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    Nash Equilibrium and Pareto Efficiency in Game Theory

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    1. Some games of strategy are cooperative. One example is deciding which side of the road to drive on. It doesn't matter which side it is as long as everyone chooses the same side. Otherwise, everyone may get hurt.
    Driver 2
    Left Right
    Driver 1 Left 0,0 -1000 -1000
    Right -1000, -1000 0,0

    a. Does either player have a dominant strategy? Explain.
    b. Is there Nash equilibrium in this game? Explain
    c. Why this game is called a cooperative game?

    2. Explain the following

    a. What is a firm's Total Revenue?
    b. What is a firm's Total Cost?
    c. What is a firm's Total Profits?
    d. If a monopolist were to behave like a perfectly competitive firm (operating in the long run), discuss the effect.

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    Solution Preview

    1. Some games of strategy are cooperative. One example is deciding which side of the road to drive on. It doesn't matter which side it is as long as everyone chooses the same side. Otherwise, everyone may get hurt.
    Driver 2
    Left Right
    Driver 1 Left 0,0 -1000 -1000
    Right -1000, -1000 0,0

    a. Does either player have a dominant strategy? Explain.
    b. Is there Nash equilibrium in this game? Explain
    c. Why this game is called a cooperative ...

    Solution Summary

    (Part 1) In order for a cooperative game strategy to yield a desirable outcome, the actions of all players must take precedence over individual choice in the game. For example, when determining which side of the road to drive on, it is important to account for what other drivers will choose when making the decision (rather than simply choosing by personal preference). For two drivers making this decision, there are several pareto efficient outcomes to consider.

    (Part 2) If a monopolistic firm begins to act like a perfectly competitive firm, this will change the cost, revenue, and profit structures of the firm.

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