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Two co-conspiratorial criminals are arrested. When they are taken to the police station, they refuse to say anything and are put in separate interrogation rooms. Eventually, a police officer enters the room where Prisoner A is being held and says: “You know what? Your partner in the other room is confessing. So your partner is going to get a light prison sentence of just one year, and because you’re remaining silent, the judge is going to stick you with eight years in prison. Why don’t you get smart? If you confess, too, we’ll cut your jail time down to five years, and your partner will get five years, also.” Over in the next room, another police officer is giving exactly the same speech to Prisoner B. What the police officers do not say is that if both prisoners remain silent, the evidence against them is not especially strong, and the prisoners will end up with only two years in jail each.

The game theory situation facing the two prisoners is shown in [link] . To understand the dilemma, first consider the choices from Prisoner A’s point of view. If A believes that B will confess, then A ought to confess, too, so as to not get stuck with the eight years in prison. But if A believes that B will not confess, then A will be tempted to act selfishly and confess, so as to serve only one year. The key point is that A has an incentive to confess regardless of what choice B makes! B faces the same set of choices, and thus will have an incentive to confess regardless of what choice A makes. Confess is considered the dominant strategy or the strategy an individual (or firm) will pursue regardless of the other individual’s (or firm’s) decision. The result is that if prisoners pursue their own self-interest, both are likely to confess, and end up doing a total of 10 years of jail time between them.

The prisoner’s dilemma problem
Prisoner B
Remain Silent (cooperate with other prisoner) Confess (do not cooperate with other prisoner)
Prisoner A Remain Silent (cooperate with other prisoner) A gets 2 years, B gets 2 years A gets 8 years, B gets 1 year
Confess (do not cooperate with other prisoner) A gets 1 year, B gets 8 years A gets 5 years B gets 5 years

The game is called a dilemma because if the two prisoners had cooperated by both remaining silent, they would only have had to serve a total of four years of jail time between them. If the two prisoners can work out some way of cooperating so that neither one will confess, they will both be better off than if they each follow their own individual self-interest, which in this case leads straight into longer jail terms.

The oligopoly version of the prisoner’s dilemma

The members of an oligopoly can face a prisoner’s dilemma, also. If each of the oligopolists cooperates in holding down output, then high monopoly profits are possible. Each oligopolist, however, must worry that while it is holding down output, other firms are taking advantage of the high price by raising output and earning higher profits. [link] shows the prisoner’s dilemma for a two-firm oligopoly—known as a duopoly    . If Firms A and B both agree to hold down output, they are acting together as a monopoly and will each earn $1,000 in profits. However, both firms’ dominant strategy is to increase output, in which case each will earn $400 in profits.

Questions & Answers

what is competitive market?
Shantal Reply
a compataive market is when there are many producers competating to provide consumers with a goods and services needed
Tanveer
in a compitative market no single producer or consumer can dictate the market
Tanveer
types of demand elasticity
Farouq Reply
What is price elasticity of demand and its degrees. also explain factors determing price elasticity of demand?
Yutansh Reply
Price elasticity of demand (PED) is use to measure the degree of responsiveness of Quantity demanded for a given change on price of the good itself, certis paribus. The formula for PED = percentage change in quantity demanded/ percentage change in price of good A
GOH
its is necessarily negative due to the inverse relationship between price and Quantity demanded. since PED carries a negative sign most of the time, we will usually the absolute value of PED by dropping the negative sign.
GOH
PED > 1 means that the demand of the good is price elasticity and for a given increase in price there will be a more then proportionate decrease in quantity demanded.
GOH
PED < 1 means that the demand of the good is price inelasticity and for a given increase in price there will be a less then proportionate decrease in quantity demanded.
GOH
The factors that affects PES are: Avaliablilty of close substitutes, proportion of income spent on the good, Degree of necessity, Addiction and Time.
GOH
Calculate price elasticity of demand and comment on the shape of the demand curve of a good ,when its price rises by 20 percentage, quantity demanded falls from 150 units to 120 units.
Helen Reply
5 %fall in price of good x leads to a 10 % rise in its quantity demanded. A 20 % rise in price of good y leads to do a 10 % fall in its quantity demanded. calculate price elasticity of demand of good x and good y. Out of the two goods which one is more elastic.
Helen
what is labor
Grace Reply
labor is any physical or mental effort that helps in the production of goods and services
Kwabena
what is profit maximizing level of out put for above hypothetical firm TC = Q3 - 21Q2 + 600 + 1800 P = 600 MC = 3Q2 - 42Q + 600
Sosna Reply
consider two goods X and Y. When the price of Y changes from 10 to 20. The quantity demanded of X changes from 40 to 35. Calculate cross elasticity of demand for X.
Sosna
sorry it the mistake answer it is question
Sosna
consider two goods X and Y. When the price of Y changes from 10 to 20. The quantity demanded of X changes from 40 to 35. Calculate cross elasticity of demand for X.
Sosna
The formula for calculation income elasticity of demand is the percent change in quantity demanded divided by the percent change in income.
Sosna
what is labor productivity
Lizzy Reply
if the demand function is q=25-4p+p² 1.find elasticity of demand at the point p=5?
Puja Reply
what are some of the difference between monopoly and perfect competition market
Obeng Reply
n a perfectly competitive market, price equals marginal cost and firms earn an economic profit of zero. In a monopoly, the price is set above marginal cost and the firm earns a positive economic profit. Perfect competition produces an equilibrium in which the price and quantity of a good is economic
Naima
what are some characteristics of monopoly market
Obeng Reply
explicit cost is seen as a total experiences in the business or the salary (wages) that a firm pay to employee.
Idagu Reply
what is price elasticity
Fosua
...
krishna
it is the degree of responsiveness to a percentage change in the price of the commodity
Obeng
economics is known to be the field
John Reply
what is monopoly
Peter Reply
what is taxation
Peter
is the compulsory transfer of wealth from the private sector to the public sector
Jonna
why do monopoly make excess profit in both long run and short run
Adeola Reply
because monopoly have no competitor on the market and they are price makers,therefore,they can easily increase the princes and produce small quantity of goods but still consumers will still buy....
Kennedy
how to identify a perfect market graph
Adeola Reply
what is the investment
jimmy
investment is a money u used to the business
Mohamed
investment is the purchase of good that are not consumed today but are used in the future to create wealth.
Amina
investment is the good that are not consumed
Fosua
What is supply
Fosua
 Supply represents how much the market can offer.
Yusif
it is the quantity of commodity producers produces at the market
Obeng

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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