According to economic theory, state governments A) will be ...

[Kthamas]

According to economic theory, state governments
 
  A) will be biased toward chronic budget deficits.
  B) will act in the public interest.
  C) will act in the national interest.
  D) will do all of the above.
  E) will do none of the above.

Question 2

There are two players in a game. At each round of the game, one player has to trust the other for a particular task. In the first round, Player 1 has to decide whether he will trust Player 2.
 
  If he does not trust Player 2, he will get one-third of the prize money, while Player 2 will get the rest of the prize money. If he trusts Player 2, Player 2 can either cooperate with him or defect. If Player 2 defects, Player 1 will earn 0, while Player 2 will get the entire prize money. If Player 2 cooperates, each of them will get half the prize money.
  What will the equilibrium outcome of this game be if Player 1 can impose a guilt penalty of two-thirds of the prize money and is known to be a vengeful player?

[ndhahbi]

Answer to Question 1

E

Answer to Question 2

If there is no guilt penalty, in equilibrium Player 1 will not trust Player 2. He will make this decision using the method of backward induction. If he trusts Player 2, Player 2 is likely to defect because Player 2 will earn the entire prize money in that case, while he will earn only half the money by cooperating. Given this information, Player 1 will not trust him as he will not earn money if he trusts him, while he will earn one-third of the money if he does not trust him.
However, if there is a guilt penalty of two-thirds of the prize money, Player 2 will choose to cooperate because he will earn a lower payoff by defecting. Given this information, Player 1 will trust him and each of them will get half the money.

[Kthamas]

Gracias!

[kjohnson]

Thanks for the timely response, appreciate it