Mrs. Jones is seeking a divorce from Mr. Jones. Under the terms of her prenuptial agreement,...

Mrs. Jones is seeking a divorce from Mr. Jones. Under the terms of her prenuptial agreement, her settlement will be $100,000 if she can prove that Mr. Jones has had an affair, but $50,000 otherwise. Her lawyer, acting as her agent, can prove the affair only if he hires a private detective for $10,000, which will come out of the lawyer's fee. Mrs. Jones has the option of paying her lawyer a flat fee of $20,000 regardless of the outcome of the case or 1/3 of the settlement. The lawyer will hire the private detective only if it is profitable for him to do so.

1. Whose is the first move?

2. Draw a tree diagram for this "game in extensive form".

3. Express the strategies in normal form.

4. Which payment method will enable Mrs. Jones to win the case? (Use backward induction.)

5. Can you think of any other way (besides the flat fee and the 1/3 share) that Mrs. Jones might compensate the lawyer so as to get the best outcome for herself?

Solutions

Expert Solution

1. Mrs. jones is the first move whether to hire detective to proves affair or not.

2. image uploaded

3.Strategies in normal form:

Mrs. Jones Decides whether she go for proves to affair of mr.john or not to go for proves affair

* If She go for proves affair of mr.john so now she has to decide whether appoint detective or not.

* if she appoint detective she has to pay $10000 to detective.

* if after appointing detective proves affair so she get stellement $100000 out of which she has to choose payment method to lawyer either $20000 or $33333.

* if she appoint detective but affair not proved then she get $50000 as stellement and paid $20000 or $16667 to lawyer

*If she decided not to proves affair then she get $50000 as stellement and paid $20000 or $16667 to lawyer.

5.Yes if Mrs. john decide to pay 25000 in case of affair proved and $17000 in case of affair not proved.

In case affair proved she had to pay either $33333 or $20000 so it is better that she aggred on $25000 which is beneficail for her because it is lower that $33333 but more than 20000 so lawyer also agrred on this.

In case affair not proved she had to pay either $16667 or $20000 so it is better that she aggred on $17000 which is beneficail for her because it is more that $16667 but less than 20000 so lawyer also agrred on this.

ekkarill92 answered 2 years ago

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