Which of the following games has the property that Nash equilibrium is played when players are rational (in the sense that each player tries to maximize her/his own payoff)?

a. Traffic game

b. Prisoner's Dilemma

c. Coordination Game

d.

1. Consider two gas stations in nearby locations. They face difficulties in sustaining high prices to enjoy high profits. What is the main reason for that? O Customers demand that the gas price be decreased over time. O High prices do not attract enough customers. () Gas stations cannot agree on the level of price that maximizes their total profit. O) Each gas station has an incentive to undercut the high price to steal customers from their opponent. 2. (Continued from question 1) If the gas stations could sign a legally binding contract, how would that help them to sustain high gas prices? The contract specifies a sufficiently large penalty when a gas station deviates from the high price specified in the contract. () Customers understand that the gas prices are legally justified. O Gas stations now have moral obligation to sustain high prices. ) The contract helps them to agree on the right price. 3. (Continued from question 1) In reality, writing a contract to maintain high prices is prohibited in many countries (because it is anti-competitive and harmful). When this is true, the gas stations can use their long-term relationship to sustain their high prices. What is the basic mechanism of "long-term relationship"? O By deviating from the high price, a gas station can gain some profit today, but its future profits may decrease. In a long-term relationship, players can agree on what is the right thing to do. In a long-term relationship, players care about the stability of the outcomes. O In a long-term relationship, players' hostility towards each other is mitigated. 4. A restaurant in a touristic location may have an incentive to cheat its customers by providing low-quality food. How does the "reputation mechanism" explained in the lecture resolve this problem? 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. ) 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. O If the restaurant cheats a customer, its reputation among restaurant owners goes down. Eventually, the restaurant loses its profit