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    Under the prisoner's dilemma, each player chooses to protect themselves at the expense of the other player, resulting in a worse outcome for both than if they had cooperated. A Nash equilibrium exists when no player has an incentive to deviate from their strategy given an opponent's choice. In the prisoner's dilemma game, betraying the other player is the dominant strategy for each, though both would be better off cooperating, which is not the Nash equilibrium.

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    Under the prisoner's dilemma, each player chooses to protect themselves at the expense of the other player, resulting in a worse outcome for both than if they had cooperated. A Nash equilibrium exists when no player has an incentive to deviate from their strategy given an opponent's choice. In the prisoner's dilemma game, betraying the other player is the dominant strategy for each, though both would be better off cooperating, which is not the Nash equilibrium.

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    36 views6 pages

    Eco Assign (2093) PDF

    Uploaded by

    Dhruv Goyal
    Under the prisoner's dilemma, each player chooses to protect themselves at the expense of the other player, resulting in a worse outcome for both than if they had cooperated. A Nash equilibrium exists when no player has an incentive to deviate from their strategy given an opponent's choice. In the prisoner's dilemma game, betraying the other player is the dominant strategy for each, though both would be better off cooperating, which is not the Nash equilibrium.

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    of 6

    ECONOMICS ASSIGNMENT

    Q 1. Differentiate between monopoly & perfectly competitive market


    structure?
    Ans 1. Perfect competition is a form of market in which there is existence of
    large number of buyers and sellers in the market. The sellers in the
    perfectly competitive market sells homogenous product. Monopoly is the
    market structure in which there is only one seller amongst large number
    of buyers. The monopolist sells product with no close substitute available
    in market.
    1. Output and Price: Under perfect competition price is equal to marginal
    cost at the equilibrium output. While under monopoly, the price is greater
    than average cost.
    2. Equilibrium: Under perfect competition equilibrium is possible only
    when MR = MC and MC cuts the MR curve from below. But under
    monopoly, equilibrium can be realized whether marginal cost is rising,
    constant or falling.

    3. Entry: Under perfect competition, there exist no restrictions on the


    entry or exit of firms into the industry. Under monopoly, there are strong
    barriers on the entry and exit of firms.

    4. Profits: The difference between price and marginal cost under


    monopoly results in super-normal profits to the monopolist. Under perfect
    competition, a firm in the long run enjoys only normal profits.

    5. Slope of Demand Curve:


    Under perfect competition, demand curve is perfectly elastic. It is due to
    the existence of large number of firms. Price of the product is determined
    by the industry and each firm has to accept that price. On the other hand,
    under monopoly, average revenue curve slopes downward. AR and MR
    curves are separate from each other. Price is determined by the
    monopolist.

    6. Comparison of Output:
    Perfect competition output is higher than monopoly price. Under perfect
    competition the firm is in equilibrium where AR = MR = AC = MC are equal.
    On the other hand monopoly firm is in equilibrium where MC=MR. The
    monopoly output is lower than perfectly competitive firm output.

    Q 2. Explain different ways of price discrimination under monopoly.

    ANS 2. Discriminating monopoly or price discrimination occurs when a monop-


    olist charges the same buyer different prices for the different units of a
    commodity, even though these units are in fact homogeneous.
    Following are the degree of price discrimination:-
    First Degree:
    In discrimination of the first degree, the monopolist knows the maximum
    amount of money each consumer will pay for any quantity. He then fixes
    up prices accordingly and takes from each consumer the entire amount of
    his consumer’s surplus. This type of situation occurs when the monopolist
    sells each unit of his product at a different price. This means that he
    changes the maximum price a consumer is ready to pay for each unit, i.e.,
    as much as the traffic will bear. The simplest kind of discrimination of the
    first degree is one where, for some reason, each of his customers buy only
    one unit from the monopolist. When consumers buy more than one unit
    of the monopolist’s product, they are willing to buy more units at lower
    prices. The monopolist must then adjust his units of sale.
    Second Degree:
    In discrimination of the second degree, the monopolist captures parts of
    his buyers’, consumers’, surplus, but not all. This is frequently found in
    public utility pricing. The different of rates charged by public utilities like
    the CESC is an obvious example. One rate or price schedule must apply to
    all buyers. Second degree discrimination is furthermore limited to services
    sold in blocks of small units — cubic feet of gas, kilowatt hours of
    electricity, minutes of telephoning — that can be easily metered, recorded
    and billed.

    Third Degree:
    Third degree price discrimination refers to the fact that the monopolist
    divides his customers into two or more classes or groups, charging a
    different price to each class of customer. Each class is a separate market,
    e.g., the lounge seats in a cinema halls, the reserved seats in a cultural
    programme and so on. This is the commonest kind of price discrimination.
    Here, the monopolist sells the same commodity in two separate markets
    at two separate prices at the same time. Thus, he applies the equi-
    marginal principle: the last unit sold in each of the two markets makes the
    same addition to total revenue.

