Question

You and a classmate are assigned a project on which you will receive one combined grade. You each want to receive a good grade, but you also want to avoid hard work. In particular, here is the situation:

If both of you work hard, you both get an A, which gives each of you 40 units of happiness.

If only one of you works hard, you both get a B, which gives each of you 30 units of happiness.

If neither of you works hard, you both get a D, which gives each of you 10 units of happiness.

Working hard costs 25 units of happiness, where as avoiding hard work doesn't cost any happiness.

a. Calculate the happiness payoff to you and to your classmate in 4 possible scenarios:

Scenario-1: Both you and your classmate work hard.

Scenario-2: Both you and your classmate avoid hard work.

Scenario-3: You work hard but your classmate avoids hard work.

Scenario-4: You avoid hard work but your classmate works hard.

b. What is the likely outcome? Explain your answer.

c. If you get this classmate as your partner on a series of projects throughout the year, rather than only once, how might that change the outcome you predicted in part b?

Answer 1

Solution:

(A) There are the following 4 scenarios for which the payoff has been calculated. The first payoff value within the parentheses belongs to you and the second one belongs to your classmate. Both the payoffs are separated by a comma. the payoffs are calculated by subtracting 25 units from the total happiness units only for those who work hard.

Scenario-1: If both you and your classmate work hard, then the payoff profile is (15, 15).

Scenario-2: If both you and your classmate avoid hard work, then the payoff profile is (10, 10).

Scenario-3: If you work hard but your classmate avoids hard work, then the payoff profile is (5, 30).

Scenario-4: If you avoid hard work but your classmate works hard, then the payoff profile is (30, 5).

YOU (IST PLAYER)		YOUR CLASSMATE (2ND PLAYER)
	work hard	avoids hard work
work hard	15, 15	5, 30
avoids hard work	30, 5	10, 10

(B) From the above table, it is clear that when one of you and your classmate works hard or even both of you work hard, there is a possibility that one of you can deviate and maximize her own payoff. Therefore, the action profile where each of you chooses to avoid work is a Nash equilibrium. It means that each of them is better off avoiding work when the other person works hard. This game is like the prisoners dilemma, where the equilibrium outcome is not desirable.

(C) If you and your classmate are partnered together on a series of projects throughout the year, rather than only once, then both you and your classmate will agree upon an outcome that will give both of you better payoffs than the equilibrium outcome in part b. In this case, both will agree to work hard and obtain the payoff profile (15, 15), rather than (10,10).