Scenario: Tom and Harry are participating in a game in which the participants are divided into groups of two. Tom and Harry have been put in the same group. In each round of the game, Tom will be given an item. Tom can either give it to Harry or pass it on to the next team. If he decides to pass it on to the next team, neither of them will get the prize. If he gives it to Harry, Harry can either pass it on to the next team or sell it himself. If he passes it on to the next team, each of them will get $100. However, if he decides to sell it, he will get an amount higher than $100 and Tom will get nothing.
-Refer to the scenario above.Which of the following will be true if Harry is known to be trustworthy?

Question

Quizplus · Accepted Answer

If Harry is known to be trustworthy and Tom trusts him, then Tom will give the item to Harry in every round. Harry, being trustworthy, will choose to pass it on to the next team and split the prize equally between them, resulting in both Tom and Harry receiving $100 each. This is the best choice for both of them as they can guarantee a payoff of $100 in every round, whereas if Tom chooses to pass it on to the next team, they both get nothing. Thus, the equilibrium outcome will be socially efficient, and a unique equilibrium will occur.

Scenario: Tom and Harry Are Participating in a Game in Which