2. You and your sister have just inherited a house worth 2+x millions, where x is the last digit of your student number. You both negotiate your shares of the inheritance according to the following protocol: You make an initial offer. Your sister either accepts the initial offer or makes a counteroffer. Then, you either accept her counteroffer or the house is assigned randomly to one of you with equal probabilities. Each time an offer is not accepted, 1 million is due in lawyers’ fees, which are paid by the house owner. Further, assume that both of you maximize expected money earnings and value future payments just as much as current payments.
1. Draw the complete game tree
[10 marks]
e) Describe carefully the relevant solution concept and calculate the equilibrium shares
[10 marks]
f) Who benefits, you or your sister, when lawyers’ fees increase or when you both become risk averse? Discuss.
[6 marks]
g) Carefully explain the process of backward induction in sequential games.
[7 marks]
Word count: 250 (not including mathematical expressions and graphs)
