Scenario 13.9
Consider the following game:
Two firms are situated next to a lake, and it costs each firm $1,500 per period to use filters that avoid polluting the lake. However, each firm must use the lake's water in production, so it is also costly to have a polluted lake. The cost to each firm of dealing with water from a polluted lake is $1,000 times the number of polluting firms.
-Refer to Scenario 13.9. What kind of game is being played by Lago and Nessie?
A) Battle of the Sexes
B) Prisoners' Dilemma.
C) Beach Location
D) Stackelberg Output Choice
E) Cournot Output Choice

Question

Scenario 13.9
Consider the following game:
Two firms are situated next to a lake, and it costs each firm $1,500 per period to use filters that avoid polluting the lake. However, each firm must use the lake's water in production, so it is also costly to have a polluted lake. The cost to each firm of dealing with water from a polluted lake is $1,000 times the number of polluting firms. 
-Refer to Scenario 13.9. What kind of game is being played by Lago and Nessie?
A) Battle of the Sexes 
B) Prisoners' Dilemma. 
C) Beach Location 
D) Stackelberg Output Choice 
E) Cournot Output Choice

Quizplus · Accepted Answer

Lago and Nessie are playing a Prisoners' Dilemma. If both firms use filters and avoid polluting the lake, they both incur a cost of $1,500 each. If both firms pollute the lake, they both incur a cost of $2,000 ($1,000 per firm). However, if one firm uses filters while the other firm pollutes, the firm using filters incurs a cost of $1,500 while the polluting firm incurs a cost of $2,000 ($1,500 for filters + $1,000 for dealing with pollution from one firm). In this scenario, each firm has a dominant strategy to pollute the lake, which results in a suboptimal outcome for both firms. Therefore, the Nash Equilibrium is for both firms to pollute the lake.

Scenario 13.9 Consider the Following Game