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3. Two countries are disputing ownership of a nearby island, that each coun- try values at V. Each has two possible strategies: Invade or Compromise.

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3. Two countries are disputing ownership of a nearby island, that each coun- try values at V. Each has two possible strategies: Invade or Compromise. If both countries compromise, each gets a payoff of V/2. If one country invades and the other compromises, the invading country gets a payoft of V' and the compromising country gets (0. If both countries invade, there is a costly war and each country gets a payoff of X where X > V. A) Show this game in strategic form. B) Find a symmetric mixed-strategy Nash equilibrium for this game. C) The expected cost of a war is the probability of a war times its cost. As war gets more costly, in the symmetric mixed strategy Nash equilibrium, does the expected cost of a war increase or decrease? Explain. 3. Two countries are disputing ownership of a nearby island, that each coun- try values at V. Each has two possible strategies: Invade or Compromise. If both countries compromise, each gets a payoff of VV/2. If one country invades and the other compromises, the invading country gets a payoff of V' and the compromising country gets (. If both countries invade, there is a costly war and each country gets a payoff of X where X > V. A) Show this game in strategic form. B) Find a symmetric mixed-strategy Nash equilibrium for this game. C) The expected cost of a war is the probability of a war times its cost. As war gets more costly, in the symmetric mixed strategy Nash equilibrium, does the expected cost of a war increase or decrease? Explain.

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