Assume that in a price-fixing game, if Player A breaks the agreement in the first year, she earns $11 while Player B earns $5.However, if Player A breaks the agreement once, Player B decides to break the agreement for eternity, leaving each to receive $8 per year for the rest of their lives.If they both keep the agreement each receives $9 per year for the rest of their life.If the discount rate is 120 percent per period:
A)Player A will prefer to break the agreement in the first year.
B)Player A will prefer to break the agreement in the second year.
C)Player A will prefer to keep the agreement throughout her life.
D)Player A will prefer to keep the agreement only for the first five years.

Question

Quizplus · Accepted Answer

Player A's payoff from breaking the agreement in the first year is $11, which is greater than the discounted value of $10.90 she would receive if she kept the agreement for eternity [(0.9 / 1.2) * $9 + (0.9 / (1.2^2)) * $8 + (0.9 / (1.2^3)) * $8 + ...]. Therefore, Player A will prefer to break the agreement in the first year.

Assume That in a Price-Fixing Game, If Player a Breaks