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Suppose two neighbours (1 & 2) are deciding upon how many hours H1 and H2 to spend for keeping their common lawn tidy. Average benefits
Suppose two neighbours (1 & 2) are deciding upon how many hours H1 and H2 to spend for keeping their common lawn tidy. Average benefits are B1 = 10 - H1 + H2 and B2 = 10 - H2 + H1 per hour, implying that neighbour's hours increase but own hours decrease benefit as they decrease leisure time. Opportunity costs of lawn hours are constant c1 = C2 = $5. a) Calculate the Nash equilibrium (NE) hours for both neighbours and draw their best-response functions on a graph indicating the NE. b) Now suppose neighbour 1 could be either low-cost (c1L = $2) or high-cost (c1H = $8) type with equal probability and this private information is hidden from neighbour 2, whose cost remains at c2 = $5. Calculate the incomplete information or Bayesian-Nash equilibrium (BNE) and the full-information NE (FINE) number of hours. c) Draw the best-response functions on a graph and clearly indicate the values of the BNE and FINE solutions. A big and clear diagram please. d) For the high-cost type (HIHC), calculate the net benefits or profits (T1HC) for both BNE and FINE hours to determine if neighbour 1 has incentive to disclose his type to neighbour 2. e) For the low-cost type (H1LC), calculate the net benefits or profits (TLC) for both BNE and FINE hours to determine if neighbour 1 has incentive to keep his type hidden from neighbour 2
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