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# problemset10 - Problem Set 10 Econ 159a/MGT522a Ben Polak...

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Problem Set 10 Econ 159a/MGT522a Ben Polak Four Problems Due December 5, 2007 Alex and Barry have a joint project. make these individual investment choices simultaneously. Once made, these investments are sunk. If no-one invests, the project generates a total revenue of \$0. If just one of them invests, then the project generates a (gross) total revenue of \$15. If both of them invests, the project generates a (gross) total revenue of \$30. Alex and Barry then use the following scheme to divide the total project revenue. Each player simultaneously writes down a ‘share demand’ on a piece of paper. The demands can be either 1 5 , 1 2 , or 4 5 . If the two ‘share demands’ add up exactly to one then each player is given his demand. Otherwise, all the money is thrown away. \$10 then the project generates a gross total of \$30 . If Alex then writes down 4 5 and Barry writes down 1 5 then (since this adds up to one) Alex gets his demand of \$24 ( = 4 5 \$30 \$14 (i.e., \$24 minus his initial investment of \$10 ), while Barry gets his demand of \$ 6 ( = 1 5 \$30 ± \$4 (i.e., \$6 minus his initial investment of \$10 ). If Barry had demanded 1 2 while Alex was still demanding 4 5 , then the project money would have been thrown away and each would simply have lost his initial investment of \$10 .] Suppose for now that both Alex and Barry are told how much the project has generated before they make their ‘share demands’. (a)

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problemset10 - Problem Set 10 Econ 159a/MGT522a Ben Polak...

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