Author Question: Tourists in foreign countries are often charged more for hand-made items at tourist shops compared ... (Read 124 times)

BRWH · **on:** Jun 29, 2018

Tourists in foreign countries are often charged more for hand-made items at tourist shops compared to the local customers. Why?

A) The tourists are typically less informed than the local customers.
B) The tourists typically have fewer available alternatives compared to the local customers.
C) The shop owners can usually identify tourists.
D) For all of the above reasons.

Question 2

Under what circumstances will the equilibrium in a trust game be efficient?

What will be an ideal response?

juiceman1987 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

D

Answer to Question 2

In a trust game, the first mover has to decide whether he will trust the second mover or not. If he chooses to trust the second mover, the second mover can either cooperate or defect. If he cooperates, both the players will earn a higher payoff than they would have if the first player chose not to trust. If the second mover defects, he will earn a higher payoff than the first player. Therefore, the second mover always has an incentive to defect. Given that the second mover is likely to defect, the first mover chooses not to trust. This results in a socially inefficient equilibrium. However, if the second mover has a reputation of trustworthiness, the first mover will choose to trust him and both of them will earn a higher payoff leading to an efficient outcome. Such an efficient outcome can also occur if the game is repeated several times because the players will then realize that they can maximize their payoffs if the first mover chooses to trust and the second mover chooses to cooperate.