The owners and the players’ union are negotiating over a contract for the upcoming hockey season. In October, the owners will make an offer to the union. If they reach an agreement they will share $50 of revenues. So, for example, if the owners offer the players $10 in October and the players accept, then the players receive $10 and the owners keep the remaining $40. If the players reject the offer then they go on strike and negotiations resume in November. In November the players will make an offer to the owners. If they reach an agreement they will share just $20 of revenues (revenues have fallen because of the strike). So, for example, if the players offer the owners $10 in November and the owners accept, then the owners receive $10 and the players keep the remaining $10. If the owners reject the November offer then the strike continues for the rest of the season and the players and the owners both receive zero.
a. What would you expect to happen in November if there is a strike in October?
b. Use backwards induction to find what would happen in October. For simplicity, assume that if someone is indifferent between accepting or rejecting an offer, they will accept the offer.