ECON5111 Practice problem 2
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ECON5111
Practice problem
1. You and your business partner are working on a project together. Where y is the level of effort chosen by you and p is the level of effort chosen by your partner, the profits of the partnership are 4y + 4p + yp. You and your partner will split these profits equally. However, each of you individually incurs a cost of your effort, equal to y2 for you and p2 for your partner. Effort decisions are taken simultaneously: neither you nor your partner know the choice of the other when making their decision.
(a) Suppose the only effort choices possible are 0, 1 and 2. Represent this game in a payoff matrix, and find the Nash equilibria.
(b) Suppose any nonnegative effort level is a possible choice for both players. Find the Nash equilibrium.
2022-06-20