The next questions are all related to the payoff matrix below: a. What is the sh

Question

The next questions are all related to the payoff matrix below: a. What is the short-run outcome of this game? b. What is the best outcome that can be achieved in any given period for both players? c. Assume both players have a deal to cooperate over the long run. If either party defects, the other will defect indefinitely. To induce cooperation, the condition that must be satisfied is: Benefits of Cooperation in Long Run > Benefits of Defection in First Round + Benefits of Mutual Defection in All Subsequent Round What discount factor makes this condition true?

Explanation / Answer

a. The short run nash equilibrium of this game is(Defect, Defect) and the outcome of this game is that both the players will defect.

b. Best outcome that can be achieved is (cooperate, cooperate) as both of them get a higher pay-off when they cooperate.

c. Benifits of cooperation are more than benifits of defection inthe first round as both get ($8,$8) when they choose to cooperate.

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