3 . Individual Problems 15-4

After graduation, you enter salary negotiations for your first job. Suppose the potential employer (employer A) has two choices: to offer you a high salary or to offer you a low salary. You may then accept or reject whatever offer is made. The payoffs, as well as the decision tree, are depicted in the following figure.

Employee Accept

Employee: 100

Employer A: 50

High Offer

Employee Reject

Employee: 0

Employer A: 0

Employer

Employee Accept

Employee: 50

Employer A: 100

Low Offer

Employee Reject

Employee: 0

Employer A: 0

Assume this is a sequential game.

If employer A offers a low salary, you, as the employee, are best served by(accepting or rejecting)the offer.

In this case, you would earn a payoff of(50, 100, or 0), and employer A would earn a payoff of(50, 0, or 100).

Alternatively, if employer A offers a high salary, you are best served by(accepting or rejecting)the offer.

In this case, you would earn a payoff of(100, 0, or 50), and employer A would earn a payoff of(0, 100, or 50).

With this information, employer A will choose to make a(high or low)offer, since it will yield a higher payoff for him, based on what you (the employee) will subsequently choose.

Suppose you have a competing job offer from employer B. Accepting this job offer gives a payoff of 75. During your negotiations with employee A, you have the option of taking this offer from employer B, and employer A is aware of this offer (as well as the payoff to you). Given this competing offer, the negotiation with employer A is depicted in the following figure:

Employee Accept

Employee: 100

Employer A: 50

High Offer

Employee Reject

Employee: 75

Employer A: 0

Employer

Employee Accept

Employee: 50

Employer A: 100

Low Offer

Employee Reject

Employee: 75

Employer A: 0

True or False: With this competing job offer, your threat to reject employer A's offer, if it is low, is now credible.

4 . Individual Problems 15-5

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 $2 million). Each side can choose to hire, or not hire, an expensive labor lawyer (at a cost of $300,000) who is effective at preparing the proposal in the best light. If neither hires a lawyer 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 four fifths, or 0.8, of the time.

Use the given information to fill in theexpected payoff, in dollars, for each cell in the matrix. (Hint: To find the expected payoff, multiply the probability of winning by the dollar amount of the payoff. Be sure to account for lawyer costs, which are incurred with certainty if a lawyer is hired.)

Management (M)

No LawyerLawyer

Labor (L)No LawyerL:_________M:_________L:_________M:_________

Laywer.L:_________M:_________L:_________M:_________

The Nash equilibrium for this game is for Management to(hire or not hire)a lawyer, and for Labor to(not hire or hire)a lawyer.