ECONOMICS W/CONNECT+20 >C<
20th Edition
ISBN: 9781259714993
Author: McConnell
Publisher: MCG CUSTOM
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Chapter 8, Problem 10DQ
To determine
Self-interest behavior.
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Suppose it is a well-known fact that among ten-year old Ford F-150s, half the trucks are good and half of them are lemons. Suppose that it is also known to all parties that a good truck is worth $8,000 to current owners and $10,000 to potential buyers. A bad truck, on the other hand, is only worth $1,000 to current owners and $2,000 to potential buyers.
Throughout, assume that buyers are risk-neutral.
4) Suppose that after much haggling, the current owner is willing to let her truck go for $6,000. What is the most likely implication?
a) The truck is a lemon.
b) The buyer is an excellent negotiator.
c) It's a mutually beneficial transaction.
7
2. Consider the ultimatum game, where player 1 makes a take-it-or-leave-it offer to player 2,
but suppose that player 2 is one of two types:
with probability p, player 2 is a "standard" type, who maximizes his utility as usual;
with probability 1 - p, player 2 is a "crazy" type, who accepts an offer if and only if
the offer gives player 2 at least fraction q of the surplus.
Player 1 does not know the type of player 2.
In this game, a strategy profile must specify strategies for both player 1 and the standard type
of player 2 (note that the strategy of the crazy type of player 2 is given).
For every pair (p, q) E (0,1] x (0,1], find all strategy profiles where player 1 and the
standard type of player 2 are both maximizing their expected utility, given their opponent's
strategy.
Hint: First, figure out the best responses for the standard type of player 2. Then, to find
player l's best response to these strategies for various values of (p, q), start by writing down
the possible expected…
Chapter 8 Solutions
ECONOMICS W/CONNECT+20 >C<
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