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Alice and Bob are entering into a joint venture that will yield $500 mln., but they must negotiate how they split the profit first. Assume
Alice and Bob are entering into a joint venture that will yield $500 mln., but they must negotiate how they split the profit first. Assume that at most three rounds of bargaining are allowed. In the first round, Alice claims her share A [0, 1] at zero cost. Bob either accepts (ending the game and getting B = 1 A) or rejects. In the latter case, the game moves into the second round. In the second round, Bob claims his share B [0, 1] incurring the cost of $10 mln. Alice either accepts (ending the game and getting A = 1 B ) or rejects. In the latter case, the game moves into the third (last) round. In the third round, Alice claims her share A [0, 1] incurring the cost of $C [0, 500) mln. Bob either accepts (ending the game and getting B = 1 A) or rejects. In the latter case, the joint venture is cancelled, and the players get nothing. (a) What is the equilibrium in this bargaining game? (b) What is the equilibrium outcome if C = 0? (c) What is the equilibrium outcome if C = 100
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