Two US states, New California and North Arizona, are negotiating over the distribution of water from a river. Assume the total amount of the river is 100, and each state wants as much as possible. The river starts in North Arizona, so they make an offer to New California about how to divide the river. New California can accept or reject the offer. They can also ask the federal government to decide the issue. Both states expect that the federal government would give New California 60% of the waters and North Arizona the remainder. However, the delay of asking the federal government to decide the issue would cost each state utility worth 5% of the river waters. Draw a bargaining game to represent this situation. Solve the game to find its subgame perfect Nash equilibrium. How much water would each state get?

Bargaining theory is a theory in the Nash equilibrium and helps analyze a game. Bargaining power can…

Answered: Two US states, New California and North…

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Two US states, New California and North Arizona, are negotiating over the distribution of water from a river. Assume the total amount of the river is 100, and each state wants as much as possible. The river starts in North Arizona, so they make an offer to New California about how to divide the river. New California can accept or reject the offer. They can also ask the federal government to decide the issue. Both states expect that the federal government would give New California 60% of the waters and North Arizona the remainder. However, the delay of asking the federal government to decide the issue would cost each state utility worth 5% of the river waters. Draw a bargaining game to represent this situation. Solve the game to find its subgame perfect Nash equilibrium. How much water would each state get?

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