Alex is bringing a business opportunity to Bobby that would generate 100K. Before they agree to...

Alex is bringing a business opportunity to Bobby that would generate 100K. Before they agree to be partners, they need to agree on how to split profits. They both have an outside option of earning 10K (that is, each could choose not to join the partnership and still earn 10K in another business, alone). In this quest you will explore various ways in which they could bargain over profits.

Deterministic game

Alex, when sharing this opportunity with Bobby, makes an offer to split the profits by specifying a sum A for Alex and a sum B for Bobby (both A and B are between 0 and 100, i.e in thousands of dollars). This is a one-time offer that Bobby can either accept (and then they are partners) or reject (and then they go their separate ways). Model this game and find the subgame perfect equilibrium.

Now suppose that if Bobby can make a counteroffer after rejecting Alex’s offer. Alex can then accept (and they are partners) or reject (and then they go their separate ways). Model this game, and find the subgame perfect equilibrium.

Expert Solution

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Rahul Sunny answered 2 years ago

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