part a-iii (continued) microeconomic theory review (continued)

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Part A-III Part A-III (continued)(continued)

Microeconomic Theory Microeconomic Theory Review Review (continued)(continued)

09/22/0909/22/09 Intro_EIntro_E 22

Economics One-on-OneEconomics One-on-One

The limitations of the Market Model The limitations of the Market Model

Game TheoryGame Theory

A model of BargainingA model of Bargaining

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To begin withTo begin with

Remember Remember trading is ‘good’trading is ‘good’

Voluntary exchange of anything between any Voluntary exchange of anything between any two agents improves the wellbeing of both two agents improves the wellbeing of both agents (people, firms – parties)agents (people, firms – parties)

Voluntary exchangeVoluntary exchange generally generally represents a represents a Pareto Improvement Pareto Improvement

Generally?Generally? Why generally? Remember the concept of market failures: Why generally? Remember the concept of market failures:

--Monopoly (monopsony) Monopoly (monopsony) -Externalities -Externalities

-Public goods -Public goods -Severe informational -Severe informational asymmetriesasymmetries

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Market failures aside,Market failures aside,

One primary goal of any economic system is to One primary goal of any economic system is to structure itself so as to facilitate structure itself so as to facilitate voluntary voluntary exchangeexchange among the economic agents. among the economic agents.

By ‘facilitate’ we mean By ‘facilitate’ we mean

Make it ‘easy and cheap’Make it ‘easy and cheap’

- minimize transaction costs - minimize transaction costs More on this laterMore on this later

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Recall, a market is any coming together of buyers and sellersRecall, a market is any coming together of buyers and sellers

Markets help facilitate voluntary exchange (trading) and trading Markets help facilitate voluntary exchange (trading) and trading generallygenerally increases wellbeing – they lower the cost of trading increases wellbeing – they lower the cost of trading

In first and second year you learn about the ‘market model’.In first and second year you learn about the ‘market model’.

This is one particular model of how trading occurs.This is one particular model of how trading occurs.

The ‘market model’ describes the process of trading The ‘market model’ describes the process of trading

- coordinating the utility and profit maximizing behaviour of - coordinating the utility and profit maximizing behaviour of many independent of individual agentsmany independent of individual agents

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The ‘market model’ is intended to explain how The ‘market model’ is intended to explain how trading takes place when there are trading takes place when there are manymany relatively smallrelatively small individual agents coming together individual agents coming together to trade in a to trade in a relatively large and very impersonalrelatively large and very impersonal environment. environment.

- a farmer selling wheat- a farmer selling wheat- you buying apples- you buying apples

No individual buyer or seller can affect the outcome No individual buyer or seller can affect the outcome – each agent acts independently. – each agent acts independently.

Welfare improvingWelfare improving trades occur at a price set by trades occur at a price set by ‘the market’‘the market’

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The market modelThe market model

Market for ApplesMarket for Apples

Quantity of applesQuantity of apples

Price of applesPrice of applesSupply of applesSupply of apples(all potential apple producers)(all potential apple producers)

Demand for applesDemand for apples(all potential apple consumers)(all potential apple consumers)

Pe

Qe

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Many buyers and/or sellersMany buyers and/or sellers

All buyers are buying and all sellers are All buyers are buying and all sellers are selling the same (or similar) itemselling the same (or similar) item

Perfect (very good) informationPerfect (very good) information

Price is knownPrice is known

Price is ‘given’ (accepted) by buyers and Price is ‘given’ (accepted) by buyers and sellers (or at least one of the buying side sellers (or at least one of the buying side or selling side) or selling side)

Limitations of the market modelLimitations of the market model

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But what if ?But what if ?

There is only one buyer and one seller (or just a few decisions There is only one buyer and one seller (or just a few decisions makers)makers)

The item being sold is more or less uniqueThe item being sold is more or less unique

There is no established market price set prior to tradingThere is no established market price set prior to trading

Can voluntary exchange (trading) still take place? - YESCan voluntary exchange (trading) still take place? - YES

Will it be Will it be welfare improvingwelfare improving? – GENERALLY? – GENERALLY

What can the market model say about the process of What can the market model say about the process of trading? – NOT MUCHtrading? – NOT MUCH

What can economic theory say about the process of What can economic theory say about the process of trading and the outcome? - LOTStrading and the outcome? - LOTS

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Economics One-on-OneEconomics One-on-One

- - few decision makersfew decision makers (agents) (agents)

- the optimal decision of each agent depends on the - the optimal decision of each agent depends on the decision of the other agents - decision of the other agents - interdependenceinterdependence

In such a situation, each agent must formulate a In such a situation, each agent must formulate a ‘strategy’ which accounts for the ‘strategy’ which accounts for the possible decisions possible decisions of the other agents.of the other agents.

