Discuss each of the following topics & attempt to relate to real world examples:

Question

Discuss each of the following topics & attempt to relate to real world examples:
The prisoners’ dilemma and how it applies to oligopoly and other issues?
Why equilibrium wages equal the value of the marginal product of labor?
Why a few superstars earn tremendous incomes in some occupations?
Some problems that arise when measuring economic inequality? Discuss each of the following topics & attempt to relate to real world examples:
The prisoners’ dilemma and how it applies to oligopoly and other issues?
Why equilibrium wages equal the value of the marginal product of labor?
Why a few superstars earn tremendous incomes in some occupations?
Some problems that arise when measuring economic inequality? Discuss each of the following topics & attempt to relate to real world examples:
The prisoners’ dilemma and how it applies to oligopoly and other issues?
Why equilibrium wages equal the value of the marginal product of labor?
Why a few superstars earn tremendous incomes in some occupations?
Some problems that arise when measuring economic inequality?

Explanation / Answer

Prisoner’s dilemma:

Prisoner’s dilemma demonstrates how contestants behaving selfishly perform differently to their mutual or reciprocal interests. This can be explained with an example. Two culprits are interrogated separately in two different chambers where they could not communicate with each other. If one confesses and the other doesn’t, the first one will be awarded imprisonment for a shorter period and the other for an extended term. If both confess, they both will be given equal terms of imprisonment, say 5 years, but if both do not confess, both of them will get the least number of years of imprisonment according to the provisions of the law. The choices are presented in the form of a matrix which may be referred to as years of imprisonment.

The prisoner’s dilemma can be made relevant to the oligopoly theory. Instead of two prisoners, we need to take two firms A and B that have entered into a cartel agreement and have fixed the price of the product. The choice available to both the firms is whether to cooperate by the agreement or to cheat the other in order to make higher profits. If both the firms cheat and violate the agreement, the cartel has to break down and the resultant profit would drop to the competitive level. It is strongly evident that each firm has a strong incentive to cheat and it is the pursuit of self-interest rather than common interest that prompts firms to cheat each other.

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