Question

1. Suppose we played the following game in the lab. There are two players who have 10 dollars to divide. There are two stages. In stage 1, player A proposes an offer to divide the $10 between herself and player B. Player B can accept or reject the offer. If player B accepts, the offer is implemented. If player B rejects the game moves to stage 2. In stage 2, there is only $8 to divide. Player A proposes a division of the $8. Player B must accept the offer, which is then implemented. a) (5 points) What is the equilibrium to this game? b) (5 points) What do you think would happen if the game were played as an experiment? Explain your answer.

Answer 1

A. Using backward induction game would be solved. Player A will propose a division (9.9, 0.1) in the first stage and player B will accept it. Because if B does not accept then game will reach in stage 2 and (8,0) will be offered and this would be the only payoff. So using backward induction player B will accept the offer even if he gets any small positive value.

b. Eventaugh it is experimented, output and payoff would Remain same.