Two individuals with diverse interests are bargaining over the distribution of $500 in which payoffs must be in increments of $10. Each player submits a one time bid. If the sum of the bids is less than or equal to $500, each player gets the amount of their bid and the game ends. If the sum of the bids exceed $500, the bargaining ends and the players go home empty handed. The most likely strategy profile for this game is:
I. {$0, $0}
II. {$10, $10}
II. {$500, $0}
III. {$0, $500}
IV {$250, $250)
Which of the following is correct?
A) I only.
B) II only.
C) III only.
D) IV only.
E) All of the above are equally likely.

Question

Quizplus · Accepted Answer

The most rational strategy for both players, assuming they are both trying to maximize their own payoff while ensuring they receive something (rather than nothing), is to split the $500 evenly. This results in each player receiving $250, which is a fair division that ensures neither player risks bidding too much and ending up with nothing. This outcome is based on the Nash Equilibrium concept, where neither player has anything to gain by changing their strategy unilaterally.

Two Individuals with Diverse Interests Are Bargaining Over the Distribution