Suppose That Each of Two Prisoners Has the Independent Choice

question 202

Multiple Choice

Suppose that each of two prisoners has the independent choice of confessing to a crime or not confessing.If neither confesses, they spend 2 years in jail; if both confess, they spend 3 years in jail; and if one confesses while the other does not, the confessor gets off with 1 year in jail while the other gets 6 years in jail.According to game theory, the likely strategy by the prisoners is:

• A) both will confess.
• B) neither will confess.
• C) one will confess and the other will not.
• D) both may or may not confess.

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Definitions:

Covert Collusion

An implicit, non-public agreement between firms to fix prices, limit production, or divide markets, without explicit communication.

Allocative Efficiency

A state of the economy where resources are allocated in a way that maximizes the overall benefit to society.

Productive Efficiency

Occurs when a good or service is produced at the lowest possible cost, utilizing all resources efficiently.

Cartel

A formal agreement among firms (or countries) in an industry to set the price of a product and establish the outputs of the individual firms (or countries) or to divide the market for the product geographically.