Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![Alice and Bob negotiate over a deal which generates a surplus of 10 (payoffs in
thousands of dollars). They negotiate as in the standard Rubinstein Stahl
bargaining model from Chapter 11- Alice offers x, € [0,10] representing her share
of the surplus, Bob accepts or rejects, if Bob rejects then the roles reverse and Bob
offers x2 € [0,10], and so on – with a twist: There is no time discount. Instead, the
size of the surplus remains the same (so, offers are always from 0 to 10), but for
every rejection, both players' payoffs are reduced by 1 to pay for lawyer fees. (Ex: if
there are two rejections and then an acceptance of an offer of x3 = 5, then the
payoffs are 3 and 3).
a. Solve the SPNE for the ultimatum game (T=1).
Bob accepts any offer x, s 10. Alice sets x,
= 10.
b. Describe the SPNE outcome (does agreement occur, when, who offers, what is
the offer) for T=3.
c. Describe the SPNE outcome for T=4.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F77914a6f-d94d-4e53-9f8c-c34eddc60977%2Feaeeed64-a49d-4cc2-a78f-7c7f70f015aa%2Ftegew3r_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Alice and Bob negotiate over a deal which generates a surplus of 10 (payoffs in
thousands of dollars). They negotiate as in the standard Rubinstein Stahl
bargaining model from Chapter 11- Alice offers x, € [0,10] representing her share
of the surplus, Bob accepts or rejects, if Bob rejects then the roles reverse and Bob
offers x2 € [0,10], and so on – with a twist: There is no time discount. Instead, the
size of the surplus remains the same (so, offers are always from 0 to 10), but for
every rejection, both players' payoffs are reduced by 1 to pay for lawyer fees. (Ex: if
there are two rejections and then an acceptance of an offer of x3 = 5, then the
payoffs are 3 and 3).
a. Solve the SPNE for the ultimatum game (T=1).
Bob accepts any offer x, s 10. Alice sets x,
= 10.
b. Describe the SPNE outcome (does agreement occur, when, who offers, what is
the offer) for T=3.
c. Describe the SPNE outcome for T=4.
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