Scenario: Tom and Harry are participating in a game in which the participants are divided into groups of two. Tom and Harry have been put in the same group. In each round of the game, Tom will be given an item. Tom can either give it to Harry or pass it on to the next team. If he decides to pass it on to the next team, neither of them will get the prize. If he gives it to Harry, Harry can either pass it on to the next team or sell it himself. If he passes it on to the next team, each of them will get $100. However, if he decides to sell it, he will get an amount higher than $100 and Tom will get nothing.
-Refer to the scenario above.Which of the following will happen in equilibrium if Harry is known to be trustworthy?

Question

Quizplus · Accepted Answer

If Harry is known to be trustworthy, Tom will trust Harry in the first round and give him the item. Since Harry is trustworthy, he will pass it on to the next team, and they will get $100 each. This way, Tom and Harry will receive some money. In the subsequent rounds, Tom will continue to trust Harry as long as Harry is cooperative. Thus, in equilibrium, both Tom and Harry will cooperate, and they will each receive some money.

Scenario: Tom and Harry Are Participating in a Game in Which