Scenario: You walk onto a used car lot to buy a car. You are willing to pay up to $15,000 for a car of good quality, but you value a lemon at $0. You are now wondering whether you should trust the car dealer when it comes to the quality of his cars. If you choose to trust him, he can choose to cooperate or defect. If you do not trust him, he will not earn any money and you will not be able to buy a car. If you trust him and he cooperates, both of you will gain, because the dealer values a good-quality car at $13,000. However, if he defects, he will earn $15,000, while you will not derive any satisfaction.
-Refer to the scenario above.Which of the following will happen in equilibrium if the car dealer has a reputation for trustworthiness?

Question

Quizplus · Accepted Answer

If the car dealer has a reputation for trustworthiness, it is more likely that he will cooperate rather than defect, even though he could earn more money by defecting. As a result, you will trust him and both of you will gain. This represents a cooperative equilibrium. Therefore, the best choice is to trust him and hope that he will choose to cooperate.

Scenario: You Walk onto a Used Car Lot to Buy