Consider the following decision tree and information when answering the followin
ID: 1128312 • Letter: C
Question
Consider the following decision tree and information when answering the following questions:
The decision tree depicts two players (Jane and Aaron) playing an ultimatum game where Aaron is given $1,000 and asked to propose a way of splitting it with Jane. When Jane learns Aaron’s proposal, Jane chooses whether to accept or reject the split. If Jane accepts the split, both players receive the money according to Aaron’s split proposal. If Jane rejects the split, both players receive nothing. This game will be played only once, so Aaron does not have to worry about reciprocity when making his choice.
There are four sets of payoffs at the terminal nodes of the decision tree. In each node, the dollar amount to the left of the comma represents Aaron’s payoff, and the dollar amount to the right of the comma represents Jane’s payoff.
If Aaron were to offer an unfair proposal, experimental results show that Jane would likely punish him by making herself ________ off by ________ and rejecting his offer.
a. worse; $1 Aaron Fair proposal Unfair proposal Jane Jane Accept Reject Accept Reject ($500, $500)(SO, SO) ($999, $1) ($0, $O)Explanation / Answer
answer : option a - worse; $1
reason : the nash equilibrium of this game is when aaron makes an unfair proposal and jane accepts it with a payoff of 999 to aaron and 1 to jane . but since aaron is making an unfair proposal she is likely to punish him by rejecting his propsal so that both gets 0 payoff. thus making herself worse off by $1 ($1 - $0 = $1) and thereby punishing him by making him loose $999 as a payoff ( $999 - $ 0 = $999).