Consider an interaction between a consultant (player 1) and an investor (player 2). The investor considers...

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Consider an interaction between a consultant (player 1) and an investor (player 2). The investor considers whether to construct a parking lot on her own land, but she is uncertain about its prof- itability. The investor believes that the returns are high with probability 2/3 and low with proba- bility 1/3. The game proceeds as follows. At the beginning the consultant investigates on demand for parking in the neighborhood, receiving a private signal about the exact returns. Then the con- sultant provides an advice to the investor, telling that high or low returns are to be expected (sending message H and L, respectively). The investor, listening to the consultant's advice but not observing his exact signal, chooses either to build a parking lot or not. The players' payoffs are determined as follows: If the investor builds a parking lot, she earns 2 in case of high returns but loses 3 in case of low returns. If the investor decides to forgo this project, she obtains a payoff of zero. The consultant's payoff is the sum of two components. He gets a payoff of 3 if the investor builds a parking lot, irrespective of its true returns. In addition, the investor gets a payoff of 1 if his advice is truthful (reflecting his career concern). (a) Represent this game in an extensive form by drawing a game tree. (b) Compute all of sequential equilibria in pure strategies. (c) Are any of the equilibria in part (b) rules out by the Cho-Kreps criterion? Explain. Consider an interaction between a consultant (player 1) and an investor (player 2). The investor considers whether to construct a parking lot on her own land, but she is uncertain about its prof- itability. The investor believes that the returns are high with probability 2/3 and low with proba- bility 1/3. The game proceeds as follows. At the beginning the consultant investigates on demand for parking in the neighborhood, receiving a private signal about the exact returns. Then the con- sultant provides an advice to the investor, telling that high or low returns are to be expected (sending message H and L, respectively). The investor, listening to the consultant's advice but not observing his exact signal, chooses either to build a parking lot or not. The players' payoffs are determined as follows: If the investor builds a parking lot, she earns 2 in case of high returns but loses 3 in case of low returns. If the investor decides to forgo this project, she obtains a payoff of zero. The consultant's payoff is the sum of two components. He gets a payoff of 3 if the investor builds a parking lot, irrespective of its true returns. In addition, the investor gets a payoff of 1 if his advice is truthful (reflecting his career concern). (a) Represent this game in an extensive form by drawing a game tree. (b) Compute all of sequential equilibria in pure strategies. (c) Are any of the equilibria in part (b) rules out by the Cho-Kreps criterion? Explain.

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het B denotes the imuestarn buitd the park... View the full answer