Answer to Question #64015 in Economics of Enterprise for Wagh Urs

Question

suppose exert either low effort or high effort. Low effort is costless and high effort costs $10. The return to effort on the total combined effort. If they both exert low effort then the return is $5 for each. If one exerts low effort and the other high effort then the return is $10 for each. If they both exert high effort then the return is $30 for each.
(a) what is net pay (show payoff matrix),(b) tell equilibrium outcome.(c) Is there a prisoners' dilemma?

Answer 1

Low effort is costless and high effort costs $10. If they both exert low effort then the return is $5 for each. If one exerts low effort and the other high effort then the return is $10 for each. If they both exert high effort then the return is $30 for each.
(a) the payoff matrix will be:
1\2 low effort high effort
low effort $5\$5 $10\$0
high effort $0\$10 $20\$20
(b) The equilibrium outcome is $5 for both with low efforts.
(c) There is a prisoners' dilemma, because the equilibrium outcome is not most profitable for both.