Two players are playing a game. Player 1 is given $100 and is asked to offer a certain share of the money to Player 2. Player 2 can then choose to accept or reject the offer
If he accepts the offer, the money will be split between the two players in the ratio as decided by Player 1. If he rejects the offer, neither of the players will get anything. a) Assume that both players prefer more money to less. How would Player 1 choose his optimal strategy in this case? b) If Player 2 prefers fairness to money, how will his decision change?
a) This is an example of an ultimatum game, and Player 1 should choose his optimal strategy using the process of backward induction, that is, by considering Player 2's decision first. If Player 1 offers a certain percentage of money to Player 2, Player 1 will definitely accept the offer because he prefers more money to less. Therefore, Player 1's optimal strategy is to offer the minimum possible amount to Player 2.
b) If Player 2 prefers fairness to money, he will not accept the offer in case Player 1 offers the lowest possible amount. If Player 1 knows that Player 2 prefers fairness to money, he will figure out that Player 2 will not accept the offer if he offers the lowest possible amount, leaving each of them with $0. Therefore, Player 1 will choose to offer a fair deal.
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If government expenditures are increased by $50 billion, assuming all other factors stay constant, we would expect the initial impact of the increased spending to cause real GDP to
A. increase by $50 billion. B. stay constant. C. increase by less than $50 billion. D. increase by more than $50 billion.
In the long run, perfectly competitive firms will exit the market if the price is
A) higher than average variable cost. B) equal to average total cost. C) less than average total cost. D) equal to average fixed cost. E) equal to marginal revenue.
For all firms, the additional revenue collected from the sale of one additional unit of output is termed:
A. marginal profit. B. average revenue. C. marginal revenue. D. price.
The economy enters a period of robust economic growth that is expected to last for several years. How would this be reflected in the risk structure of interest rates?
A. A decrease in the term spread B. An increase in yields on tax-exempt bonds C. A decrease in the interest rate spread D. An inverted yield curve