Consider the Ultimatum Game, a two-player game often played in experimental economics labs. In the Ultimatum...

Consider the Ultimatum Game, a two-player game often played in experimental economics labs. In the Ultimatum Game, one player is given an amount of money and then instructed to give some arbitrary portion of it to an anonymous second player. The second player has the option of accepting the offer or rejecting it. If the second player rejects the offer, neither player gets anything. Now answer the following question if the First Player is given $100:

(a) According to traditional economic theory (which assumes that individuals are self-interested utility maximisers), what should the first player offer the second? (b) What does traditional economic theory suggest the second player should be willing to accept? (c) In experimental settings, the first player often offers the anonymous second player between 40% of the initial amount. Is this result consistent with theory? How can we explain the differences between theory and the experimental findings?

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Expert Solution

Rahul Sunny answered 11 months ago

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