Question
2) Two individuals, A and B, are working on a joint project. Each one can exert either high effort or low effort. If both players
2) Two individuals, A and B, are working on a joint project. Each one can exert either high effort or low effort. If both players exert low effort, the outcome of the project is of low quality and each one receives 50. If one or both exert high effort, the outcome of the project is of high quality and each one receives 100. The cost to provide high effort is 30 for an individual. The cost to provide low effort is 0.
a) Assume individuals A and B choose simultaneously if they exert high or low effort. Represent this game in matrix form. Find the Nash equilibria of this game. (15 marks)
b) Assume now the following timing: First, individual A chooses high or low effort. Then, individual B observes A's choice and chooses high or low effort. Represent this game in a game tree and find the Subgame Perfect Equilibrium. (15 marks)
c) Compare your answers in a) and b) and discuss.(10 marks)
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