B The Prisoners Dilemma 15 In Chapter 1 the textbook introdu

B. The Prisoner\'s Dilemma (15): In Chapter 1, the textbook introduces the Prisoner\'s Dilemma game -perhaps the most famous of the games to come out of Game Theory to help illustrate how private property rights might emerge. 1. Explain what is involved in the Prisoner\'s Dilemma (be sure to address the general structure of the game as opposed to any one particular version of the game, such as the one that gives it its name.) 2. Adam Smith\'s invisible hand metaphor says that people acting in their own self- interest make both themselves and society better off. In other words, free markets not only allow people to pursue their own self-interest, they direct people\'s actions in such a way as to get them to act in the best interest of others But economists find the Prisoner\'s Dilemma game interesting because in it, players who act in their own self-interest don\'t end up better off -they end up worse off instead. Is that a good thing or a bad thing that acting in their own self- interest makes them worse off? Explain. (Warning! Whenever an economist asks a question like that, the answer is almost always \"BOTH!\")

Solution

Answer 1:

Prisoners dilemma is the most important game used in game theory. In this game two individuals acting in their own self interest pursue a course of action that does not result in the ideal outcome. Both the parties in this game choose to protect each other at the expense of the other. If they both cooperate then their punishment tenure can be reduced but they do not cooperate thinking that other person will not follow the agreement. Thus, in the end both find themselves in the worse state if they had cooperated with each other in the decision making process.

Answer 2:

The statement cannot be generalized that acting in one\'s own self interest makes a person worse off because in case of free markets the optimum allocation reached when the markets are able to take free decisions. It maximizes total surplus in the market. However, if the government intervention takes place then total surplus is not maximized and optimum utilization of resources does not take place. In the case of game theory, opposite happens. Thus, it can be concluded that the context in which the entire thinking takes place is important to consider.