Orangeland and Blueland are involved in a dispute over a certain piece of land, which is currently under Blueland’s control. Orangeland’s leader has to decide whether to try and get the territory by negotiating with Blueland or by waging a war. The territory is worth 100 pazoozas to Orangeland. The minimum compromise that Blueland’s leader is willing to accept is 30 pazoozas to give up the land peacefully. Suppose Orangeland’s probability of winning a war is 0.8 and the cost of fighting is 10 pazoozas. What will be Orangeland’s leader’s decision? Assume Orangeland’s leader is risk-neutral.
a. Orangeland’s leader will prefer to offer the compromise of 30 pazoozas and obtain the territory peacefully.
b. Orangeland’s leader will prefer to wage a war.
c. Orangeland’s leader will be indifferent between waging a war and offering a compromise.
d. We cannot tell
Ans: c
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