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In what follows, ignore the negative impact that social distancing has on household income. Assume that individuals’ income remains unchanged. The government would now like you to help them understand “hoarding” behaviour and its effect on the market. We will define
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- hoarding behaviour as the tendency to buy excessive amounts of a good, though individuals are not expected to usemore of the good. For example, the government sees that individuals are hoarding toilet paper—they are buying excessive amounts, though they are using a normal amount. (6 marks) a. You decide to describe individual hoarding behaviour using game theory. You model the behaviour using a simultaneous game between two players. Assume the actions that each player can choose are to “hoard” or “not hoard”. You are seeing that nearly everyone people in society is engaging in various types of hoarding behaviours, even though everyone would be better off without any hoarding. What type of game can best describe the decision to “hoard” versus “not hoard”? (1 marks)
- b. Given your answer to part (a), assign a set of real payoffs to each action, drawthe normal form game and defineand describethe Nash Equilibrium. (3 marks)
- c. Is the Nash Equilibrium socially efficient? If not, what types of policy might you recommend to encourage individuals to achieve an outcome that is efficient? (2 marks)