FEIZHEN MAE B.

RODELAS BSACC 1-Y2-1 MECO211

CHAPTER 15 INDIVIDUAL PROBLEMS ASSIGNMENT
Short Answer Questions

15-1 To Vote or Not to Vote

Mr. and Mrs. Ward typically vote oppositely in elections and so their votes “cancel each other out.” They each
gain two units of utility from a vote for their positions (and lose two units of utility from a vote against their
positions). However, the bother of actually voting costs each one unit of utility. Diagram a game in which they
choose whether to vote or not to vote.

ANSWER:

Mrs. Ward
Mr. Ward To Vote Not to Vote
To Vote -1, -1 1, -2
Not to Vote -2, 1 0, 0

15-2 To Vote or Not to Vote Part II

Suppose Mr. and Mrs. Ward agreed not to vote in tomorrow’s election. Would such an agreement improve
utility? Would such an agreement be an equilibrium?

ANSWER:

The Nash equilibrium of this game is for both to vote. This is the worst of all possibilities as total payoffs are
minimized here (this game is a prisoners’ dilemma). In fact, the outcome with the highest total payoffs is for the
couple not to vote. Therefore, an agreement not to vote would improve utility. However, because cheating on the
agreement is so hard to detect, it is easy to cheat and thus difficult to maintain the agreement.

15-3 Shirk or Work

Microsoft and a smaller rival often have to select from one of two competing technologies. The rival always
prefers to select the same technology as Microsoft (because compatibility is important), while Microsoft always
wants to select a different technology from its rival. Describe the equilibrium of this game.

ANSWER:

Microsoft (M) and the small rival (R) are two players. They can either compete or work together by using the same
technology.

There are two technologies in the market, A and B.

M wants to compete by using different technologies. But R wants to use the same technology as M.

Their payoff matrix is:

MICROSOFT
A B
RIVAL A 50, 25 75, 0
B 75, 0 50, 25
15-4 Salary Negotiation

The following represents the potential outcomes of your first salary negotiation after graduation:

Employer

Low Salary Offer High Salary Offer

Employee Walks Employee Accepts Employee Walks Employee Accepts

Employer gets 0 Employer gets 100 Employer gets 0 Employee gets 100
Employee gets 0 Employee gets 75 Employee gets 0 Employer gets 75

Assuming this is a sequential move game with the employer moving first, indicate the most likely outcome. Does
the ability to move first give the employer an advantage? If so, how? As the employee, is there anything you
could do to realize a higher payoff?

ANSWER: In the given negotiation, both the employer and employee get the same amount from both the low
salary offer and the high salary offer. Then, the employer will offer a low salary and accept the employees. The
employer has a first mover advantage by forcing the movement down to the low salary offer side. The employee
can communicate a clear credible commitment to walking if the salary offer is low.

15-5 Renegotiating Employment Contracts

Every year, management and labor renegotiate a new employment contract by sending their proposals to an
arbitrator who chooses the best proposal (effectively giving one side or the other $1 million). Each side can choose
to hire, or not hire, an expensive labor lawyer (at a cost of $200,000) who is effective at preparing the proposal in
the best light. If neither hires lawyers or if both hire lawyers, each side can expect to win about half the time. If
only one side hires a lawyer, it can expect to win three-quarters of the time.

A. Diagram this simultaneous move game.

Since there are 50% chances of winning when they do not hire the lawyer, thus expected payout will be
$500,000 (50% of $1 million). But when they hire the lawyer then the winning percentage is 50% but, in
this case, they must pay a $200000 fee. Thus, payout will be $500000 - $200000 = $300,000. If one hires
the lawyer, then the winning probability is 75% but they have to pay the fee of $200000. Thus, the payout
will be [(75% of $1000000) -$200000] = $550000. While the payoff of the other side who do not hire a
lawyer is (25% of $1000000) = 250000.

Management
No Lawyer Lawyer
No Lawyer 500,000 ; 500,000 250,000 ; 550,000
Labor Lawyer 550,000 ; 250,000 300,000 ; 300,000

B. What is the Nash Equilibrium of the game?

The Nash equilibrium indicates that every person involved in the game makes the good decision with
having the knowledge that what other players will do. The Nash equilibrium will exist if both hire the
lawyer or when both don’t hire the lawyer.

C. Would the sides want to ban lawyers?

Since greater profit can be seen when there is no lawyer, thus, lawyer should be banned by both sides.