Pepperdine University

FINC 655

Chapter 16

1)For threats or commitments to be effective, they must be

1. irrational. [There is no reason why a commitment needs to be “irrational” to be credible.]
2. profitable. [Often, commitments and threats relate to courses of action that are contrary to one’s interests.]
3. credible. [The goal of a commitment or threat is to have your rival believe you.]
4. None of the above. [One of the answers above is correct.]

2. Fred is a salesman who can sell enough to generate $200,000/year worth of profit for his company. He earns only

$110,000 in compensation. What is the value of his outside or next best alternative?

1. 1. $0. [According to the non-strategic view of , this would lead to $100,000 in compensation, halfway between $0 and

$200,000.]

1. 2. $5,000. [According to the non-strategic view of bargaining, players split the gains to trade evenly. An outside alternative of $5,000 would provide Fred with $105,000 of the gains to trade which is more than his company receives.]
   3. $10,000. [According to the non-strategic view of bargaining, players split the gains to trade evenly. An outside alternative of $10,000 would provide Fred with $100,000 of the gains to trade which is more than his company receives.]
   4. $20,000. [the players split the $180,000 gain from trade evenly.]

3. How many pure strategy equilibria does the following game have?
   1. 0 [The game has pure strategy equilibria in which each player is playing a best response to the strategy of the other.]
   2. 1 [The game has more than one pure-strategy equilibrium.]
   3. 2 [Both outcomes in which one player bargains hard and the other is nice are equilibria.]
   4. 3 [the best response to the other player bargaining hard is to be nice, and vice versa.]

LABOR

Bargain Hard                                                                Be Nice

MANAGEMENT             Bargain Hard                   0,0                                       20, 10

Be Nice                                             12, 18                                                15, 15

4. In the game above, how much does Labor earn if they can move first?
   1. 10 [Labor can do better by not being nice.]
   2. 15 [Both being nice is not an equilibrium of the game.]
   3. 18 [if labor chooses to bargain hard, management would respond with being nice.]
   4. 20 [this is not a possible payoff for labor.] 2

5. Consider a vendor-buyer relationship. Which of the following conditions would lead to the buyer having more bargaining power?
   1. Lots of substitutes for the vendor's product are available. [this would give the buyer better alternatives to an agreement with the vendor; this is not the only correct answer.]
   2. There are relatively few buyers and many vendors. [this would give the buyer better alternatives to an agreement with the vendor and would give the vendor worse alternatives to an agreement, both benefitting the buyer; this is not the only correct answer.]
   3. It costs little for buyers to switch vendors. [this would increase the value of not reaching an agreement with the vendor; this is not the only correct answer.]
   4. All of the above. [each of the above improves the buyer’s alternatives to an agreement and thus reduces the buyer’s gains from reaching an agreement with this vendor.]

6. In the following game, how many pure strategy equilibria are there?
   1. 0 [management always wants to match labor’s strategy and labor always wants to adopt a different strategy from management.]
   2. 1 [an equilibrium requires that each player is playing a best response to the other player’s strategy.]
   3. 2 [For Labor, the best response to “Bargain Hard” is to be nice, and the best response to “Be Nice” is to bargain hard.]
   4. 3 [For Management, the best response to “Bargain Hard” is also to bargain hard, and the best response to “Be Nice” is also to be nice.]

7. Pete and Lisa are entering into a bargaining situation in which Pete stands to gain up to $5,000 and Lisa stands to gain up to $1,000, provided they reach agreement. Who is likely to be the stronger bargainer?
   1. Pete [Pete has more to gain from reaching agreement and therefore will be a weaker bargainer.]
   2. Lisa [Lisa has less to gain from agreement and therefore will be a stronger bargainer.]
   3. They will be equally effective. [the agreement reached depends on the gains for each party from reaching agreement.]
   4. These potential gains will have no impact on bargaining. [the gains for each party from reaching agreement directly relate to the agreement that will be reached.]

8. George and KC have been working jobs that pay $60,000 and $30,000 per year, respectively. They are trying to decide whether to quit their jobs and jointly open up a taco stand on the beach, which they estimate can earn

$150,000/year. How will the taco stand proceeds be split? 3