Question
5. Do question 8 of the textbook on pp. 242-243 with the following modification. The confectioner can buy a less noisy blender that costs
5. Do question 8 of the textbook on pp. 242-243 with the following modification. The confectioner can buy a less noisy blender that costs $50. With this, the physician gets a production value of $1,900 without shutting down the confectioner. Use the following notation to derive the outcome: Let Player 1 be the physician and Player 2 be the confectioner. Let x (0, 1) represent the set of outcomes for the confectioner operating. x = 0 represents the outcome where the confectioner does not operate while x = 1 is the outcome where the confectioner operates. Let y [0,1] represent the set of outcomes for the confectioner buying the less noisy blender. y = 0 represents the outcome where the confectioner does not buy it while x = 1 is the outcome where the confectioner buys the new blender. t represents the payment made by the physician to the confectioner. If payments are in reverse, i.e., the confectioner pays the physician, t <0. The payoffs to each player given x, y and I are as follows u (x, y, t) $2,000(1-x)+ $1,900xy-t u2(x,y,t) = $400x-$50y+t The joint payoff given x and y is as follows v(x,y) = $2,000-$1,600x-$50y+$1,900xy. The bargaining weights for each player are = = a. Fill in the payoffs to each player and the joint payoffs for each value of x and y in the table below. X y 0 0 0 1 1 0 1 1 #1 112 v = 1 + 2 b. Find the outcome in terms of x and y' that maximizes the joint payoff. Consider the legal default rule that is specified in part a) of the question on p. 243 where the confectioner has the right to operate. c. What is the disagreement payoff for each player, (d, d)? d. What is the surplus at the efficient outcome obtained in part b). e. Determine the value of t that will lead to the efficient outcome obtained in part b). f. What are the payoffs to player 1 and player 2? Suppose the legal rules are the ones laid out in part b) of the question on p. 243 where the confectioner cannot use a blender without obtaining the physician's permission. g. Redo parts c) to f) under the new rules. h. Compare the payoffs to each player under each legal default rule. Comment on your findings. Q
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