Medical Arms Race and Game Theory in Economics

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Box 14-1 on page 288 of FGS describes how game theory helps explain the “medical arms race” among hospitals up to about 20 years ago.

(1) Explain what a “dominant strategy” is in game theory. 

(2) Using Box 14-1, replace the entry in the first row, second column with (125, -50). Does A have a dominant strategy? Does B? What is the solution to this game? 

(3) Why is the medical arms race less a problem today than it once was? 

(Tip: In order to determine what strategy a “player” should adopt, the player asks, “If B adopts, then what should I do? If B does NOT adopt, then what should I do?” Both players in the game approach the selection of their strategy in this way.)

 
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