Economic questions - Assignment Example

ect an offer of zero units, but at an offer of one unit they will accept it if they are self-interested and risk-neutral because it is one more unit than they would be getting if they rejected the one unit offer. c) The subgame perfect Nash equilibrium does not match the actual behavior at all. The different assumptions we can make in part a to explain this is basically that if people feel that the amount they are getting is unfair, they will try to hurt the other person as well as themselves by making sure nobody gets anything.

2- In this situation, the drug-dealer’s best option is to go to the park because if the officer is at the park the dealer will still make 50 deals whereas if they are both on the street he will only make 30 deals. The officer can do better if she stays on the street but knows the drug dealer will do better at the park given that they both choose the same place. Therefore, the most likely payoff would probably be the bottom right square where 50 deals are made and 120 are stopped. However, Player Two has a bigger payoff when they are at different locations.

Because of this, a mixed-strategy Nash equilibrium shows that the dealer would average about 100 deals, meaning the officer would be able to stop an average of 70 deals. If Player Two is self-regarding, Player One will benefit more from sending payment if Player Two delivers (P,D). In this situation Player One will also make a profit if they don’t send payment and Player Two delivers (NP, D). In the other two situations Player One & Player Two will benefit equally (NP,K) and Player One will lose in the payment – non delivery situation (P,K).

If Player Two is reciprocal, Player Two stands to benefit more from a payment and delivery situation (P,D), as well as benefiting more from a payment and non-delivery situation and a non-payment, non-delivery situation (NP, K). The only situation where Player one benefits more is where they don’t pay but the item is still delivered (NP,