Return to the story of Monica and Nancy from Exercise S10. After some additional professional training, Monica is more productive on the job, so that the joint profits of their company are now given by 5m 4n mn, in tens of thousands of dollars. Again, m is the amount of effort put into the business by Monica, n is the amount of effort put in by Nancy, and the costs of their efforts are m2 and n2 to Monica and Nancy respectively (in tens of thousands of dollars). The terms of their partnership still require that the joint profits be split equally, despite the fact that Monica is more productive. Assume that their effort decisions are made simultaneously.

1) What is Monica's best response if she expects Nancy to put in an effort of n = 4/3? 2)What is the Nash equilibrium of this game? 3)Compared with the old Nash equilibrium found in Exercise S10, part (c), does Monica now put in more, less, or the same amount of effort? What about Nancy? 4)What are the final payoffs to Monica and Nancy in the new Nash equilibrium (after splitting the joint profits and accounting for the costs of their efforts)? How do these payoffs compare to the payoffs to each of them under the old Nash equilibrium? In the end, who receives more benefit from Monica's additional training?

Answer rating: 100% (QA)

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