays whatever strategy the other firm played last.
Over four seasons, how much will Caroline make if she plays a tit‑for‑tat strategy and Teresa always exposes?
$_______
Over four seasons, how much will Caroline make if she and Teresa both always expose?
$_________
Does Caroline have a dominant strategy when she and Teresa play for four seasons?
No, there is no dominant strategy between tit‑for‑tat and always expose in this situation.
Yes, always expose is a dominant strategy.
Yes, tit‑for‑tat is a dominant strategy.
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