Question

QUESTION 1

1. Suppose two people, Jack and Jill, controlled the market and had a marginal cost of $0. If they could successfully collude with each other, how much water would each produce and what would be the price of water?

   	A.	Each would produce 20 gallons and the price would be $100
   	B.	Each would produce 30 gallons and the price would be $60
   	C.	Each would produce 40 gallons and the price would be $40
   	D.	Each would produce 60 gallons and the price would be $60

  

QUESTION 2

1. Imagine that Jack and Jill are players in a game. They can choose to produce either 30 gallons of water or 40. Do either of them have a dominant strategy?

   	A.	No, neither of them have a dominant strategy
   	B.	Yes, only Jack has a dominant strategy
   	C.	Yes, only Jill has a dominant strategy
   	D.	Yes, both Jack and Jill have dominant strategies

  

QUESTION 3

1. Does their game have a Nash equilibrium? If so, what is it?

   	A.	No, there's no Nash equilibrium
   	B.	Yes, it's where Jack and Jill both produce 30 gallons.
   	C.	Yes, it's where Jack and Jill both produce 40 gallons.
   	D.	Yes, it's where Jack produces 40 gallons and Jill produces 30.

Answer 1

Question 1

If two people control the market and collude then they would be acting as a monopolist.

So, they would be producing a combined output of 60 gallons and would be charging $60 per gallon.

It is assumed that both of them evenly split the output.

Thus, each would produce 30 gallons and the price would be $60.

Hence, the correct answer is the option (B).

Question 2

In two player game, if players are colluding then there is an incentive for them to cheat and increase their individual pay-off respectively.

In given game also, there is an incentive for both players to cheat and increase their production assuming that other player will not do so.

So,

Yes, both Jack and Jill have dominant strategies.

Hence, the correct answer is the option (D).

Question 3

Both Jack and Jill will eventually cheat and will increase their production to 40 gallons.

So,

Yes, this game has a Nash equilibrium. It is where Jack and Jill produce 40 gallons.

Hence, the correct answer is the option (C).