There are two neighboring countries Wizardland and Muggleland, each having two strategies to choose from: whether to abate pollution or not. Pollution abatement is considered a public good in the context that the atmosphere is open access, and therefore, abatement by either country benefits both. Each unit of pollution abatement costs £70 to the country which abates but confers benefits of £50 to both countries. If both abate, both experience a benefit of £100. The table below shows the payoff of each strategy in British Pounds. The first number is the payoff to Wizardland, while the second number is the payoff to Muggleland (the negative numbers signify losses). Assume that the game is a simultaneous one-shot game. Based on this information read the following statements and select the correct two.
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Question

There are two neighboring countries Wizardland and Muggleland, each having two strategies to choose from: whether to abate pollution or not. Pollution abatement is considered a public good in the context that the atmosphere is open access, and therefore, abatement by either country benefits both. Each unit of pollution abatement costs £70 to the country which abates but confers benefits of £50 to both countries. If both abate, both experience a benefit of £100. The table below shows the payoff of each strategy in British Pounds. The first number is the payoff to Wizardland, while the second number is the payoff to Muggleland (the negative numbers signify losses). Assume that the game is a simultaneous one-shot game. Based on this information read the following statements and select the correct two.

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Answer

The Nash equilibrium is (abates, abates) i.e. Wizardland chooses to abate, Muggleland chooses to abate.

Answer

If only Muggleland has access to new technology that can lower the abatement cost to £45 while it still costs Wizardland £70, and all other factors remain constant, then Muggleland would have an incentive to deviate from the Nash equilibrium.

Answer

If, in the scenario where both countries choose to abate, they both receive a benefit of £110 instead of £100, then both countries would choose to abate.

Answer

If, as a result of technological advancements, the cost of abatement per unit drops from £70 to £45 while everything else remains constant, the Nash equilibrium will result in the highest possible enjoyment levels for both players.

Answer

Wizardland would be better off choosing to not abate, regardless of Muggleland’s decision.

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There are two neighboring countries Wizardland and Muggleland, each having two s...

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