many areas of the country, aquifers (pools of underground water) serve as the primary water source. Water is extracted from the aquifer using wells and is replenished by rain and rivers. In many places the water is being extracted from the aquifers faster than it is being replenished, causing wells to run dry and farmers to have insufficient water for their crops. To address this, farmers in Kansas have all mutually agreed to reduce their usage of water. After reaching this agreement, each farmer must decide whether to follow the agreement. Assume that if everyone chooses a low level of production, all farmers will have enough water for the entire season. If a farmer chooses a high level of production, they will have more crops to sell but it will reduce the water available (and therefore the crop quality) for all farmers. Specifically, the farmers are faced with the decision shown in the images. a. If the game is played only one time, characterize each farmer’s best strategy. b. What is the Nash equilibrium? Is the Nash equilibrium pareto efficient? Briefly explain why or why not. c. If this were an infinitely repeated game, what outcome would you expect to emerge as the equilibrium? Briefly explain.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
100%

3. many areas of the country, aquifers (pools of underground water) serve as the primary water source. Water is extracted from the aquifer using wells and is replenished by rain and rivers. In many places the water is being extracted from the aquifers faster than it is being replenished, causing wells to run dry and farmers to have insufficient water for their crops. To address this, farmers in Kansas have all mutually agreed to reduce their usage of water. After reaching this agreement, each farmer must decide whether to follow the agreement.

Assume that if everyone chooses a low level of production, all farmers will have enough water for the entire season. If a farmer chooses a high level of production, they will have more crops to sell but it will reduce the water available (and therefore the crop quality) for all farmers. Specifically, the farmers are faced with the decision shown in the images.

a. If the game is played only one time, characterize each farmer’s best strategy.
b. What is the Nash equilibrium? Is the Nash equilibrium pareto efficient? Briefly explain why or why not.
c. If this were an infinitely repeated game, what outcome would you expect to emerge as the equilibrium? Briefly explain.

3. many areas of the country, aquifers (pools of underground water) serve as the
primary water source. Water is extracted from the aquifer using wells and is
replenished by rain and rivers. In many places the water is being extracted from
the aquifers faster than it is being replenished, causing wells to run dry and
farmers to have insufficient water for their crops. To address this, farmers in
Kansas have all mutually agreed to reduce their usage of water. After reaching this
agreement, each farmer must decide whether to follow the agreement.
Assume that if everyone chooses a low level of production, all farmers will have
enough water for the entire season. If a farmer chooses a high level of production,
they will have more crops to sell but it will reduce the water available (and
therefore the crop quality) for all farmers. Specifically, the farmers are faced with
the following decision:
Farmer 2 Decision
High Production
($45 k, $45 k)
Low Production
($58 k, $40 k)
High
production
Low production
Farmer 1
Decision
($40 k, $58 k)
where cells contain (Farmer 1's profit, Farmer 2's profit).
($50 k, $50 k)
a If the game is played only one time, characterize each farmer's best strategy.
b. What is the Nash equilibrium? Is the Nash equilibrium pareto efficient? Briefly
explain why or why not.
c Ifthis were an infinitely repeated game, what outcome would you expectto
emerge as the equilibrium? Briefly explain.
Transcribed Image Text:3. many areas of the country, aquifers (pools of underground water) serve as the primary water source. Water is extracted from the aquifer using wells and is replenished by rain and rivers. In many places the water is being extracted from the aquifers faster than it is being replenished, causing wells to run dry and farmers to have insufficient water for their crops. To address this, farmers in Kansas have all mutually agreed to reduce their usage of water. After reaching this agreement, each farmer must decide whether to follow the agreement. Assume that if everyone chooses a low level of production, all farmers will have enough water for the entire season. If a farmer chooses a high level of production, they will have more crops to sell but it will reduce the water available (and therefore the crop quality) for all farmers. Specifically, the farmers are faced with the following decision: Farmer 2 Decision High Production ($45 k, $45 k) Low Production ($58 k, $40 k) High production Low production Farmer 1 Decision ($40 k, $58 k) where cells contain (Farmer 1's profit, Farmer 2's profit). ($50 k, $50 k) a If the game is played only one time, characterize each farmer's best strategy. b. What is the Nash equilibrium? Is the Nash equilibrium pareto efficient? Briefly explain why or why not. c Ifthis were an infinitely repeated game, what outcome would you expectto emerge as the equilibrium? Briefly explain.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Limiting the Common Resources
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education