ECON 121 ch 20

Define the prisoner's dilemma game. a. What assumptions lead to the dilemma? b. _______ creates the possibility of escaping it. c. What does the standard model say about your answer to b? What does experimental economics say?

Define the prisoner's dilemma game. The prisoner's dilemma game is a two-person noncooperative simultaneous game that demonstrates the difficulty of cooperative behavior in certain circumstances. a.If the prisoners do not confess, each would get a light sentence. But each prisoner is interrogated separately and is offered the chance to go free if he or she confesses to the crime and agrees to serve as a witness against the other prisoner. This creates the incentive for both prisoners to confess. b. Cheap talk c. Standard economics would say that the answer to b does not matter. Experimental economics would say it does matter. Explanation: The prisoner's dilemma is a noncooperative simultaneous game that demonstrates the difficulty of cooperative behavior in certain circumstances. a. If the prisoners do not confess, each would get a light sentence. But each prisoner is interrogated separately and is offered the chance to go free if he or she confesses to the crime and agrees to serve as a witness against the other prisoner. This creates the incentive for both prisoners to confess. b. The use of cheap talk, or communication that occurs before the game is played that carries no cost and is backed up only by trust, could be a way for both prisoners to not confess. c. Standard economics would say that cheap talk does not influence the results. Experimental economists would use controlled experiments to determine what would happen in real life. They find that people will work toward a cooperative strategy, at least initially.

True or false? If a game has a Nash equilibrium, that equilibrium will be the equilibrium that we expect to observe in the real world.

False. People don't always act in the way that a Nash equilibrium requires. People don't always make the necessary calculations and they take into account the outcome of others. correct

Why does it take just a few people to act rationally for the standard model to hold?

If "money is left on the table," the few people who act rationally will take advantage of the irrationality of others, and they will take that money off the table. correct

Would the results of the prisoner's dilemma game be different if it were a sequential rather than a simultaneous game?

It would no longer be a dilemma because one player's choice would be revealed. The first player would reveal his or her choice and then the second player would choose the best strategy, potentially making both better off. correct

Why might the multiple-play ultimatum game have a different result than the single-play ultimatum game?

The multiple-play ultimatum game allows for players to send signals. Therefore, the receiver can punish a player who doesn't share enough. correct

When consumers were given the opportunity to select a package of ground beef labeled "75% lean" or a package of ground beef labeled "25% fat," most consumers chose "75% lean." Why? What concept from the chapter does this illustrate?

The reason is that consumers are loss averse. This is called a framing effect. correct

Why do sellers generally prefer a Vickrey auction to a regular sealed bid if sellers don't receive the highest bid in the Vickrey auction?

The second-highest bid in a Vickrey auction is generally higher than the highest bid in a regular sealed-bid auction. Explanation: In a Vickrey auction, the strategy for buyers is to their true valuation. Sellers prefer this type of auction because the second-highest bid in a Vickrey auction is generally higher than the highest bid in a regular sealed-bid auction.

Is the solution to the prisoner's dilemma game a Nash equilibrium? Why?

The solution to the prisoner's dilemma game is a Nash equilibrium because no player can improve his or her payoff by changing strategy unilaterally. correct

Can a player have a rollback strategy in a simultaneous move game?

Yes. Rollback strategies exist for both simultaneous and sequential games. In a simultaneous game, a rollback strategy is based on the expected choices of other players. correct

If a player does not have a dominant strategy, can the game still have a Nash equilibrium?

Yes. There is no reason that a dominant strategy must exist to have a Nash equilibrium. The outcome is a Nash equilibrium because each player has made his or her choice based on the best strategy of the other player. correct

Say that you are bidding in a sealed-bid auction and that you really want the item being auctioned. Winning it would be worth $250 to you. Say you expect the next-highest bidder to bid $100. a. In a standard "highest-bid" auction, what bid would a rational person make? b. In a Vickrey auction, what bid would he make?

a. The rational choice is to bid a little bit more than $100 because that is the expected next-highest bid. b. the rational choice is to bid $250.