Question:
Assume the following:
â€¢             High quality orange sells for a higher price than low quality, but costs more to make.
â€¢             With full information, there is a higher profit margin from producing high quality (versus low quality).
â€¢             But buyers are not fully informed of an individual orange growers' quality. Instead, they infer quality from what NJ producers as a whole are making. If almost all producers make high quality oranges in NJ, then any NJ orange can sell at a "high quality" price, regardless of individual quality. But if almost all producers make low quality oranges in NJ, then any NJ oranges will sell at a "low quality" price, regardless of individual quality.

Model the NJ oranges industry (for simplicity) as consisting of two orange growers. Each has a choice of "making a lot more money in the short term" through "reckless exploitation" or producing more costly, but much higher quality oranges.

1) Illustrate, using ideas from game theory, why it may be in everyone's short term individual interest to produce low quality, while all might be better off if everyone were compelled to produce high quality. Use a matrix with numbers, explain your numbers (the relative payoffs to each producer in each of the four outcomes), and explain the equilibrium of the non-repeated game.

2) Use this framework to explain why it may be necessary to "get tough" with producers who will not invest in producing higher quality oranges.

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