-Consider the oil-drilling game depicted in Figure 5.4 in which payoffs are in millions of dollars. Suppose that this game is played repeatedly and the probability that the game will be played in the next round is 20 percent. At what discount rate are the players indifferent between cooperating and defecting?
A) 25 percent.
B) 27.5 percent.
C) 32.75 percent.
D) 45 percent.
E) None of the above.

Question

-Consider the oil-drilling game depicted in Figure 5.4 in which payoffs are in millions of dollars. Suppose that this game is played repeatedly and the probability that the game will be played in the next round is 20 percent. At what discount rate are the players indifferent between cooperating and defecting?
A) 25 percent. 
B) 27.5 percent. 
C) 32.75 percent. 
D) 45 percent. 
E) None of the above.

Quizplus · Accepted Answer

In a repeated game scenario, players' decisions to cooperate or defect depend on the future expected payoffs, which are discounted by a factor related to the probability of the game continuing and the players' discount rate. The discount rate that makes players indifferent between cooperating and defecting is not directly provided by the probability of the game continuing alone (20% in this case). It also depends on the specific payoffs of cooperating versus defecting, the structure of the game, and how future payoffs are valued relative to immediate payoffs. Since none of the provided options explicitly account for these factors without additional context or calculations based on the specific payoffs and game structure, the correct answer is that the information given is insufficient to determine the exact discount rate without further details about the payoffs and how they are affected by the continuation probability.

-Consider the Oil-Drilling Game Depicted in Figure 5