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Jon owes $15,000 to each of two creditors, but he only has $25,000. If he defaults on the debt (doesn't pay), he will lose all $25,000. The legal cost of defaulting, filing bankruptcy, and liquidating his assets will be $15,000, so each of his debtors will collect only $5,000. Jon has his lawyer draw up the following letter, which he sends to each of the creditors: "I hereby offer you $5,001 if both you and my other creditor agree to cancel my debt. If either or both of you decline this offer, I will be legally in default and you will receive $5,000." So, what happens? Form a payoff matrix for the two creditors. They have two strategies: "Accept" or "Reject" Jon's offer.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M953520

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