1. 1 The Prisoners Dilemma -1,-1 -10,0 -8,-80, -10 Keep Quiet Confess Smith Jones Smith and Jones have engaged in bank fraud together. The evidence against them is only enough to convict them of poor recordkeeping, which carries a one-year prison sentence. If Smith confesses, shifting the blame to Jones, then Smith gets off scot free, but Jones goes to prison for 10 years. If Jones shifts the blame to Smith, it is Jones who goes free and Smith who faces ten years in prison. Finally, if both confess, each gets 8 years in prison. Confess Keep Quiet

2. 2 The Basic Pricing Problem 3,30,4 2,24,0 High Price Low Price Firm 1 Firm 2 Low Price High Price If both firms charge high prices, market revenue is 6 million dollars, split evenly between them. If both firms charge low prices, market revenue is 4 million dollars, split evenly between them. If one firm charges high prices and the other one low, market revenue is 4 million and the low-price firm gets all of it.

3. 3 Cournot Competition Q 1 Q 2 0,0 45 90 30 Equilibrium R 1 R 2 Q 1 Q 2 0,0 45 90 30 R 1 How Firm 1 reacts Putting them together How Firm 2 reacts Firm 1 is a monopoly if Q 2 = 0 Firm 2 is a monopoly if Q 1 = 0 If Q 2 = 90, Firm 1 lets Firm 2 take the market If Q 1 = 90, Firm 2 lets Firm 1 take the market