Homework Help is Here – Start Your Trial Now!
Business
Economics
Consider the following ultimatum game. In Stage 1, the proposer chooses a shares of $1 to offer to the responder. The shares can be any number between 0 and 1 (including 0 and 1). After observing the proposer's decision, the responder may choose to accept or reject. If the responder accepts, the proposer keeps (1 − s) × $1 and the responder receives s × $1. If the responder rejects, both players receive 0. Assume that the responder always accepts when she is indifferent between accepting and rejecting. Suppose that both the proposer (Player P) and the responder (Player R) exhibit inequity aversion as specified in the model of Fehr and Schmidt (1999), with ap = aR = 2 and ẞp = ẞR = 0.6 (ap and ẞp are the parameters for player P; OR and BR are the parameters for player R). Suppose these preferences are commonly known to both players. Use backward induction to solve the subgame perfect Nash equilibrium.

Consider the following ultimatum game. In Stage 1, the proposer chooses a shares of $1 to offer to the responder. The shares can be any number between 0 and 1 (including 0 and 1). After observing the proposer's decision, the responder may choose to accept or reject. If the responder accepts, the proposer keeps (1 − s) × $1 and the responder receives s × $1. If the responder rejects, both players receive 0. Assume that the responder always accepts when she is indifferent between accepting and rejecting. Suppose that both the proposer (Player P) and the responder (Player R) exhibit inequity aversion as specified in the model of Fehr and Schmidt (1999), with ap = aR = 2 and ẞp = ẞR = 0.6 (ap and ẞp are the parameters for player P; OR and BR are the parameters for player R). Suppose these preferences are commonly known to both players. Use backward induction to solve the subgame perfect Nash equilibrium.

Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter18: Auctions
Section: Chapter Questions
Problem 10MC
See similar textbooks
icon
Related questions
Question
Consider the following ultimatum game. In Stage 1, the proposer chooses a shares of $1 to offer to the responder. The shares can be any number between 0 and 1 (including 0 and 1). After observing the proposer's decision, the responder may choose to accept or reject. If the responder accepts, the proposer keeps (1 − s) × $1 and the responder receives s × $1. If the responder rejects, both players receive 0. Assume that the responder always accepts when she is indifferent between accepting and rejecting. Suppose that both the proposer (Player P) and the responder (Player R) exhibit inequity aversion as specified in the model of Fehr and Schmidt (1999), with ap = aR = 2 and ẞp = ẞR = 0.6 (ap and ẞp are the parameters for player P; OR and BR are the parameters for player R). Suppose these preferences are commonly known to both players. Use backward induction to solve the subgame perfect Nash equilibrium.
Transcribed Image Text:Consider the following ultimatum game. In Stage 1, the proposer chooses a shares of $1 to offer to the responder. The shares can be any number between 0 and 1 (including 0 and 1). After observing the proposer's decision, the responder may choose to accept or reject. If the responder accepts, the proposer keeps (1 − s) × $1 and the responder receives s × $1. If the responder rejects, both players receive 0. Assume that the responder always accepts when she is indifferent between accepting and rejecting. Suppose that both the proposer (Player P) and the responder (Player R) exhibit inequity aversion as specified in the model of Fehr and Schmidt (1999), with ap = aR = 2 and ẞp = ẞR = 0.6 (ap and ẞp are the parameters for player P; OR and BR are the parameters for player R). Suppose these preferences are commonly known to both players. Use backward induction to solve the subgame perfect Nash equilibrium.
Expert Solution
steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Recommended textbooks for you
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Microeconomic Theory
Microeconomic Theory
Economics
ISBN:
9781337517942
Author:
NICHOLSON
Publisher:
Cengage
Managerial Economics: Applications, Strategies an…
Managerial Economics: Applications, Strategies an…
Economics
ISBN:
9781305506381
Author:
James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:
Cengage Learning
Economics (MindTap Course List)
Economics (MindTap Course List)
Economics
ISBN:
9781337617383
Author:
Roger A. Arnold
Publisher:
Cengage Learning
Microeconomics
Microeconomics
Economics
ISBN:
9781337617406
Author:
Roger A. Arnold
Publisher:
Cengage Learning
Exploring Economics
Exploring Economics
Economics
ISBN:
9781544336329
Author:
Robert L. Sexton
Publisher:
SAGE Publications, Inc
SEE MORE TEXTBOOKS