-Consider the infinitely-repeated pricing game depicted in Figure 4.4. 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 most likely trigger strategy?
A) $270
B) $330.
C) $370.
D) $500.
E) $550.

Question

-Consider the infinitely-repeated pricing game depicted in Figure 4.4. 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 most likely trigger strategy?
A) $270 
B) $330. 
C) $370. 
D) $500. 
E) $550.

Quizplus · Accepted Answer

The present value of the stream of payoffs from defection can be calculated using the formula for the present value of a perpetuity: PV = D / r, where D is the payoff from defection and r is the discount rate. Assuming the payoff from defection is $37 (as implied by the choice $370), and the discount rate is 10% (0.10), the present value is $37 / 0.10 = $370.

-Consider the Infinitely-Repeated Pricing Game Depicted in Figure 4