Question

Refer to the Scenario. Dominic plows Soraya's driveway for $65. Dominic's opportunity cost of plowing Soraya's driveway is $55, and Soraya's willingness to pay Dominic to plow her driveway is $100.

Assume Dominic is required to pay a tax of $15 each time he plows a driveway. Which of the following results is most likely if the price of the plowing services remains at $65?
a. Soraya will no longer be willing to pay $65 dollars to get her driveway plowed, and Dominic will decide it is no longer in his interest to plow Soraya's driveway.
b. Dominic and Soraya still engage in a mutually-agreeable trade at a price of $65.
c. Soraya is still willing to pay Dominic $65 to plow her driveway, but Dominic will decline her offer.
d. Dominic is still willing to plow Soraya's lawn for $65, but Soraya is no longer willing to pay that price.

Answer 1

The most likely outcome with the tax imposed is that Soraya is willing to pay $65, but Dominic will decline due to the tax reducing his earnings below his opportunity cost. In the prisoner's dilemma scenario with Mary and Raj, the best outcome is for both to cooperate and lower output, but this requires trust which is not guaranteed.

Step-by-step explanation:

Referring to the scenario where Dominic plows Soraya's driveway for $65 with an opportunity cost of $55 and Soraya's willingness to pay being $100, let's consider the impact of a $15 tax on the plowing services. If the price remains at $65, the most likely result is c. Soraya is still willing to pay Dominic $65 to plow her driveway, but Dominic will decline her offer. This is because after paying the $15 tax, Dominic would only receive $50 ($65 - $15 tax), which is less than his opportunity cost of $55. Thus, not covering his opportunity cost makes it no longer beneficial for Dominic to provide his service at that price.

Moving to the prisoner's dilemma scenario with Mary and Raj, the best choice for Raj if he is sure Mary will cooperate (B) is to cheat and work independently (A), making $200 while Mary earns $0. However, if Mary suspects that Raj will not cooperate, she is better off working independently as well, ensuring she still earns $100 rather than risking earning nothing. The prisoner's dilemma result typically indicates that both parties choose to behave non-cooperatively, aiming to protect their own interests, even though cooperation would lead to a better collective outcome. Ideally, if they could ensure cooperation, the preferred choice for both would be B, Cooperate and Lower Output, leading to increased earnings for each of them ($150 each).