A. Consider the forgiving trigger punishment (i. e. partial punishment trigger, punish any deviation to confess with T rounds of (C, c)). How high does the value of the discount factor δ need to be in order for the nice guy behavior – (N, n) forever – to be achievable as part of a subgame perfect equilibrium? Your answer will depend on the length of the punishment phase T; try T = 3.

b. Calculate the minimum value of the discount factor δ for which the grim trigger strategy (infinite punishment for deviation to confess) is a subgame perfect equilibrium. Compare this minimum value of δ to the minimum value of the discount factor found in part a, which is bigger?

Two firms, a and b, each currently emit 100 tons of chemicals into the air. the government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. the government gives each firm 40 pollution permits, which it can either use or sell to the other firm. it costs firm a $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs firm b $100 for each ton of pollution that it eliminates before it is emitted into the air. after the two firms buy or sell pollution permits from each other, we would expect that firm a will emit a. 100 fewer tons of pollution into the air, and firm b will emit 20 fewer tons of pollution into the air. b. 20 more tons of pollution into the air, and firm b will emit 100 fewer tons of pollution into the air. c. 50 fewer tons of pollution into the air, and firm b will emit 50 fewer tons of pollution into the air. d. 20 fewer tons of pollution into the air, and firm b will emit 100 fewer tons of pollution into the air.