This is a ‘game’ - poker, football, bridge, dating, This is a ‘game’ - poker, football, bridge, dating, politics, war, whatever.politics, war, whatever.

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Courts and lawyers (The Law) frequently deal with Courts and lawyers (The Law) frequently deal with situations in which there are a few decision situations in which there are a few decision makers making decisions that are makers making decisions that are interdependent.interdependent.

Game theory is a formal method of analysis which Game theory is a formal method of analysis which allows us to understand (and predict) the allows us to understand (and predict) the behaviour of rational economic agents when behaviour of rational economic agents when there are a there are a few agentsfew agents making making interdependentinterdependent decisions.decisions.

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Basic Game TheoryBasic Game Theory

The Basics of a game:The Basics of a game:

- the players (economic agents) - the players (economic agents)

- the strategies of each player- the strategies of each player

- the payoffs to each player under each strategy- the payoffs to each player under each strategy

- determining each player’s optimal strategy and - determining each player’s optimal strategy and the game outcomethe game outcome

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Example: Mary and John each want to Example: Mary and John each want to sell somethingsell something

Situation: - two potential sellers of the same good Situation: - two potential sellers of the same good (home owners, car owners, merchants (home owners, car owners, merchants contemplating a sale, etc.)contemplating a sale, etc.)

- if Mary offers her good for sale and John does - if Mary offers her good for sale and John does not, then Mary will earn $1.not, then Mary will earn $1.

- if Mary offers her good for sale and John offers - if Mary offers her good for sale and John offers his good for sale, Mary will suffer a $2 loss. his good for sale, Mary will suffer a $2 loss.

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- if John offers his good for sale and Mary does - if John offers his good for sale and Mary does not, then John will earn $1.not, then John will earn $1.

- if John offers his good for sale and Mary - if John offers his good for sale and Mary offers her good for sale, John will suffer a $2 loss. offers her good for sale, John will suffer a $2 loss.

- if either seller does not sell, then that - if either seller does not sell, then that seller will break even.seller will break even.

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In the above ‘Game’In the above ‘Game’

Players: Mary and JohnPlayers: Mary and John

Strategies: Sell or don’t sellStrategies: Sell or don’t sell

Payoffs to each player under each strategy:Payoffs to each player under each strategy:

(listed in the last two slides)(listed in the last two slides)

The decisions of Mary and John are clearly interdependent. The decisions of Mary and John are clearly interdependent. Each must consider what the other agent is going to do Each must consider what the other agent is going to do before they make their own decisionbefore they make their own decision

Can we predict the outcome? What will Mary Can we predict the outcome? What will Mary and John do?and John do?

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Let’s consider what we know in the form of a ‘payoff matrix’:Let’s consider what we know in the form of a ‘payoff matrix’:the value to each player for each of the possible outcomesthe value to each player for each of the possible outcomes

PAYOFF MATRIXPAYOFF MATRIX

Mary’s decisionMary’s decision

SELLSELL DON’T DON’T SELLSELLJohn’s decisionJohn’s decision

SELLSELL (-$2, -$2)(-$2, -$2) ( $1, $0)( $1, $0)

DON’T SELLDON’T SELL ( $0, $1)( $0, $1) ( $0, $0)( $0, $0)

(first entry in the round brackets represents John's payoff(first entry in the round brackets represents John's payoffsecond entry represents Mary's payoff)second entry represents Mary's payoff)

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What will each player do? Consider Mary’s options What will each player do? Consider Mary’s options and the resulting outcomes – the ‘and the resulting outcomes – the ‘extensive formextensive form’ ’ or a ‘or a ‘decision treedecision tree’’

Mary’s payoffMary’s payoff

If John sellsIf John sells

and Mary sellsand Mary sells -$2 -$2

and Mary does not selland Mary does not sell $0 $0

If John does not sell If John does not sell

and Mary sellsand Mary sells $1 $1

and Mary does not selland Mary does not sell $0$0

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Assume that Mary and JohnAssume that Mary and John do not cooperate do not cooperate – – neither will tell the other agent what they intend to neither will tell the other agent what they intend to dodo

