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Problem Set 8 Econ 159a/MGT522a Ben Polak Three Questions due November 14, 2007 1. Bargaining. It is November 1st, and Angus and Bronwen are arguin er how to divide the remainder of their left-over trick or treat candy. They decide on the following rules. On Nov 1st, Angus will make Bronwen an o er [s (1); s (1)] where s (1) +s (1) = 1. If Bronwen A B A B accepts then Angus gets a share s(1) of the candy and Bronwen gets sB (1). If Bronwen refuses, however, then no-one gets any candy on Nov 1st. In this case, on Nov 2nd, Bronwen gets to make Angus an o er [s (2); s (2)] where s (2) + s (2) = 1. If Angus accepts then Angus gets A B A B a share sA (2) of the candy and Bronwen gets sB (2). If Angus refuses, however, then no-one gets any candy on Nov 2nd. In this case, on Nov 3rd, Angus gets to make Bronwen an o er [s (3); s (3)] where s (3) + s (3) = 1. If Bronwen accepts then Angus gets a share s (3) of A B A B A the candy and Bronwen gets sB (3). If Bronwen refuses, however, then no-one gets any candy on Nov 3rd. In this case, on Nov 4th, Bronwen gets to make Angus an o er [s (4); s (4)] where A B s (4) + s (4) = 1. If Angus accepts then Angus gets a share s (4) of the candy and Bronwen A B A gets sB (4). If Angus refuses, however, then all the candy is thrown away by their parents. There is a catch. Both Angus and Bronwen are hungry and impatient for candy so they discount candy to