Orangeland and Blueland are involved in a dispute over a certain piece of land, which is currently under Blueland’s control. Orangeland offers Blueland a compensation of 23 pazoozas if it will surrender the territory peacefully. Otherwise, Orangeland threatens to use force against Blueland to recover the territory. Suppose Blueland’s utility from holding the territory is 80 pazoozas. If it fights Orangeland, Blueland’s probability of winning is 0.4 and the cost of fighting is 10 pazoozas. If Blueland loses the war, its utility is 0. What will Blueland’s leader do? Assume that Blueland’s leader is risk-neutral.
a. Accept the compromise of 23 pazoozas, give up the territory, and avoid war.
b. Reject the compromise, and go to war.
c. Blueland’s leader is indifferent between accepting the compromise and going to war.
d. Blueland’s leader will prefer to go to war because the compromise of 23 pazoozas is not enough to compensate for the loss of territory that is worth 80 pazoozas.
Ans: a
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