Mary has no information on what John will do so she Mary has no information on what John will do so she must assume that there is a 50/50 chance of him must assume that there is a 50/50 chance of him selling or not selling. In this case:selling or not selling. In this case:

the expected value to Mary if she sells is the expected value to Mary if she sells is

.5(-$2) + .5($1) = -$0.50 .5(-$2) + .5($1) = -$0.50

the expected value to Mary if she does not sell is the expected value to Mary if she does not sell is

.5($0) + .5($0) = $0.5($0) + .5($0) = $0

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Prediction: Mary will not sellPrediction: Mary will not sell

What about John?What about John?

How does he view the situation?How does he view the situation?

In this particular In this particular non-cooperative game with no non-cooperative game with no informationinformation – exactly the same way – exactly the same way

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John’s payoffJohn’s payoff

If Mary sellsIf Mary sells

and John sellsand John sells -$2 -$2

and John does not selland John does not sell $0 $0

If Mary does not sell If Mary does not sell

and John sellsand John sells $1 $1

and John does not selland John does not sell $0$0

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If John has no information on what Mary will do so If John has no information on what Mary will do so he also must assume that there is a 50/50 chance he also must assume that there is a 50/50 chance of her selling or not selling. In this case:of her selling or not selling. In this case:

the expected value to John if he sells is the expected value to John if he sells is

.5(-$2) + .5($1) = -$0.50.5(-$2) + .5($1) = -$0.50

the expected value to John if he does not sell is the expected value to John if he does not sell is

.5($0) + .5($0) = $0.5($0) + .5($0) = $0

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Is this a good outcome? Is this a good outcome?

It is the best that Mary and John can do in the It is the best that Mary and John can do in the situation: situation: no information/no co-operationno information/no co-operation

We would say that each player has a We would say that each player has a dominant dominant strategy strategy

‘ ‘ the optimal move for a player to make the optimal move for a player to make irrespective of the other player’s decision’irrespective of the other player’s decision’

Prediction: Both Mary and John will decide Prediction: Both Mary and John will decide not to sellnot to sell

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In a sense, this is a pretty amazing result.In a sense, this is a pretty amazing result.

Neither agent knows anything about the other Neither agent knows anything about the other agent’s expected payoffs (the nature of their agent’s expected payoffs (the nature of their utility or profit function) nor the other agent’s utility or profit function) nor the other agent’s likely strategy. Each agent only knows their own likely strategy. Each agent only knows their own utility or profit function.utility or profit function.

Yet in this particular Yet in this particular non-cooperative game with non-cooperative game with no informationno information we can predict how each agent we can predict how each agent will behave and the game outcomewill behave and the game outcome

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Since each player has a Since each player has a dominant strategydominant strategy we can predict we can predict what each player will do (in this game – it is ‘not sell’)what each player will do (in this game – it is ‘not sell’)

This leads to a prediction that the This leads to a prediction that the equilibriumequilibrium for this game for this game is such that neither Mary not John will offer their item for is such that neither Mary not John will offer their item for salesale

In this particular case the equilibrium is a In this particular case the equilibrium is a Nash EquilibriumNash Equilibrium

‘‘no individual player can do any better by changing no individual player can do any better by changing their decision so long as the other player does not their decision so long as the other player does not change their decision’change their decision’

For a non-repeated game this is it?For a non-repeated game this is it?

Dominant strategies and equilibriumDominant strategies and equilibrium

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But is there a better outcome for Mary and But is there a better outcome for Mary and John John and for society?and for society?

Is the solution in the above game a Pareto Is the solution in the above game a Pareto Optimum?Optimum?

Can Society as a whole do better? Can Society as a whole do better?

The game which we just described is a The game which we just described is a non-co-non-co-operative game with no informationoperative game with no information

But what if Mary and John decide to meet and But what if Mary and John decide to meet and co-co-operate? operate?

