Answer Happy

Amy (Player 1) and Beth (Player 2) have decided to dissolve a business part- nership whose assets have been valued at $100,000. The charter of the part- nership prescribes that the senior partner, Amy, make an offer concerning the division of the assets to the junior partner, Beth. The junior partner can Ac- cept, in which case the proposed division is implemented, or Reject, in which case the case goes to litigation. Litigating involves a cost of $20,000 in legal fees for each partner and the typ- ical verdict assigns 60% of the assets to the senior partner and the remaining 40% to the junior partner. Suppose, for simplicity, that there is no uncer- tainty about the verdict. Suppose also that there are only two possible offers that Amy can make: a 50-50 split or a 70-30 split. (a) Assuming that both Amy and Beth are selfish and greedy, represent this situation as an extensive game. (b) Find the backward induction solution of the game in part (a). (c) Find all the Nash equilibria of the game in part (a). Is there a difference between the backward induction solution and the Nash equilibria of this game?