2. An agent can pursue activity A or activity B. Activity B yields the return 0. ActivityA yields the return y but requires both an unrecoverable investment of c, where0 < c < y, and a permit from an official. The permit is free, but the official maydemand a bribe of any magnitude; the permit is granted only after the investmenthas been made and the bribe paid.(a) Model this situation as an extensive game with perfect information in which theagent first chooses A or B. If she chooses B, the game ends and her payoff andthat of the official are both 0. If she chooses A, the official then demands abribe (any number), which the agent either agrees or refuses to pay. If the agentagrees to pay the bribe, she pursues activity A and her payoff is y-c-b whilethe official's payoff is b, where b is the bribe demanded by the official. If theagent refuses to pay the bribe, her payoff is -c and that of the official is 0.(b) Find the subgame perfect equilibrium/equilibria of the game.

Subgame Perfect Equilibrium (SPE) is a refinement of Nash equilibrium in game theory. It requires…

Answered: 2. An agent can pursue activity A or…

2. An agent can pursue activity A or activity B. Activity B yields the return 0. Activity A yields the return y but requires both an unrecoverable investment of c, where 0

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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