8.7 Return to the game with two neighbors in Problem 8.5. Continue to suppose that player i’s average benefit per hour of work on landscaping is 10 ! li þ

lj 2

:

Continue to suppose that player 2’s opportunity cost of an hour of landscaping work is 4. Suppose that player 1’s opportunity cost is either 3 or 5 with equal probability and that this cost is player 1’s private information.

a. Solve for the Bayesian–Nash equilibrium.

b. Indicate the Bayesian–Nash equilibrium on a best-response function diagram.

c. Which type of player 1 would like to send a truthful signal to player 2 if it could? Which type would like to hide his or her private information?