Question

Exercise #6

We are presented with land use choices. Individuals are free to choose their own development strategy based on the profit potential of the development

.

a) Does either landowner have a dominant strategy? (5 Points) A dominant strategy is what you are going to do, knowing what they are going to do—this leads to the Nash Equilibrium Explain how and what the dominant strategy is (hint, there does not need to be two dominant strategies).

b) Is there a Nash equilibrium? Explain. (5 Points)

d) What is the socially optimal solution? (5 Points)

e) How can we arrive at the optimal solution (consider the Coase Solution). Explain the necessary payoff. (5 Points)

Payoff Matrix

                                                                Davis

                                                                Alfalfa                                   Dairy Farm

                Apartment House B: Profit =$700                 B: Profit = $400

                                                                D: Profit =$180                D: Profit = $425              

Benson

                Commercial Real Estate B: Profit =$650                 B: Profit = $455

                                                                D: Profit =$400                D: Profit = $500              

Answer 1