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With no co-operation Mary and John ended up at the ($0, $0) With no co-operation Mary and John ended up at the ($0, $0) payoffpayoff



SELLSELL DON’T DON’T SELLSELL

John’s decisionJohn’s decision

SELLSELL (-$2, -$2)(-$2, -$2) ( $1, $0)( $1, $0)


Are there better outcomes for John and Mary (and Are there better outcomes for John and Mary (and society) society)

09/22/0909/22/09 Intro_EIntro_E 2727

What if John and Mary decide to What if John and Mary decide to co-co-operate operate (jointly maximize profits)(jointly maximize profits)



SELLSELL DON’T SELLDON’T SELLJohn’s decisionJohn’s decision

SELLSELL (-$2, -$2)(-$2, -$2) ( $1, $0)( $1, $0)


Mary and John meet and decide that one of them Mary and John meet and decide that one of them will sell and one will not sell. Together they will will sell and one will not sell. Together they will make $1 in profit and then they will split the profit make $1 in profit and then they will split the profit (say $0.50 each).(say $0.50 each).

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Solution to the game if there is Solution to the game if there is co-co-operationoperation

Mary and John are each better off and society is Mary and John are each better off and society is better off – the better off – the co-operative outcomeco-operative outcome is a Pareto is a Pareto Improvement (at least one person is made better Improvement (at least one person is made better off and no one is made worse off). Actually three off and no one is made worse off). Actually three people can be made better off (Mary, John and people can be made better off (Mary, John and the buyer).the buyer).

Trading is good and in this case Trading is good and in this case co-operationco-operation among the players leads to trading which among the players leads to trading which otherwise would not take place. otherwise would not take place.

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Variations on the ‘Mary and John want Variations on the ‘Mary and John want to sell something game’to sell something game’

Go back to no co-operation state but what if one Go back to no co-operation state but what if one player has information on the other player’s likely player has information on the other player’s likely strategy?strategy?

How could this happen?How could this happen?

- reputation (watched this player play before)- reputation (watched this player play before)

- espionage (industrial spying)espionage (industrial spying)

- John (mistakenly) ‘sent’ a signal John (mistakenly) ‘sent’ a signal

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Suppose Mary has reason to believe that there is a Suppose Mary has reason to believe that there is a 75% chance that John will not sell75% chance that John will not sell

Then Mary believes that the probability of John Then Mary believes that the probability of John selling or not selling is 25/75. In this case:selling or not selling is 25/75. In this case:

the expected value to Mary if she sells is the expected value to Mary if she sells is

.25(-$2) + .75($1) = $0.25.25(-$2) + .75($1) = $0.25

the expected value to Mary if she does not sell is the expected value to Mary if she does not sell is

.25($0) + .75($0) = $0.25($0) + .75($0) = $0

09/22/0909/22/09 Intro_EIntro_E 3131

What about John? If John has not acquired any new What about John? If John has not acquired any new information then his best belief on what Mary will information then his best belief on what Mary will do remains that there is a 50/50 chance of her do remains that there is a 50/50 chance of her selling or not selling. In this case nothing has selling or not selling. In this case nothing has changed for John:changed for John:


.5(-$2) + .5($1) = -$0.50.5(-$2) + .5($1) = -$0.50


.5($0) + .5($0) = $0.5($0) + .5($0) = $0

09/22/0909/22/09 Intro_EIntro_E 3232

Mary’s dominant strategy has changed to Mary’s dominant strategy has changed to sellsell while while John’s remains John’s remains don’t selldon’t sell. So the model predicts . So the model predicts that Mary will sell and John will not sell.that Mary will sell and John will not sell.

Prediction: Mary will sell and earn $1 profit, Prediction: Mary will sell and earn $1 profit, John will not sellJohn will not sell



SELLSELL DON’T SELLDON’T SELLJohn’s decisionJohn’s decision

SELLSELL (-$2, -$2)(-$2, -$2) ( $1, $0)( $1, $0)


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Is this still a Nash Equilibrium? Yes. Neither John Is this still a Nash Equilibrium? Yes. Neither John nor Mary can improve their situation if the other nor Mary can improve their situation if the other player’s decision remains unchanged.player’s decision remains unchanged.

Is it a Pareto Improvement? Yes. Trading takes Is it a Pareto Improvement? Yes. Trading takes place: poor John/fortunate Mary but economics place: poor John/fortunate Mary but economics does not care who wins, as long as no one loses.does not care who wins, as long as no one loses.

Two people have been made better off (Mary and Two people have been made better off (Mary and the buyer) John is no worse off.the buyer) John is no worse off.

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What if the players value the outcomes differently?What if the players value the outcomes differently?

How could this happen?How could this happen?

