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Tragedy of commons (public good problem): Suppose that there are two firms each choosing how much to produce simultaneously. Each production consumes some of the clean air. There is a total amount of clean air that is equal to K and the consumption of clean air comes out of this common resource. Each player i (firm) chooses its own consumption of clean air for production, which is denoted by ki 2 0. The amount of clean air left is K - _,_kj. The firm enjoys not only the consumption of the clean air for its production but also the clean air left after the production. Thus, its payoff function is given as: u(ki, k_;) = In(k;) + In(K - M j=1 Answer the questions below for this environment. (a) Describe this situation as a strategic game. (b) Compute and draw the best response correspondence for each firm. Then find the NE. (c) Is the Nash equilibrium outcome Pareto efficient? If not, give an example of an efficient strategy profile. (d) Which actions survive one round of iterated elimination of strictly dominated ac- tions? What is the rationality requirement for one round of iteration? Justify your answer. 2 (e) Which strategy profiles survive IESDS? Is this game dominance solvable? What is the rationality requirement (rationality, k-level knowledge, common knowledge)? Justify your