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M5 Problem Set

M5 Problem Set

Q Question 1 1 / 1 pts A dominant strategy for a player Question 2 1 / 1 pts The following applies to the next three questions: two firms are situated next to a lake, and it costs each firm $1,500 per period to use filters that avoid polluting the lake. However, each firm must use the lake's water in production, so it is also costly to have a polluted lake. The cost to each firm of dealing with water from a polluted lake is $1,000 times the number of polluting firms. The matrix below shows the two players' payoffs in each of the four possible outcomes of this game (note that the payoffs are costs, and thus are expressed as negative numbers). Answer the following three questions assuming that this is a one-shot, simultaneous-move game. Question 3 1 / 1 pts Which of the following statements is correct? Question 4 1 / 1 pts Which of the following statements is correct? Question 4 1 / 1 pts Which of the following statements is correct?

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1.is best for a player, whatever the opponent's choice. This is the correct answer. Indeed, the statement is the definition of a dominant strategy. 2.Both firms have a dominant strategy. This is the correct answer. ?Pollute? is a dominant strategy for both firms, since each firm is better off polluting regardless of the rival's action. For example, for Loch Inc.: if Nessie Corp. pollutes, Loch Inc. is better of polluting (payoff = -$2,500) than not polluting (payoff = -$2,500); and if Nessie Corp. does not pollute, Loch Inc. is better of polluting (payoff = -$1,000) than not polluting (payoff = -$2,500). 3.The Nash Equilibrium is (Pollute, Pollute).