Suppose that 400 people are choosing between Action X and
Action Y. The relative payoffs of the two actions depend on how many of the 400
people choose Action X and how many choose Action Y. The payoffs are as shown
in the following diagram, but the vertical axis is not labeled, so you do not
know whether the lines show the benefits or the costs of the two actions.
(a) You are told that the outcome in which 200 people
choose Action X is an unstable equilibrium. If 100 people are currently choosing
Action X, would you expect the number of people choosing X to increase or
decrease over time? Why?
(b) For the graph to be consistent with the behavior that
you described in part (a), should the lines be labeled as indicating the costs
or benefits of Action X and Action Y? Explain your answer.