Suppose that management and the union are bargaining over how much of a $500 surplus to give to the union.It is assumed that the surplus can only be split into $250 increments.Furthermore, negotiations are set up such that management and the union must simultaneously and independently write down the amount of surplus to allocate to the union.The payoff structure to this one-shot bargaining game is listed in the above payoff matrix.The number of inefficient outcomes resulting from the bargaining game is
A)3.
B)5.
C)6.
D)8.

Question

Quizplus · Accepted Answer

To find the inefficient outcomes, we need to look for outcomes where both players would have been better off if they had chosen a different option.

In the payoff matrix, we can see that the only efficient outcome (i.e. mutual agreement) is (300,200), where the union gets $300 and management gets $200.

All other outcomes are inefficient because at least one player could do better by choosing a different option. For example, if both players choose to split the surplus equally, they would get (250, 250), which is better for both of them than (200, 300) or (300, 200).

The inefficient outcomes are:
- (200, 300)
- (300, 200)
- (250, 250)
- (300, 0)
- (0, 300)
- (250, 0)

There are 6 inefficient outcomes in total, so the answer is C)6.

Suppose That Management and the Union Are Bargaining Over How