Every year, management and labor renegotiate a new employment contract by sending their proposals to an arbitrator, who chooses the best proposal (effectively giving one side or the other $2 million). Each side can choose to hire, or not hire, an expensive labor lawyer (at a cost of $300,000) who is effective at preparing the proposal in the best light. If neither hires a lawyer or if both hire lawyers, each side can expect to win about half the time. If only one side hires a lawyer, it can expect to win four fifths, or 0.8, of the time. Use the given
Every year, management and labor renegotiate a new employment contract by sending their proposals to an arbitrator, who chooses the best proposal (effectively giving one side or the other $2 million). Each side can choose to hire, or not hire, an expensive labor lawyer (at a cost of $300,000) who is effective at preparing the proposal in the best light. If neither hires a lawyer or if both hire lawyers, each side can expect to win about half the time. If only one side hires a lawyer, it can expect to win four fifths, or 0.8, of the time. Use the given
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter15: Strategic Games
Section: Chapter Questions
Problem 15.5IP
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Every year, management and labor renegotiate a new employment contract by sending their proposals to an arbitrator, who chooses the best proposal (effectively giving one side or the other $2 million). Each side can choose to hire, or not hire, an expensive labor lawyer (at a cost of $300,000) who is effective at preparing the proposal in the best light. If neither hires a lawyer or if both hire lawyers, each side can expect to win about half the time. If only one side hires a lawyer, it can expect to win four fifths, or 0.8, of the time.
Use the given information to fill in the expected payoff, in dollars, for each cell in the matrix. (Hint: To find the expected payoff, multiply the probability of winning by the dollar amount of the payoff. Be sure to account for lawyer costs, which are incurred with certainty if a lawyer is hired.)
| Management (M) | |||
| No Lawyer | Lawyer | ||
| Labor (L) | No Lawyer | L:
|
L:
|
| Lawyer | L:
|
L:
|
The Nash equilibrium for this game is for Management to _____(hire or not hire) a lawyer, and for Labor to _____(hire or not hire) a lawyer.
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