The State of California (Player 1) wants to build a Hyperloop from Downtown LA to Santa Monica, CA. The State wants to identify the best strategy for funding the project. One consideration is; if the State takes any federal it must not take any private money. The Federal Department of Transportation is offering a Grant for $3 Billion in new hyperloop construction money whereas the private market can raise around $2.6 Billion in charitable funds (there is no expectation of paying these funds back).

However, the City of Santa Monica (Player 2) can choose to raise local bonds for paying for the hyperloop project. The bonds are low interest and are expected to attract moderate demand. The Bonds would raise $1.6 Billion with $0.2 Billion being paid back in 10 years. The city of Santa Monica May chooses an alternative to bonds by dipping into its rainy-day fund at the start of the project, investing $1 Billion. If the city invests using the rainy day fund it will make its money back in ten years with an expected total return of $0.6 Billion Plus the initial principal (the initial funds invested).

Use an Extended Form game to help the State of California make a funding decision. Address the following Questions:

1. Short-Run: What is the dominant strategy for the Short-Run Game? Explain Californias Decision? (Hint: Consider a two-stage game the State is Player 1, and the City is Player 2, the payoffs are the sum of each decision node).
2. Long-Run: What is the dominant strategy in the long-run; where the long-run is 10 years? Explain Californias decision? (Hint: Please discount the payoffs by a discount rate of 0.03 percent with the initial year being year 1 i.e., t=1)