4. A restaurant in a touristic location may have an incentive to cheat its customers by providing low-quality food. 1 point How does the "reputation mechanism" explained in the lecture resolve this problem? O The owner of the restaurant is proud of its reputation and therefore refrains from cheating customers. Once the restaurant cheats a customer, she/he never comes back to the restaurant. O Once the restaurant cheats a customer, it will be known through rumors or through messages posted on the Internet sites. Then, other customers stop coming to the restaurant. If the restaurant cheats a customer, its reputation among restaurant owners goes down. Eventually, the restaurant loses its profit. 5. Recall the repeated price competition game of two nearby gas stations in the lecture. How does the long-term 1 point relationship work as a mechanism to sustain a favorable outcome? Why do they cooperate in the equilibrium? O Because each gas station has to pay a large amount of fine to the court, if it breaks the agreement on maintaining a high price. O) Because each gas station believes that even if it reduces the price slightly, its sales will not increase sufficiently, since consumers do not consider such minor changes in price. Because each gas station finds that the loss from reducing its price today is greater than the gain from doing so. In particular, if it reduces its price, it will eventually lose future payoffs that could be earned by maintaining a high price, and this loss is greater than today's additional payoff obtained by reducing the price. O Because each gas station believes that, if it reduces its price today, the opponent will also reduce its price simultaneously. Thus, deviating from maintaining a high price is not at all profitable