This game has two players: the employee (Homer) and the employer (Mr. Burns). Ho
ID: 3318419 • Letter: T
Question
This game has two players: the employee (Homer) and the employer (Mr. Burns). Homer has to decide whether or not to pursue a training opportunity that will cost him $1,000. Undergoing the training will give Homer the opportunity to potentially generate additional revenue through a new business venture. Mr. Burns has to decide whether or not to pay a fixed wage to Homer of $10,000 for the new venture or to share the revenue from the new enterprise with Homer on a 50/50 split. Demand for the new venture is somewhat unpredictable. Cash flows are positively affected by both training and revenue sharing. With no training and a fixed wage, cash flow is projected to be $20,000. If either training or revenue sharing is implemented, cash flows rise to $22,000. If both training and revenue sharing are implemented, the cash flow position is even better at $25,000.
a. Construct a pay-off matrix for this scenario.
b. Is there a dominant strategy for both parties that results in equilibrium? Explain your thinking.
Explanation / Answer
[Answer]: Equilibrium state is: Homer trains and Burns shares revenue.
Explanation is as follows.
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a. Pay-off matrix as follows:-
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b.
If Homer trains, Burns should share revenue as it is the best possible outcome (12.5k)
If Homer doesn't train, Burns should still share revenue as it is the best possible outcome (11k)
=> Burns should ALWAYS SHARE REVENUE (Equilibrium)
As Burns will ALWAYS SHARE REVENUE, Homer needs to train to get his best possible outcome.
=> [Answer]: Equilibrium state is: Homer trains and Burns Shares Revenue
Burns pays fixed income (10k) Burns shares revenue (50:50) Homer doesn't train 20k => 10k H + 10k B 22k => 10k H + 11k B Homer trains (-1k) 22k => 9k H + 12k B 25k => 11.5k H + 12.5k BRelated Questions
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