Cooperated and produced fewer gizmos

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Peter and Paul are the only two producers of gizmos. They know that if they cooperated and produced fewer gizmos, they could raise the price of their product. If they work independently, they will each earn $75. If they decide to work together and both lower their output, they can each earn $125. If one person lowers output and the other does not, the person who lowers output will earn $0 and the other person will capture the entire market and will earn $175. Set up the decision matrix. What is the best choice for Paul if he is sure that Peter will cooperate? If Peter thinks Paul will cheat, what should Peter do and why? What is the prisoner’s dilemma result? What is the preferred choice if they could ensure cooperation?

Reference no: EM131097293

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