    Q 3. Explain the concept of excess capacity under monopolistic competition.

    ANS. Under monopolistic competition the demand curve facing the


    individual firm is not horizontal as under perfect competition, but it is
    downward sloping. A downward sloping demand curve cannot be tangent
    to the LAC curve at its minimum point.

    The double condition of equilibrium LMC = MR = AR (d) = Minimum LAC


    will not be fulfilled. The firms will, therefore, be of less than the optimum
    size even when they are earning normal profits. No firm will have the
    incentive to produce the ideal output, since any effort to produce more
    than the equilibrium output would involve a higher long-run marginal cost
    than marginal revenue.

    Thus each firm under monopolistic competition will be of less than the
    optimum size and work under excess capacity.
    A comparison of the equilibrium positions under monopolistic competition
    and perfect competition reveals that the output of a firm under
    monopolistic competition is smaller and the price of its product is higher
    than under perfect competition. The monopolistic competition output is
    less than the perfectly competitive output, and the monopolistic
    competitive price is higher than the competitive equilibrium price. This is
    because of the existence of excess capacity under monopolistic
    competition.

    Assumptions:
    (i) The number of firms is large.

    (ii) Each firm produces a similar product independently of the others.

    (iii) It can charge a lower price and attract other’s customers and by raising
    its price will lose some of its customers.

    (iv) Firms are free to enter its field of production.

    Q 4. Write short notes on

    b. Kinked demand curve model: A kinked demand curve occurs when the
    demand curve is not a straight line but has a different elasticity for higher
    and lower prices.

    One example of a kinked demand curve is the model for an oligopoly. This
    model of oligopoly suggests that prices are rigid and that firms will face
    different effects for both increasing price and decreasing price. The kink in
    the demand curve occurs because rival firms will behave differently to
    price cuts and price increases.

    c. Natural monopoly: A natural monopoly is a type of monopoly that exists


    due to the high start-up costs or powerful economies of scale of
    conducting a business in a specific industry. A natural monopoly, as the
    name implies, becomes a monopoly over time due to market conditions
    and without any unfair business practices that might stifle competition.
    Natural monopolies are allowed when a single company can supply a
    product or service at a lower cost than any potential competitor, and at a
    volume that can service an entire market. Since natural monopolies use an
    industry's limited resources efficiently to offer the lowest unit price to
    consumers, it is advantageous in many situations to have a natural
    monopoly. For example, the utility industry is a natural monopoly. The
    utility monopolies provide water, sewer services, electricity, and energy
    such as natural gas and oil to cities and towns across the country.

    Q 5. Explain the concept of dominant strategy and Nash equilibrium with


    reference to Prisoners ' Dilemma.

    ANS. The prisoner's dilemma is a paradox in decision analysis in which two


    individuals acting in their own self-interests do not produce the optimal
    outcome. The typical prisoner's dilemma is set up in such a way that both
    parties choose to protect themselves at the expense of the other
    participant. As a result, both participants find themselves in a worse state
    than if they had cooperated with each other in the decision-making
    process. The prisoner's dilemma is one of the most well-known concepts
    in modern game theory.
    Nash equilibrium is a concept within game theory where the optimal
    outcome of a game is where there is no incentive to deviate from their
    initial strategy. More specifically, the Nash equilibrium is a concept
    of game theory where the optimal outcome of a game is one where no
    player has an incentive to deviate from his chosen strategy after
    considering an opponent's choice.

    Overall, an individual can receive no incremental benefit from changing


    actions, assuming other players remain constant in their strategies. A
    game may have multiple Nash equilibria or none at all.

    EXAMPLE- Imagine a game between Tom and Sam. In this simple game,
    both players can choose strategy A, to receive $1, or strategy B, to lose $1.
    Logically, both players choose strategy A and receive a payoff of $1. If you
    revealed Sam's strategy to Tom and vice versa, you see that no player
    deviates from the original choice. Knowing the other player's move means
    little and doesn't change either player's behavior. The outcome A
    represents a Nash equilibrium.

    It's possible that a dominant strategy solution is also in Nash equilibrium,


    although the underlying principles of a dominant strategy render Nash
    analysis somewhat superfluous. In other words, the cost and benefit
    incentives don't change based on other actors.

    In the dominant strategy, each player's best strategy is unaffected by the


    actions of other players. This renders the critical assumption of the Nash
    equilibrium-that each actor knows the optimal strategy of the other
    players-possible but almost pointless.

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