Scenario: Pat and Joe Are Playing a Game

question 11

Multiple Choice

Scenario: Pat and Joe are playing a game. The rules of the game are simple. Pat is given $100. He can either give it to Joe or keep it for himself. If he keeps it for himself, $50 will be taken back, and the remaining will be split between them. If he gives it to Joe, Joe can either divide it into two equal parts or keep it for himself. If he divides it into two equal parts, each of them will get $50. If he does not split the money, he will get the entire amount.
-Refer to the scenario above.Suppose Pat can impose a fine of $70 if Joe chooses to keep the money,and the cost to Pat of imposing such a fine is $10.Which of the following is likely to happen if Pat is known to be vengeful?

• A) Joe will choose to split the money into two parts if Pat gives it to him.
• B) Joe will choose to keep the entire money for himself if Pat gives it to him.
• C) Pat will not give the money to Joe.
• D) A unique equilibrium will not occur.

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Definitions:

Interest Rates

The cost of borrowing money or the return on investments, expressed as a percentage of the principal amount.

Government Borrowing

The process by which the government raises funds through issuing debt instruments, such as bonds, to finance its spending.

Budget Deficit

A financial situation where an entity’s expenditures exceed its revenues over a specified period, leading to a shortfall that must be financed through borrowing.

Government Borrowing

The process by which a government raises funds to finance its operations and projects by issuing debt instruments, such as bonds.