Exercise 9 Imagine two students are working together on a team project. Each stu

Question

Exercise 9 Imagine two students are working together on a team project. Each student can make a high or low effort on the project and their final grade will depend on the amount of effort made by each student. Howewer, making effort is costly, so each student has incentives free ride on their partner. More precisely, the students' payoffs from making high or low efort are determined by the payoff matriz below: Student 2 Student 1 high effort low effort high effort 7,7 low effort 8,56,6 5,8 Table 6: A free rider problem a) Assuming agents are rational, how would you predict students would play this game? b) Is the resulting allocation from your prediction Pareto efficient?

Explanation / Answer

a) We will find the best response for both the players.

BR1(High) = Low , BR1(Low) = Low

BR2(High) = Low , BR2(Low) = Low

Since choosing low effort is the dominant strategy for both the players so they will end up choosing the low effort.

b) The allocation is not pareto-efficient because both the players can be better off by both choosing the high effort (higher payoffs).

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