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Two countries, A and B, are bargaining to split a resource that is valued at $100. A makes the first offer, stating how the $100 will be divided between them. If B accepts the offer, the game is over. If B rejects it, the total available to bargain is reduced by $1 to $99. Then B gets to make an offer. The players take turns making offers this way, and each round the amount shrinks by $1. A makes offers in the odd numbered periods, and B makes offers in the remaining periods until they reach an agreement or they run out of money to divide. A's outside option is $2.25 and B's outside option is $3.50. Assume that if players are indifferent between an offer and their outside option, they accept the offer. Also assume that they do not discount future payoffs. Find the subgame perfect equilibria of this game using backward induction.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M938473

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