Medical Arms Race and Game Theory in Economics

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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