11. Problems and Applications Q5

Synergy and Dynaco are the only two firms in a specific high-tech industry. They face the following payoff matrix as they decide upon the size of their research budget:

	Synergy's Decision
Large Budget	Small Budget
Dynaco's Decision	Large Budget	$20 million,$25 million	$15 million,$0
Small Budget	$0,$60 million	$25 million,$30 million

If Synergy believes Dynaco will go with a large budget, it will choose a (Large or small?) budget. If Synergy believes Dynaco will go with a small budget, it will choose a(Large or small?) budget. Therefore, Synergy (has or does not have?) a dominant strategy.

If Dynaco believes Synergy will go with a large budget, it will choose a (Large or small?) budget. If Dynaco believes Synergy will go with a small budget, it will choose a (Large or small?) budget. Therefore, Dynaco (has or does not have?)a dominant strategy.

True or False: There is a Nash equilibrium for this scenario. (Hint: Look closely at the definition of Nash equilibrium.)

True

False

13. Problems and Applications Q8

Two athletes of equal ability are competing for a prize of $10,000. Each is deciding whether to take a dangerous performance-enhancing drug. If one athlete takes the drug and the other does not, the one who takes the drug wins the prize. If both or neither take the drug, they tie and split the prize. Taking the drug imposes health risks that are equivalent to a loss of

X

X dollars.

Complete the following payoff matrix describing the decisions the athletes face. Enter Player One's payoff on the left in each situation, Player Two's on the right.

	Player Two's Decision
Take Drug	Don't Take Drug
Player One's Decision	Take Drug
Don't Take Drug

True or False: The Nash equilibrium is taking the drug if X is less than $10,000.

True

False

Suppose there was a way to make the drug safer (that is, have lower X).

Which of the following statements are true about the effects of making the drug safer? Check all that apply.

1. It increases the payoff of taking the drug.
2. It has no effect on the athletes' decision to take the drug if X remains greater than $5,000.
3. It lowers the likelihood of taking the drug.