Question
In class we spent a lot of time talking about game theory. (a) Carefully define the following concepts: (i) dominant strategy equilibrium; (ii) Pareto improvement;
In class we spent a lot of time talking about game theory. (a) Carefully define the following concepts: (i) dominant strategy equilibrium; (ii) Pareto improvement; (iii) Pareto efficiency; (iv) prisoner's dilemma game. Then describe two situations that do not involve CPRs where the prisoner's dilemma model can be used to understand social, political, or economic behavior in the real world. Explain. (b) Consider a two-person prisoner's dilemma game where if one player cooperates and the other defects, the cooperator gets 2 and the defector gets 10; if both cooperate, both get 6; and if both defect, both get 3. Assume the game is played infinitely many times. What is the minimum value of the discount factor that is necessary in order to have cooperation in every period? How could cooperation be achieved? Carefully justify your answers.
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