Consider the following diagram, representing the Nash Equilibrium of the \'incom
ID: 1120088 • Letter: C
Question
Consider the following diagram, representing the Nash Equilibrium of the 'incomplete contracts' case. Select the correct statements.
Select one or more:
a. At the Nash equilibrium, An earns revenues that are above his fall back position.
b. Pei maximizes her profit subject to An's best response function.
c. The blue curve is Pei's iso-profit curve. As we move South-East, her profits increase.
d. Pei maximizes her profit subject to An's fall back position.
e. The resulting Nash equilibrium is Pareto efficient, because borrower and lender are both doing the best they can.
A's best response function f=-+- NE y-y 22 CD .NE al) P's iso-profit curve NE A's participation constraint Pareto-improving lens NE Interest factor,Explanation / Answer
Correct options:
b. Pei maximizes her profit subject to An's best response function.
d. Pei maximizes her profit subject to An's fall back position.
e. The resulting Nash equilibrium is Pareto efficient, because borrower and lender are both doing the best they can.