Question

Newfoundland’s fishing industry has recently declined sharply due to overfishing, even though fishing companies were supposedly bound by a quota agreement. If all fishermen had abided by the agreement, yields could have been maintained at high levels.

Model this situation as a prisoner’s dilemma in which the players are Company A and Company B, and the strategies are to keep the quota and break the quota. Suppose that if both companies keep the quota, then each receives a payoff of $100, and if both break the quota, then each receives a payoff of $0. On the other hand, if one of the companies breaks the quota and the other keeps the quota, then the company that breaks the quota receives a payoff of $150, and the company that keeps the quota receives a payoff of -$50.

Instructions: Enter the players' payoffs in the payoff matrix below. Be sure to include a negative sign (-) in front of any negative numbers.

Company A

Keep quota Break quota

Company B                      Keep quota                                       Break quota   $ for Company A   $ for Company B   $ for Company A       $ for Company B $ for Company A $ for Company B   $ for Company A   $ for Company B

What is the dominant strategy for both companies?

	Break the quota.
	Neither company has a dominant strategy.
	Keep the quota.

In equilibrium, what is each company's payoff?

	Each company will receive a payoff of $0.
	Company B will receive a payoff of $150, and Company A will receive a payoff of -$50.
	Each company will receive a payoff of $100.
	Company A will receive a payoff of $150, and Company B will receive a payoff of -$50.

Relative to the equilibrium outcome, both companies would be better off if they (Click to select)both kept the quotaboth broke the quota.

Answer 1

		Company B
		Keep Quota	Break Quota
Company A	Keep Quota	$ 100 for Company A and $ 100 for Company B	$ - 50 for Company A and $ 150 for Company B
	Break Quota	$ 150 for Company A and $ - 50 for Company B	$ 0 for Company A and $ 0 for Company B

1. Company A has dominant strategy of Break Quota because it will give him higher payoff to A irrespective of decision of Company B. Break quota give him payoff of either $ 150 or $ 0 which is better than payoff received while choosing Keep quota i.e. either $ 100 or $ - 50.

Company B has dominant strategy of Break Quota because it will give him higher payoff to B irrespective of decision of Company A. Break quota give him payoff of either $ 150 or $ 0 which is better than payoff received while choosing Keep quota i.e. either $ 100 or $ - 50.

Answer is; Break the quota.

2. If Company A chooses to Break Quota then best response of Company B is to choose Break quota because Keep quota gives him negative payoff.

If Company B chooses to Break Quota then best response of Company A is to choose Break quota because Keep quota gives him negative payoff.

So, Nash Equilibrium is (Break Quota; Break Quota).

Answer is; Each company will receive a payoff of $0.

3. both kept the quota

When they both kept the quota then payoff of both A and B would be $ 100 which is better than payoff of $ 0.