The Ultimatum Game is a simple game that has been played as an economic experime

Question

The Ultimatum Game is a simple game that has been played as an economic experiment. In the game, player 1 is given $20, and may choose any amount to be deducted from the $20 and given to player 2. (The players do not see each other and cannot communicate.) Player 2 may either accept or reject the offer. If player 2 accepts it each player receives the share indicated. If player 2 rejects it, then both get nothing 2.2. Results of many repeated experiments involving the Ultimatum Game.for player 2even when the amount of money represents several month's pay 0 O A, show that it is better to be player 2 than player 1: can accept or reject an offer B. show that it is better to be player 1 than player 2; can only accept or reject an otter, but player 1 gets to make the ° 0 offer C. show that the prediction of neoclassical theory is incorrect rejects offers of less than about 30% D. show that the prediction of neoclassical theory is correct accepts all non-zero offers no matter how low Continue without saving

Explanation / Answer

Option C is correct

Ultimatum games shows a nonprofit maximizing behavior where one player is the proposer and he makes a kind of take it or leave it offer to the other firm. Once issued, the ultimatum is either accepted or rejected. If accepted, the responder gets the amount proposed and the proposer receives the leftover amount. It seems that the proposer chooses to offer the lowest amount because her own payoff is reduced when the offer amount is high. The Nash equilibrium here represents a dominant strategy for responder to accept the proposal. In practice, such rational behaviour is not a good predictor of actual outcomes. Lowest amount offered are most of the times, rejected.

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