(a)
Definition and assumption leads to prisoner’s dilemma.
(a)
Explanation of Solution
The prisoner’s dilemma is the game between two persons that illustrate why cooperative behaviour is difficult to maintain. In this case, both persons will take a strategy to maintain their interests. This is based on some assumptions that are listed as follows:
- 1) Each player act to fulfil their interest.
- 2) No communication between the prisoners’.
- 3) No binding agreements.
(b)
The possibility of escaping the prisoner’s dilemma.
(b)
Explanation of Solution
A binding agreement or trusting each other are the main method to escape from the prisoner’s dilemma. If one firm is ready to take his strategy without worsening the other, this will create a possibility to escape them from the dilemma.
(c)
The opinion of standard model and experiment economy to Answer b.
(c)
Explanation of Solution
According to the standard model, the firms will not trust the other one and they do only for their interest and better off. Thus, there is a possibility of cheating when the game is played by two firms. Experimental economists argue this and they say that the firms will take their decisions only after considering the effects on other firms too.
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Microeconomics
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