Question

Define and explain the following in economic terms:

1)Discount rates (rates of time preference) and their role in promoting collusion in oligopoly

2)Prisoner’s Dilemma

Answer 1

Discount rate is interest rate which firm care about the future depends ,if the firms objective is to maximize the present value of future profits . The firm's discount factor depends on other forces, such as probability that the product may become obsolete and the time needed for cheating to be detected. Given the discount rate and other variables that affect the discount factor are constantly changing, it is more better to form collusion in oligopoly. If discount factors are changes over time, collusive prices and profits increases with future levels , firms will enter into collusion, but if there are less fluctuations on interest rate related with collusive prices and profits, there will be a less chance of firms colluding each other under oligopoly Prisoner's dilemma: Two criminals are arrested after committing a big bank robbery. Each suspect is separated in a isolation room . There is no punishment for the suspect who confesses and heavy sentences of twenty years of punishment for other party. If both suspects do not confess , both will go free. if both confess , they will get ten years of imprisonment. Each suspects has two strategies in front of them- to confess ( go free if the others do not confess) and do not confess ( go free if others do not confess ). Given the lack of communication between the suspects and the uncertainty as to the loyalty of the other prisoner.,each one of them prefers to adopt the strategy " to confess", so that both get the ten years of sentence In a worse situation as compared with the adoption of the no confess strategy by both robbers. Each one will expect worse reaction from its rival. So both will take a sub optimal strategy ' to confess'