Consider an Example of the Prisoner's Dilemma Where 2 Firms

question 104

Multiple Choice

Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a highway- construction contract and each firm is allowed to bid either $100 million or $120 million. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero) . The cooperative outcome in this situation is

• A) both firms bid $100 million.
• B) both firms bid $120 million.
• C) both firms bid $50 million.
• D) one firm bids $100 million, the other firm bids $120 million.
• E) both firms bid $60 million.

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Definitions:

Price Ceiling

A government-imposed limit on how high a price can be charged on a product or service, intended to protect consumers.

Price Floor

A government-imposed minimum price charged for a good or service, typically above the equilibrium price, to prevent prices from falling too low.

Equilibrium Price

The price at which the quantity of a good demanded by consumers equals the quantity supplied by producers, leading to a stable market condition.

Surplus

The situation in which the quantity of a good or service supplied exceeds the quantity demanded at the current price; often occurs in markets where a price ceiling prevents the price from rising to its equilibrium level.