Answer to Question #249039 in Microeconomics for SHREYA

Question

Suppose Pilu and Nilu have a cake, which they need to divide among themselves. The rules are as follows:

• Pilu will propose a split, for example, she can offer a 12/88 split which means she gets 12% and Nilu gets 88% of the cake.
• Nilu decides if the split is acceptable or not. If she agrees the cake is split otherwise it Is thrown away and nobody gets anything
• a) Find the Nash equilibrium of the game.
• b) What would happen if Nilu did not have the choice to reject and had to accept the offer of Pilu? 
• c) Would the outcome be any different if the game were to be repeated 5 times? Explain 

 

Answer 1

(a)

Nilu should decide that the split is acceptable because this strategy provides a better payoff as opposed to throwing the cake away. This is in accordance with the proposal made by Pilu. Hence, the scenario where Pilu proposes a split and is acceptable by Nilu is a nash equilibrium.

(b)

The outcome of the game would majorly be a win in favour of Pilu.

(c)

Yes, the outcome would be different. This is because of the variations of the split proposals made by Pilu that would occur, and the acceptance or rejection of the proposed split by Nilu.