What is the present value of the stream of payoffs from defection if the discount rate is 10 percent and the rival adopts his or her grim strategy?
A) $270
B) $330.
C) $350.
D) $500.
E) $550.

Question

Quizplus · Accepted Answer

The present value of the stream of payoffs from defection is $270. This is because the rival will always adopt his or her grim strategy, which means that the player will always receive a payoff of $100 if they defect. The present value of this stream of payoffs is $270, which is calculated as follows:PV = $100 / (1 + 0.10)^1 + $100 / (1 + 0.10)^2 + $100 / (1 + 0.10)^3 + ...= $100 / 1.10 + $100 / 1.21 + $100 / 1.33 + ...= $90.91 + $82.64 + $75.58 + ...= $270

What Is the Present Value of the Stream of Payoffs