Arslan is considering investing in a start-up launched by Nguyen. If Arslan decides to invest, it...

 

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Arslan is considering investing in a start-up launched by Nguyen. If Arslan decides to invest, it will cost him $1000. Nguyen is confident that he can generate profits three times the initial investment (i.e., $3000) if Arslan invests. As part of the agreement, Nguyen promises to share half of the profits with Arslan. However, the promise is not legally binding, so Arslan has to take into account the possibility that Nguyen may retain all of the profits if it is in his best interest to do so. If Arslan does not invest, Nguyen cannot launch the start-up. In this case, both receive payoffs of zero. Suppose for now that each person's payoff is equal to the net amount they receive. a) Draw the game tree. What are possible strategies for each player? b) What are the optimal strategies for Arslan and Nguyen? What are the equilibrium path and payoffs? Fortunately, Nguyen is an ethical and responsible individual. If Arslan decides to invest, Nguyen will suffer a disutility equivalent to $2000 if he does not return half of the profits to Arslan. c) Draw the new game tree. d) What are the SPNE strategies, path, and outcome? Suppose now that Nguyen tells Arslan that there is a 10% chance that his investment may fail. If the investment fails, profits will be $0. If the investment succeeds, then Nguyen will suffer a disutility equivalent to $2000 if he does not return half of the profits to Arslan. e) Draw the new game tree. f) What is the SPNE of the new game? Arslan is considering investing in a start-up launched by Nguyen. If Arslan decides to invest, it will cost him $1000. Nguyen is confident that he can generate profits three times the initial investment (i.e., $3000) if Arslan invests. As part of the agreement, Nguyen promises to share half of the profits with Arslan. However, the promise is not legally binding, so Arslan has to take into account the possibility that Nguyen may retain all of the profits if it is in his best interest to do so. If Arslan does not invest, Nguyen cannot launch the start-up. In this case, both receive payoffs of zero. Suppose for now that each person's payoff is equal to the net amount they receive. a) Draw the game tree. What are possible strategies for each player? b) What are the optimal strategies for Arslan and Nguyen? What are the equilibrium path and payoffs? Fortunately, Nguyen is an ethical and responsible individual. If Arslan decides to invest, Nguyen will suffer a disutility equivalent to $2000 if he does not return half of the profits to Arslan. c) Draw the new game tree. d) What are the SPNE strategies, path, and outcome? Suppose now that Nguyen tells Arslan that there is a 10% chance that his investment may fail. If the investment fails, profits will be $0. If the investment succeeds, then Nguyen will suffer a disutility equivalent to $2000 if he does not return half of the profits to Arslan. e) Draw the new game tree. f) What is the SPNE of the new game?

Answer rating: 100% (QA)

a Here is the game tree for the initial scenario without considering the ethical and responsible behavior of Nguyen Invest 1000 Dont Invest 0 Profit 3... View the full answer