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# Question Five – Cooperation and Reputation In a large population, individuals interact in pairs,

Question: Question Five – Cooperation and Reputation In a large population, individuals interact in pairs, the strategy sets and payoffs being given by the following game a) Find the Nash equilibrium in this one-shot game. 4 Marks b) Is the Nash equilibrium in Question 5-a Pareto efficient or Pareto inferior? Explain. 2 Marks c) Now suppose that one can determine
Show transcribed image textAnswer to Question (a): Let us first find the dominant strategy of Firm A ( if any ): When Firm A chooses to Cooperate its payoff is – 17 and 4 When Firm A chooses to Cheat its payoff is – 20…View the full answerTranscribed image text: Question Five – Cooperation and Reputation In a large population, individuals interact in pairs, the strategy sets and payoffs being given by the following game a) Find the Nash equilibrium in this one-shot game. 4 Marks b) Is the Nash equilibrium in Question 5-a Pareto efficient or Pareto inferior? Explain. 2 Marks c) Now suppose that one can determine whether a partner is a “conditional co-operator” by paying an “inspection cost” of σ>0. A conditional co-operator is one who inspects and responds to a cooperative partner by cooperating and to a defector by defecting. We call these cooperative partner the “inspectors”. The only other type of strategy is unconditionally defecting. Hence the new playoff matrix becomes. Find the expected payoffs for Inspect and Defect strategies and the function that might give the interior equilibrium for the share of inspectors (α∗). 8 marks d) Assuming that 0

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