3. Two individuals are involved in a synergistic relationship. If both individuals devote more effort to the relationship, they are both better off. Specifically, an effort level is a nonnegative number, and player 1's payoff function is e₁(1+€₂-e₁), where ei is player i's effort level. For player 2 the cost of effort is either the same as that of player 1, and hence her payoff function is given by e2(1+e₁ - e₂), or effort is very costly for her in which case her payoff function is given by e₂(1 + e₁ — 2e2). 1 Player 2 knows player 1's payoff function and whether the cost of effort is high for herself or not. Player 1, however, is uncertain about player 2's cost of effort. He believes that the cost of effort is low with probability p, and high with probability 1 - p, where 0 < p < 1. Find the Bayesian Nash equilibrium of this game as a function of p.
3. Two individuals are involved in a synergistic relationship. If both individuals devote more effort to the relationship, they are both better off. Specifically, an effort level is a nonnegative number, and player 1's payoff function is e₁(1+€₂-e₁), where ei is player i's effort level. For player 2 the cost of effort is either the same as that of player 1, and hence her payoff function is given by e2(1+e₁ - e₂), or effort is very costly for her in which case her payoff function is given by e₂(1 + e₁ — 2e2). 1 Player 2 knows player 1's payoff function and whether the cost of effort is high for herself or not. Player 1, however, is uncertain about player 2's cost of effort. He believes that the cost of effort is low with probability p, and high with probability 1 - p, where 0 < p < 1. Find the Bayesian Nash equilibrium of this game as a function of p.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:3. Two individuals are involved in a synergistic relationship. If both individuals
devote more effort to the relationship, they are both better off. Specifically, an
effort level is a nonnegative number, and player 1's payoff function is e₁(1+€₂-e₁),
where ei
is player i's effort level. For player 2 the cost of effort is either the same as
that of player 1, and hence her payoff function is given by e2(1+e₁ - e₂), or effort
is very costly for her in which case her payoff function is given by e₂(1 + e₁ — 2e2).
1
Player 2 knows player 1's payoff function and whether the cost of effort is high for
herself or not. Player 1, however, is uncertain about player 2's cost of effort. He
believes that the cost of effort is low with probability p, and high with probability
1 - p, where 0 < p < 1. Find the Bayesian Nash equilibrium of this game as a
function of p.
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