The Economics of Trust and Revenge Tom and Harry are participating in a game in which the participants are divided into groups of two

The Economics of Trust and Revenge

Tom and Harry are participating in a game in which the participants are divided into groups of two. Tom and Harry have been put in the same group. At each round of the game, Tom will be given an item. Tom can either give it to Harry or pass it on to the next team. If he decides to pass it on to the next team, neither of them will get the prize. If he gives it to Harry, Harry can either pass it on to the next team or sell it himself. If he passes it on to the next team, each of them will get $100. However, if he decides to sell it, he will get an amount higher than $100 and Tom will get nothing.

1) Refer to the scenario above. Tom should use ________ to play this game.

A) backward induction

B) forward induction

C) mixed strategies

D) his dominated strategy

2) Refer to the scenario above. Which of the following will happen in equilibrium if the game is played only once?

A) Social surplus will be maximized.

B) Tom will trust Harry and Harry will defect.

C) Tom will trust Harry and Harry will cooperate.

D) Neither of them will make any money.

3) Refer to the scenario above. Which of the following is likely to be true if the game is played only once?

A) The equilibrium outcome will be a Nash.

B) The equilibrium outcome will be socially inefficient.

C) No unique equilibrium will occur.

D) Multiple Nash equilibria will occur.

4) Refer to the scenario above. Which of the following will happen in equilibrium if Harry is known to be trustworthy?

A) Tom will trust Harry and Harry will cooperate.

B) Tom will trust Harry and Harry will defect.

C) Neither of them will make any money.

D) Only Harry will make money.

5) Refer to the scenario above. Which of the following will be true if Harry is known to be trustworthy?

A) The outcome will be a Nash equilibrium.

B) The equilibrium outcome will be socially inefficient.

C) Unique equilibrium will not occur.

D) Multiple equilibria will occur.

You walk into a used-car lot to buy a car. You are willing to pay up to $15,000 for a car of good quality but you value a lemon at $0.You are now wondering whether you should trust the car dealer regarding the quality of the car. If you choose to trust him, he can choose to cooperate or defect. If you do not trust him, neither will he earn money nor will you be able to buy a car and use it. If you trust him and he cooperates, both of you will gain because the dealer values a good-quality car at $13,000. However, if he defects, he will earn $15,000 while you will not derive any satisfaction.

6) Refer to the scenario above. You should use ________ to arrive at a decision.

A) backward induction

B) forward induction

C) mixed strategies

D) prisoners' dilemma

7) Refer to the scenario above. Which of the following will happen in equilibrium?

A) You will trust him and he will defect.

B) You will trust him and he will cooperate.

C) You will not trust him.

D) You will not make any purchase.

8) Refer to the scenario above. Which of the following is true?

A) The equilibrium outcome in this case is Nash.

B) The equilibrium outcome in this case is socially inefficient.

C) There is no unique equilibrium in this case.

D) There are multiple equilibria in this case.

9) Refer to the scenario above. Which of the following will happen in equilibrium if the car dealer has a reputation of trustworthiness?

A) You will trust him and he will cooperate.

B) You will trust him and he will defect

C) You will not trust him

D) You will earn positive consumer surplus

10) Refer to the scenario above. Which of the following is true if the car dealer has a reputation of trustworthiness?

A) The equilibrium outcome is Nash.

B) There is no unique equilibrium.

C) There are multiple equilibria.

D) The equilibrium is socially efficient.