Wozza, an entrepreneur, can either Enter (E) or Hold (H). Shazza, a rival entrepreneur, observes Wozza’s choice, then can choose to either play E or H. The payoffs are as follows: Following (E, E) (played by Wozza, then Shazza) the payoffs are (60, 50) to Wozza and Shazza, respectively. Following (E, H) the payoffs are (90, 80). Following (H, E) the payoffs are (30, 20). Finally, following (H, H), the payoffs are (10, 15) to Wozza and Shazza. In the credible (subgame) perfect equilibrium, we observe the following play:Group of answer choicesE, then HE, then H or H, then EH, then E or E then HH then ENone of the other answers are correct
Question
Wozza, an entrepreneur, can either Enter (E) or Hold (H). Shazza, a rival entrepreneur, observes Wozza’s choice, then can choose to either play E or H. The payoffs are as follows: Following (E, E) (played by Wozza, then Shazza) the payoffs are (60, 50) to Wozza and Shazza, respectively. Following (E, H) the payoffs are (90, 80). Following (H, E) the payoffs are (30, 20). Finally, following (H, H), the payoffs are (10, 15) to Wozza and Shazza. In the credible (subgame) perfect equilibrium, we observe the following play:Group of answer choicesE, then HE, then H or H, then EH, then E or E then HH then ENone of the other answers are correct
Solution
This is a game theory problem. In a subgame perfect equilibrium, each player's strategy is the best response to the other player's strategy.
Let's analyze the possible outcomes:
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If Wozza chooses E, Shazza can choose between E and H. If Shazza chooses E, the payoff is (60, 50). If Shazza chooses H, the payoff is (90, 80). Shazza would choose H because 80 > 50.
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If Wozza chooses H, Shazza can choose between E and H. If Shazza chooses E, the payoff is (30, 20). If Shazza chooses H, the payoff is (10, 15). Shazza would choose E because 20 > 15.
Now, Wozza can anticipate Shazza's choices. If Wozza chooses E, he gets 90. If Wozza chooses H, he gets 30. Wozza would choose E because 90 > 30.
So, in the subgame perfect equilibrium, Wozza would choose E, then Shazza would choose H. Therefore, the answer is "E, then H".
Similar Questions
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