Question

Attempts: 0.6

Keep the highest 0.6/2.5.
2. Individual Problems 15–5
Every year, management and labour renegotiate a new employment contract by sending their proposals to an arbitrator, who chooses the best
proposal (effectively giving one side or the other $5 million). Each side can choose to hire, or not hire, an expensive labour lawyer (at a cost of
$100,000) who is effective at preparing the proposal in the best light. If neither hires a lawyer or if both hire lawyers, each side can expect to
win about half the time. If only one side hires a lawyer, it can expect to win three-fourths, or 0.75, of the time.
Use the given information to fill in the expected payoff, in dollars, for each cell in the matrix. (Hint: To find the expected payoff, multiply the
probability of winning by the dollar amount of the payoff. (Be sure to account for lawyer costs, which are incurred with certainty if a lawyer is hired.)
Management (M)
No Lawyer
M:
No Lawyer
Lawyer
Laborit
Lawyer
MS
ME
L:
The Nash equilibrium for this game is for management to
a lawyer, and for Labour to
a lawyer
Grade It Now
Save & Continue

Answer 1

The likely outcome is that both management and labor will choose to hire expensive lawyers as part of their negotiation strategy, as this presents the Nash equilibrium where both parties have the highest expected payoff, despite the cost of legal fees.

Step-by-step explanation:

The question pertains to a game theory situation where management and labor are deciding whether or not to hire expensive lawyers in annual contract renegotiations. Given that hiring a lawyer costs $100,000 and can potentially result in winning the arbitrated decision (and a $5 million payoff), the parties must determine how hiring a lawyer affects their expected payoffs and decide their best strategy. Calculating the expected payoffs reveals that management and labor both have incentives to hire a lawyer because doing so increases the likelihood of winning from 0.5 to 0.75, even after accounting for the lawyer's fee. Consequently, the Nash equilibrium in this scenario occurs when both sides opt to hire a lawyer, as the slight advantage of being the only side to hire a lawyer would prompt the other side to hire one as well, negating any first-mover advantage and stabilizing the game at both sides hiring lawyers.