Two companies, The Mitchell Scott Paper Company (MSPC) and Cadre, can collaborate on the production of paper. Cadre produces the paper and MSPC packages, sells, and ships the paper to clients. If both firms exert optimal effort, the probability is 0.35 that they will generate revenue of $1000, which they will split equally.

Suppose that effort is observable (in other words, if Cadre exerted optimal effort and revenue is not what is expected, then Cadre knows that this was due MSPC's shirking). Also suppose that a sub-optimal level of effort from one firm reduces the probability of achieving revenue of $1000 to 0.20; whereas, if both firms shirk, the probability is reduced to only 0.05. Assuming that optimal effort costs each $100, whereas shirking costs $0, then the one-shot, simultaneous-move game matrix (where payoffs are the expected monetary values) would be:

Cadre

Shirk

Optimal Effort

MSPC

Shirk

A , B

C , D

Optimal Effort

E , F

G , H

1.Write below the values of A , B: (3 points)

A = _________

B = _________

2.Write below the values of C , D: (3 points)

C = _________

D = _________

3.Write below the values of E , F: (3 points)

E = _________

F = _________

4.Write below the values of G , H: (3 points)

G = _________

H = _________

5.Which of the following is the NE of this one-shot simultaneous game (answers are provided in the form of (MSPC Strategy, Cadre Strategy)). (2 points)

a.(Shirk, Shirk)

b.(Shirk, Optimal Effort)

c.(Optimal Effort, Shirk)

d.(Optimal Effort, Optimal Effort).

e.There are two NE for this game.

f.This game has no NE.

6.Which of the following is true? (2 points)

a.MSPC has a strictly dominated strategy.

b.Cadre has a strictly dominated strategy.

c.Neither player has a strictly dominated strategy.

d.Both players have a strictly dominated strategy.

7.Given your answer to part (1) above, the NE is Pareto optimal (i.e., there is no move from it that is Pareto Superior) (Select NA if there's no NE) (2 points)

a.True

b.False

c.NA

8.This game is an example of Prisoners' Dilemma. (2 point)

a.True

b.False