Af1605 Introduction to Economics

Hong Kong Polytechnic University

First Semester 2015/16

AF1605 Introduction to Economics

AF1605 Introduction to Economics

First Semester 2015/16

Results of Presentation and Written Report

Q5.5a[pic 1]

[pic 2]

There are totally four possible outcomes. They are both Danny and Paul choose (a) $10,000, both Danny and Paul choose (b) $30,000, Danny chooses (a) and Paul chooses (b) so Danny has $40,000 and Paul has $0 and Danny chooses (b) and Paul chooses (a) so Danny has $0 and Paul has $40,000

b) The best choice is both of Danny and Paul give the other salesman $30,000 of bonus so that they can both receive the $30,000 of bonus and this can benefit to both of them. For example, if Danny gives oneself $10,000 while Paul gives the other salesman $ 30,000, Danny can get $(10,000 + 30,000)= $40000, but Paul get $0, so it is not the best choice.

c) Their collusion is likely to fail because both of them may believe the other will choose to give the other salesman $30,000 bonus. However, it would be individually rational for each of them to cheat on a collusive agreement and increase output. For example, Danny believes he can get $3,000 if he follows the collusion or get $40,000 if he does not follow the collusion and choose to give oneself $10,000. Both of them are more willing to get $40,000, so they will not follow their collusion and give oneself $30,000.

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