Alice and Betsy Are Playing a Game in Which Each

question 11

Multiple Choice

Alice and Betsy are playing a game in which each can play either of two strategies, leave or stay.If both play the strategy leave, then each gets a payoff of $400.If both play the strategy stay, then each gets a payoff of $800.If one plays stay and the other plays leave, then the one who plays stay gets a payoff of $C and the one who plays leave gets a payoff of $D.When is the outcome where both play leave a Nash equilibrium?

• A)Never, since $800 > $400.
• B)When $400 > C and D > $800 but not when $800 > D
• C)When D > C and C > $400.
• D)Whenever D < $800.
• E)Whenever $400 > C

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Definitions:

Economic Efficiency

A situation where all resources are allocated in a way that maximizes the total benefit to society or minimizes waste.

External Cost

A cost that a transaction or activity imposes on a party who is not involved in the transaction, often not reflected in market prices.

Negative Externality

A cost that affects a party who did not choose to incur that cost, often associated with environmental, health, and safety concerns of public and private actions.

Positive Externality

A benefit that is enjoyed by a third-party as a result of an economic transaction.