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HmWk02 - Economics 1200 Spring 2012 Homework 2 Write your...

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1 Economics 1200 Spring 2012 Homework # 2 Write your answers to the following questions on separate sheets of paper. Your answers are due in class on Tuesday, February 7 . Late homeworks are not accepted. 1. Consider the two-round home bargaining game discussed in class. The minimum the seller will sell his home for is $188,000 and the maximum the buyer is willing to pay is $200,000. Both players know these two amounts and are bargaining over the difference, M=$12,000. Assume the disagreement values are 0 for both players. Suppose the buyer moves first by making a proposal and the seller can accept or reject it. If the seller rejects the buyer’s proposal, the seller gets to make a counterproposal, which the buyer can then accept or reject. The game is then over. Suppose that both players discount future income using a period discount factor of =.2. a. Use rollback to find the equilibrium for this 2-round game. What is the sale price of the home? Which player buyer or seller gets the larger share of M? b. Suppose the buyer’s discount factor was b =.8 while the seller’s discount factor remained at s =.2? How does your answer to part a change in this case? c. Return to the case where both have the same discount factor of =.2. Suppose now that there is no limit to the number of alternating bargaining rounds and the buyer continues to move first. Use rollback reasoning to find the equilibrium price in this case. How does an unlimited number of bargaining rounds affect the share of the first mover—the buyer—relative to the 2- or 3-round case? What
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