9

Suppose Firm A and Firm B are considering whether to invest in a new production technology. For each firm, the payoff to investing (given in thousands of dollars per day) depends upon whether the other firm invests, as shown in the payoff matrix below. Which fo the following statements is correct?

"Invest" is a dominated strategy for Firm A.

Cartel agreements are difficult to sustain because: A it's a dominant strategy for each cartel member to cheat on the cartel agreement. b. the collective payoff to all the cartel members is lower when they all abide by the cartel agreement. c cartel members do not face the economic incentives inherent in a prisoner's dilemma. d. it's usually easy to discover if one of the members has cheated.

a

Commitment devices are necessary when: Multiple Choice a people cannot correctly identify their dominant strategy. players cannot trust that other players will avoid playing a dominated strategy. following through on a threat or promise is not in a player's best interest. commitments cannot be purchased.

c