Prisoner's dilemma games imply that cooperative behavior between two people or two firms always breaks down. But reality teaches us that people and firms often cooperate successfully to achieve their goals. Why do the results from prisoner's dilemma
games fail to predict real-world results?
A) Prisoner's dilemma games do not permit people or firms from reneging on agreements, which often occurs in real-word situations.
B) The prisoner's dilemma does not apply to most business situations that are repeated over and over.
C) Prisoner's dilemma games predict the behavior of people and firms that engage in illegal activity; most people and firms do not resort to illegal activity.
D) Most real-world situations involve more than two people or firms; the prisoner's dilemma is only applicable to situations that involve two parties.
Answer: B
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If a firm is a natural monopoly, competition from other firms cannot be counted on to force price down to the level where the company earns zero economic profit. How are prices usually set in natural monopoly markets in the United States?
A) Natural monopolies are privately owned and are allowed to set their own prices. Government regulation of the firms would result in greater deadweight losses. B) Local or state regulatory commissions usually set prices for natural monopolies. C) Natural monopolies are privately owned, but prices proposed by the firms must be approved by the Antitrust Division of the Department of Justice. D) Each natural monopoly is made a public franchise. The public franchise is then required to set its price equal to its marginal cost.
A person takes out a car loan at a bank, but actually uses the money to play the lottery. This situation is an example of which problem banks face in lending?
A) adverse selection B) moral hazard C) interest rate risk D) illiquidity