Two travelers own an identical suitcase that contains identical antiques. The airline is liable for a maximum of $100 per suitcase. To determine how much to reimburse each traveler, the airline puts them in different rooms (so that they cannot communicate), and ask them to write down an amount (an integer number) between $2 and $100. If both write down the same number, the airline will reimburse both travelers that amount. However, if the two amounts are different, both travelers will be paid the lowest of the two numbers along with a bonus/malus: $2 extra will be paid to the traveler who wrote down the lower value and a $2 deduction will be taken from the person who wrote down the higher amount. What are the travelers’ best response functions? What are the Nash equilbria of the game? Are they Pareto efficient? Explain the intuition why.
Two travelers own an identical suitcase that contains identical antiques. The airline is liable for a maximum of $100 per suitcase. To determine how much to reimburse each traveler, the airline puts them in different rooms (so that they cannot communicate), and ask them to write down an amount (an integer number) between $2 and $100. If both write down the same number, the airline will reimburse both travelers that amount. However, if the two amounts are different, both travelers will be paid the lowest of the two numbers along with a bonus/malus: $2 extra will be paid to the traveler who wrote down the lower value and a $2 deduction will be taken from the person who wrote down the higher amount. What are the travelers’ best response functions? What are the Nash equilbria of the game? Are they Pareto efficient? Explain the intuition why.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Two travelers own an identical suitcase that contains identical antiques.
The airline is liable for a maximum of $100 per suitcase. To determine how much to reimburse
each traveler, the airline puts them in different rooms (so that they cannot communicate), and
ask them to write down an amount (an integer number) between $2 and $100. If both write
down the same number, the airline will reimburse both travelers that amount. However, if the
two amounts are different, both travelers will be paid the lowest of the two numbers along with
a bonus/malus: $2 extra will be paid to the traveler who wrote down the lower value and a $2
deduction will be taken from the person who wrote down the higher amount. What are the
travelers’ best response functions? What are the Nash equilbria of the game? Are they Pareto
efficient? Explain the intuition why.
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