Problem 3 Suppose you and your class mate have to do a group assignment. Both of you can decide to work or shirk. If you both work, then both will get a good mark but both incur the cost of working. If one person works, you get a bad mark but the person who shirked will not have to put in the effort. If both shirk then the students will get an even worse mark but do not have to put in effort. The following table represents the individuals' utilities (as always the first number is the payoff of the row player): you work shirk classmate work 4,4 5,1 shirk 1,5 2,2 e) Suppose both students are inequality averse and lose half a unit of utility for each unit difference in payoffs. In other words u(x, y) = x - - (ay)/2. Show the payoff table with the psychological payoffs. Find all pure-strategy Nash equilibria and discuss.

Problem 3 Suppose you and your class mate have to do a group assignment. Both of you can decide to work or shirk. If you both work, then both will get a good mark but both incur the cost of working. If one person works, you get a bad mark but the person who shirked will not have to put in the effort. If both shirk then the students will get an even worse mark but do not have to put in effort. The following table represents the individuals' utilities (as always the first number is the payoff of the row player): you work shirk classmate work 4,4 5,1 shirk 1,5 2,2 e) Suppose both students are inequality averse and lose half a unit of utility for each unit difference in payoffs. In other words u(x, y) = x - - (ay)/2. Show the payoff table with the psychological payoffs. Find all pure-strategy Nash equilibria and discuss.