Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 3 An airline severely damages identical antiques purchased by two different travellers. The airline manager is willing to compensate them for the loss of

Question 3

An airline severely damages identical antiques purchased by two different travellers. The airline manager is willing to compensate them for the loss of the antiques. The manager doesnt know the actual value of the antiques but he knows that they are individually worth at least $180 and not more than $300. He knows that they can exaggerate the antiques value, so he decided to act as follow: He placed each one of the two travellers in a different room and asked them tell him their estimate value of the antique, as any value between $180 and $300. However, there are a couple of caveats:

  • If both travellers say the same value, he will refund each one of them that amount.
  • If they say different values, he will know that one of them is lying. He will pay both of them the lower value and reward the traveller who said the lower price by $5 for honesty, and punish the one who said the higher price with a $5 fine.

  1. Describe the above game: Who are the players? What are each players strategies? What are the payoffs? What are each players preferences?
  2. What is the Nash equilibrium of this game (what value will each one of them say to the airline manager in equilibrium)? Describe the process that got you to this solution in terms of Best Responses.
  3. Is it an efficient solution?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Accounting

Authors: Donald E. Kieso, Jerry J. Weygandt, And Terry D. Warfield

13th Edition

9780470374948, 470423684, 470374942, 978-0470423684

More Books

Students also viewed these Accounting questions