(20 points) Consider a 2 period bargaining problem. There are two players 1 and 2 -...

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(20 points) Consider a 2 period bargaining problem. There are two players 1 and 2 - who have to share a prize worth $1. However, unlike what we have seen in class, the player now have different discount factors. The discount factor for player 1 is 81, and the discount factor for player 2 is 82. The timming of the game is as follows: first player 1 makes and offer (x1, x2), which is a division of $1. Then player 2 can either accept or reject. If player 2 accepts, the game ends. On the other hand, if player 2 rejects, then player 2 gets a chance to make a counter offer (y1, y2). Player 1 then either accepts or rejects, If player 1 accepts, the game ends and the players get their respective y, i = 1,2. If player 1 rejects the game ends and each gets 0. Find a SPE of the game. (20 points) Consider a 2 period bargaining problem. There are two players 1 and 2 - who have to share a prize worth $1. However, unlike what we have seen in class, the player now have different discount factors. The discount factor for player 1 is 81, and the discount factor for player 2 is 82. The timming of the game is as follows: first player 1 makes and offer (x1, x2), which is a division of $1. Then player 2 can either accept or reject. If player 2 accepts, the game ends. On the other hand, if player 2 rejects, then player 2 gets a chance to make a counter offer (y1, y2). Player 1 then either accepts or rejects, If player 1 accepts, the game ends and the players get their respective y, i = 1,2. If player 1 rejects the game ends and each gets 0. Find a SPE of the game.

Answer rating: 100% (QA)

We can solve this using Backward Induction Stage 2 Player 1s Decision if Player 2 rejects Player ... View the full answer