If two firms operate in a market that is characterized as being a Prisoner's Dilemma,and the two strategies given them are to restrict output or expand output,which of the following strategy pairs would represent the cooperative solution in a duopoly for firm 1 and firm 2,and firm 1 given first in each pair?
A) {expand output,restrict output}
B) {restrict output,expand output}
C) {restrict output,restrict output}
D) {expand output,expand output}

Question

Quizplus · Accepted Answer

The cooperative solution in a Prisoner's Dilemma involves both firms restricting output, as this maximizes collective profits. If one firm expands output while the other restricts output, the firm that expands output will earn greater profits at the expense of the other firm. Therefore, option C, where both firms restrict output, is the cooperative solution.

If Two Firms Operate in a Market That Is Characterized