A society has two individuals, A and B, and is considering two possible institutions x and y for the purpose of allocating recourses.

6 6  

a). Suppose you subscribe to a utility-based evaluation principle in assessing the two institutions. Do you need any further information about the two institutions? Why or why not? How would you rank the two institutions in this case?

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b). Suppose that you have just learned some details about the two institutions:

 x is the market system as we have discussed and have become to know,

y is the “command system” in which each individual is `planned’ by the planning board a bundle that happens to be her/his most preferred bundle (the planning board has all the information about individuals’ preferences for the purpose of planning).  

c. With these details about the two institutions, would you change your ranking obtained in a)? Why or why not?

5. Consider the following games played between two players, A and B.  

Game 1: A and B have reached a verbal agreement: A would deliver a case of beer to B, and B would deliver a bag of beer nuts to A. Now, each player needs to take an action: keep the promise (to deliver the goods), break the promise. If both keep their promises, then each player gets a payoff of 5; if both break their promises, then each player gets a payoff of 1; if one keeps the promise and the other breaks the promise, then the one who keeps the promise gets a payoff of 0 and the other gets a payoff of 8.  

Game 2: A and B have each deposited $1000 with a bank. The bank has invested these deposits in a long-term project. If both investors make withdrawals now then each receives $600; if only one investor makes a withdrawal now then that investor receives $1000, the other receives $200, and if neither investors makes a withdrawal now, then the project matures and each gets $1400.

a). Illustrate the above two games in game tables.

b). For each game, find Nash equilibrium outcomes.

c). For each game, is there any inefficient Nash equilibrium outcome?  

c). Is either game a prisoner’s dilemma game or a stag hunt game? Explain.

d). From your analysis above, compare and contrast the role of the state in resolving an inefficient Nash equilibrium outcome.

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