- Different taste (selling is more important to one than the - Different taste (selling is more important to one than the other)other)

- Different profit functions (one agent stands to gain more Different profit functions (one agent stands to gain more if they sell)if they sell)

- Different risk functions (one agent can deal with a loss if Different risk functions (one agent can deal with a loss if it occurs better than the other agent)it occurs better than the other agent)

Variations on the ‘Mary and John want Variations on the ‘Mary and John want to sell something game’to sell something game’

09/22/0909/22/09 Intro_EIntro_E 3535

Suppose that John stands to gain $3 if he sells and Suppose that John stands to gain $3 if he sells and Mary only $1. Then the payoff matrix is the Mary only $1. Then the payoff matrix is the following:following:




SELLSELL (-$2, -$2)(-$2, -$2) ( $3, $0)( $3, $0)


09/22/0909/22/09 Intro_EIntro_E 3636

John’s payoffJohn’s payoff

If Mary sellsIf Mary sells

and John sellsand John sells -$2 -$2

and John does not selland John does not sell $0 $0

If Mary does not sell If Mary does not sell

and John sellsand John sells $3 $3

and John does not selland John does not sell $0$0

09/22/0909/22/09 Intro_EIntro_E 3737

If John has no information on what Mary will do so If John has no information on what Mary will do so he also must assume that there is a 50/50 chance he also must assume that there is a 50/50 chance of her selling or not selling. In this case:of her selling or not selling. In this case:


.5(-$2) + .5($3) = $0.50.5(-$2) + .5($3) = $0.50


.5($0) + .5($0) = $0.5($0) + .5($0) = $0

09/22/0909/22/09 Intro_EIntro_E 3838

John will sell but Mary will not sell. Again a Pareto John will sell but Mary will not sell. Again a Pareto Improvement outcome but John and the buyer are Improvement outcome but John and the buyer are the ‘winners’ the ‘winners’




SELLSELL (-$2, -$2)(-$2, -$2) ( $3, ( $3, $0)$0)

DON’T SELLDON’T SELL ( $0, $1)( $0, $1) ( $0, ( $0, $0)$0)

09/22/0909/22/09 Intro_EIntro_E 3939

Another Game: The Prisoner’s DilemmaAnother Game: The Prisoner’s Dilemma(why they always get confessions on NYPD (why they always get confessions on NYPD BLUE and Law & Order - or how the Boulder BLUE and Law & Order - or how the Boulder Police Department might have screwed-up.) Police Department might have screwed-up.)

Two individuals (Jack and Jill) areTwo individuals (Jack and Jill) aresuspected of involvement in a crimesuspected of involvement in a crime

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Situation: - two parents (Jack and Jill) are suspected Situation: - two parents (Jack and Jill) are suspected of involvement in a crime, say child murderof involvement in a crime, say child murder

- Police only have circumstantial evidence and this - Police only have circumstantial evidence and this it not enough to get a conviction.it not enough to get a conviction.

- if one (or both) of the suspects confess, then the - if one (or both) of the suspects confess, then the prosecutor will get a conviction (possibly two prosecutor will get a conviction (possibly two convictions) The police/prosecutors need a convictions) The police/prosecutors need a confession. confession.

- no matter what, the child was harmed and the - no matter what, the child was harmed and the parents can be convicted of child neglect (a lesser parents can be convicted of child neglect (a lesser crimecrime

09/22/0909/22/09 Intro_EIntro_E 4141

Jack is told Jack is told

- if you confess and implicate your partner and if you confess and implicate your partner and your partner does not confess, then your partner does not confess, then - she will be charged with murder (25 years in she will be charged with murder (25 years in

prison)prison)- you will be charged with a lesser crime (no you will be charged with a lesser crime (no

time in prison). time in prison). - if you confess and implicate your partner and if you confess and implicate your partner and

your partner also confesses and implicates your partner also confesses and implicates you, then you, then

- you will both be charged with manslaughter you will both be charged with manslaughter and each of you will spend 10 years in prison. and each of you will spend 10 years in prison.

Here’s what the police do: First, each suspect is Here’s what the police do: First, each suspect is taken to a different room – taken to a different room – no co-operationno co-operation

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- If neither of you parents confess, the prosecutor If neither of you parents confess, the prosecutor threatens to harass them publicly and ultimately threatens to harass them publicly and ultimately charge them with child neglect for which they will charge them with child neglect for which they will spend up to 1 year in jail.spend up to 1 year in jail.

