Managerial Economics 12th Edition by Mark Hirschey

Exercise 2

Prisoner's Dilemma. The classic Prisoner's Dilemma involves two suspects, A and B , who are arrested by the police. Because the police have insufficient evidence for conviction on a key charge, they place the prisoners in isolation and offer each of them the following deal: If one testifies for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives a 20-year sentence. If both stay silent, both prisoners are sentenced to only 6 months in jail on a minor charge. If each betrays the other, each receives a 5- year sentence. Each prisoner must make the choice of whether to betray the other or to remain silent. Neither prisoner knows for sure what choice the other prisoner will make. The dilemma is summarized as follows:

A. Describe the best strategy for each prisoner if neither knows what the other will do.
B. What is the paradox of the situation?