Question
Fred and Wilma are getting divorced. They have a $100,000 estate to divide between them. Hiring a lawyer costs $10,000. If they settle (50/50) without
- Fred and Wilma are getting divorced. They have a $100,000 estate to divide between them. Hiring a lawyer costs $10,000. If they settle (50/50) without the lawyers, each gets $50,000 (the lower right cell).
Fred (on left side of graph)
Wilma (on top side of graph)
| Lawyer | No Lawyer | |
| Lawyer | 40,000 40,000 | 60,000 30,000 |
| No Lawyer | 30,000 60,000 | 50,000 50,000 |
If they both hire lawyers, they achieve the same 50/50 split but each must pay the lawyers fee. If only one person hires a lawyer then that person does better than the 50/50 split because of better legal advice; that person has to pay their lawyer’s fees. The matrix above represents the possible settlement outcomes.
- What is meant by a dominant strategy?
- Do Fred and Wilma each have a dominate strategy? Explain.
- What is the outcome (the Nash Equilibrium) of this divorce settlement game? i.e. what do Fred and Wilma choose to do and what do they each gain?
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A dominant strategy in game theory refers to a course of action that provides the best outcome for a ...
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
