Two Partners Start a Business

question 5

Multiple Choice

Two partners start a business.Each has two possible strategies, spend full time or secretly take a second job and spend only part time on the business.Any profits that the business makes will be split equally between the two partners, regardless of whether they work full time or part time for the business.If a partner takes a second job, he will earn $10,000 from this job plus his share of profits from the business.If he spends full time on the business, his only source of income is his share of profits from this business.If both partners spend full time on the business, total profits will be $200,000.If one partner spends full time on the business and the other takes a second job, the business profits will be $80,000.If both partners take second job, the total business profits are $20,000.

• A)This game has two Nash equilibria, one in which each partner has an income of $100,000 and one in which each partner has an income of $20,000.
• B)In the only Nash equilibrium for this game, both partners earn $20,000.
• C)In the only Nash equilibrium for this game, one partner earns $50,000 and the other earns $40,000.
• D)In the only Nash equilibrium for this game, both partners earn $100,000.
• E)This game has no pure strategy Nash equilibria, but has a mixed strategy equilibrium.

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Definitions:

Debt Financing

The method by which a firm raises capital through the sale of fixed income products, such as bonds or loans, committing to regular payments.

Empirical Evidence

Information obtained through observation or experimentation that can be verified or proven.

Technological Change

The process of innovation and improvement in technology, which often leads to increased efficiency and productivity within an industry or economy.

Unemployment Rates

Unemployment Rates represent the percentage of the labor force that is jobless and actively seeking employment.