Question

On each of two days, Alan and Daisy can jointly undertake a project that yields a profit of $150 per day. They alternately make proposals (at most one per day), starting with Daisy, about how to split this amount. If a proposal is rejected, they don’t work on the project that day; if it is accepted, the agreement applies to that day and the remaining day (if any) . Suppose, first, that both Alan and Daisy have no outside option (they can earn nothing outside). They both want to maximize their own total income over the two days.

(a) Determine the outcome (how they will split the profit) of this bargaining situation, carefully explaining your logic. (b) Now suppose that Daisy can earn $70 a day outside (but Alan still cannot earn anything outside). Determine the bargaining outcome now.

(c) Explain why the bargaining outcomes are different in parts a and b above.

Answer 1

ANSWER:

(a)

On th first day the two of them don't have any external choice to work , they will frantically need to work in the project to bring in cash . So they will settle on a choice mutually that the two of them concurs and wipe out the opportunity of dismissal of the proposition. Hence they will split the profit $150 between them. So each of them will get $75.

(b)

Presently Daisy have an external alternative of $70 yet Alan actually can't procure anything outside. So urgency of being essential for the project for Alan is a lot higher than Daisy. So Daisy will utilize this occasion to guarantee higher sum than $75 that she was getting first day. Also, If Alan rejects that offer then he will be left out nothing. But Daisy would at present have $70. So It is probably for Alan to acknowledge Daisy's proposition.

(c)

Here the fundamental purpose behind the various results are Rational thinking of a Person. As the two of them needed to amplify their own absolute pay they decided to be rational about it. On the first day as the two of them didn't have any salary outside they were reliant at the task so made a reasonable arrangement between them with the goal that nobody whines about it. After that The circumstance changed following day when Daisy had salary outside ,she will undoubtedly make any reasonable deal any longer so she requested more cash than equivalent distribution. Alan realized that in the event that he disagree with the proposition, at that point Daisy will in any case pick up $70 from outside yet he would left with zero. So the main discerning alternative for him was to go with the proposal. Due to these reasons bargaining outcomes are different in parts a and b above.

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