Jill is told exactly the same thing Jill is told exactly the same thing

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In the above ‘Game’In the above ‘Game’

Players: Jack and JillPlayers: Jack and Jill

Strategies: Confess or don’t confessStrategies: Confess or don’t confess

Payoffs’ to each player under each strategy:Payoffs’ to each player under each strategy:

(listed in the last two slides)(listed in the last two slides)

The decisions of Jack and Jill are clearly interdependent. Each The decisions of Jack and Jill are clearly interdependent. Each must consider what the other agent is going to do before must consider what the other agent is going to do before they make their own decisionthey make their own decision

What will Jack and Jill do? What are their options?What will Jack and Jill do? What are their options?

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What does the payoff matrix look like ?What does the payoff matrix look like ?


Jill’s decisionJill’s decision

ConfessConfess Don’t confessDon’t confess

Jack’s decisionJack’s decision

ConfessConfess (10 yrs, 10 yrs)(10 yrs, 10 yrs) (0 yrs, 25 yrs)(0 yrs, 25 yrs)

Don’t confessDon’t confess (25 yrs, 0 yrs)(25 yrs, 0 yrs) (1 yr, 1 yr)(1 yr, 1 yr)

(first entry in the round brackets represents Jack's payoff(first entry in the round brackets represents Jack's payoff

second entry represents Jill's payoff)second entry represents Jill's payoff)

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What will each player do? Consider Jill’s options What will each player do? Consider Jill’s options and the resulting outcomes – the ‘and the resulting outcomes – the ‘extensive formextensive form’ ’ or a ‘or a ‘decision treedecision tree’’

Jill’s payoffJill’s payoff

If Jack confessesIf Jack confesses

and Jill confessesand Jill confesses 10 yrs10 yrs

and Jill does not confessand Jill does not confess 25 yrs25 yrs

If Jack does not confess If Jack does not confess

and Jill confessesand Jill confesses 0 yrs 0 yrs

and Jill does not confessand Jill does not confess 1 yr1 yr

09/22/0909/22/09 Intro_EIntro_E 4646

Jack and Jill can not communicate so they cannot Jack and Jill can not communicate so they cannot cooperate cooperate – neither can tell the other person what – neither can tell the other person what they intend to dothey intend to do

If Jack confesses then Jill’s best response is to If Jack confesses then Jill’s best response is to confessconfess

If Jack does not confess then Jill’s best option is to If Jack does not confess then Jill’s best option is to confess confess

The game has been carefully constructed by the The game has been carefully constructed by the police/prosecutor so that a rational individual will police/prosecutor so that a rational individual will choose to confess.choose to confess.

In this game we need not consider the probabilities. In this game we need not consider the probabilities.

09/22/0909/22/09 Intro_EIntro_E 4747

Prediction: Jill will confess and since Jack Prediction: Jill will confess and since Jack faces the exact same options his faces the exact same options his dominant dominant strategystrategy is also to confess is also to confess

They each end up spending 10 years in jailThey each end up spending 10 years in jail

Jill’s decisionJill’s decision

ConfessConfess Don’t confessDon’t confess

Jack’s decisionJack’s decision

ConfessConfess (10 yrs, 10 yrs)(10 yrs, 10 yrs) (0 yrs, 25 yrs)(0 yrs, 25 yrs)

Don’t confessDon’t confess (25 yrs, 0 yrs)(25 yrs, 0 yrs) (1 yr, 1 yr)(1 yr, 1 yr)

09/22/0909/22/09 Intro_EIntro_E 4848

What if Jack and Jill are allowed to What if Jack and Jill are allowed to co-operateco-operate, then , then what are they likely to do?what are they likely to do?

They are likely to agree that neither will confess They are likely to agree that neither will confess and each will spend 1 year in prison.and each will spend 1 year in prison.

Does guilt or innocence matter in determining the Does guilt or innocence matter in determining the outcome? Yes and no. It must be the case that outcome? Yes and no. It must be the case that each feels that the threat of conviction on a each feels that the threat of conviction on a lesser offence is real. lesser offence is real.

Loyalty and the general nature of the relationship Loyalty and the general nature of the relationship between the two suspects gets mixed in.between the two suspects gets mixed in.

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what if Mr. Ramsey committed the murder, Mrs. what if Mr. Ramsey committed the murder, Mrs. Ramsey knows he did since she arrived at the Ramsey knows he did since she arrived at the scene just after the crime was committed? scene just after the crime was committed?

