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A problem set for a class, consisting of two parts. The first part is about the prisoner's dilemma, a classic game theory scenario where two individuals must decide whether to confess to a crime. The second part deals with emissions trading in the context of environmental regulations, where firms must reduce their pollutant emissions. Students are asked to determine the best strategies for the prisoners and the firms, as well as calculate the costs and permit prices.
Typology: Assignments
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a. Figure out which strategy is in each prisoner’s best individual interest by filling out the chart below. ERNIE’S BEST STRATEGY BERT’S BEST STRATEGY If Bert confesses Action: Time served:
If Ernie confesses Action: Time served:
If Bert does not confess Action: Time served:
If Ernie does not confess Action: Time served:
Pick one element in the chart you filled out above and explain how you determined it. (10 points) b. Suppose Bert and Ernie know that the DA does not have enough evidence to convict them of the more serious crime. Thus, before they are arrested, they promise each other that they will not confess. Do you think it is more likely that each will keep the bargain or more likely each will “cheat”? Explain. (4 points)
b. Suppose that the government instead issues one emissions reduction “permit” to each firm (the holder of each permit must reduce emissions by 1 ton ) and allows them to trade the emissions reduction permits. Indicate: i. Which firm(s) will reduce emissions and why. (8 points) ii. The total cost of the emissions reduction. (4 points) iii. The price of an emissions reduction permit and how you determined it. (4 points) SHOW CALCULATIONS AND EXPLAIN YOUR REASONING CLEARLY.