Her natural tendency would be not to confess, since Her natural tendency would be not to confess, since she did not commit the crime. she did not commit the crime.

However, what if Mr. Ramsey is a real creep and However, what if Mr. Ramsey is a real creep and she believes that he might confess, implicating she believes that he might confess, implicating her and getting himself off free, while she spends her and getting himself off free, while she spends 25 years in prison. Maybe she should confess, 10 25 years in prison. Maybe she should confess, 10 years in prison is better than 25 years in prison. years in prison is better than 25 years in prison.

Recall the Ramsey Case in ColoradoRecall the Ramsey Case in Colorado – – Jon Benet RamseyJon Benet Ramsey

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What if Mr. and Mrs. Ramsey are both guilty but What if Mr. and Mrs. Ramsey are both guilty but they care deeply for each other. Then neither they care deeply for each other. Then neither would confess and both would spend 1 year in would confess and both would spend 1 year in prison. But this is really just prison. But this is really just co-operationco-operation between the suspects, whether or not they are between the suspects, whether or not they are interviewed separately. interviewed separately. The police always try to The police always try to create mistrust among the suspects.create mistrust among the suspects.

In the good old days the Mafia got cooperation In the good old days the Mafia got cooperation without any direct communication. without any direct communication. If you If you squealed you died.squealed you died. The Mafia can be thought of a The Mafia can be thought of a way of ensuring cooperative outcomes among a way of ensuring cooperative outcomes among a group of criminals.group of criminals.

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The `divide and conquer’ technique is likely to be more The `divide and conquer’ technique is likely to be more successful the more distrust there is among the suspects.successful the more distrust there is among the suspects.

What if both are completely innocent and neither confesses. What if both are completely innocent and neither confesses. They will both spend some time in jail, 1 year. This always They will both spend some time in jail, 1 year. This always has to be the case. The prosecutor must set up the options has to be the case. The prosecutor must set up the options so that there is some positive reward for confessing so that there is some positive reward for confessing (alternatively stated, some punishment for not confessing). (alternatively stated, some punishment for not confessing).

Do innocent people confess to crimes they know they did not Do innocent people confess to crimes they know they did not commit? commit?

Could you be put in a position in which your best option was to Could you be put in a position in which your best option was to admit to having committed a crime which you did not admit to having committed a crime which you did not commit? commit?

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What went wrong (or right!) in Boulder? What went wrong (or right!) in Boulder?

The Ramsey’s lawyers refused to allow the Ramseys be The Ramsey’s lawyers refused to allow the Ramseys be interviewed separately. interviewed separately.

Is this a reflection on their guilt or innocence? Is this a reflection on their guilt or innocence?

No, we saw that once you become entangled in the Prisoners’ No, we saw that once you become entangled in the Prisoners’ Dilemma, you will be punished to some extent whether or Dilemma, you will be punished to some extent whether or not you are guilty. not you are guilty.

That is one reason why prosecutors ‘leak’ embarrassing That is one reason why prosecutors ‘leak’ embarrassing information about suspects who refuse to play the game. information about suspects who refuse to play the game.

They are being punished for not playing (the situation They are being punished for not playing (the situation becomes a multi-level game - a bit more complicated). becomes a multi-level game - a bit more complicated).

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Change the setting. Change the setting.

Two young Irishmen arrested in a pub in London England after Two young Irishmen arrested in a pub in London England after a bomb goes off just down the street. a bomb goes off just down the street.

Four teenagers, each with outstanding warrants for parole Four teenagers, each with outstanding warrants for parole violations, picked-up near the scene of a recent robbery.violations, picked-up near the scene of a recent robbery.

Two Palestinians in Jerusalem, two Middle Easterners Two Palestinians in Jerusalem, two Middle Easterners anywhere in the world. anywhere in the world.

Would a law that states that a suspect cannot be convicted Would a law that states that a suspect cannot be convicted solely on the testimony of an accomplice make sense? solely on the testimony of an accomplice make sense?

Would a law that allows for a joint defense of jointly accused Would a law that allows for a joint defense of jointly accused defendants make sense?defendants make sense?

part a-iii (continued) microeconomic theory review (continued)

Documents

process of trading

market modelintro

withremember trading

agents people

decision makers agents

agents interdependencein

ethe market modelmarket

concept of market failures