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Consider the wage negotiations between Cricket Australia (CA) and the union that represents the players. Assume that Cricket Australia and the union are bargaining over how much of a $200 surplus will be split. Suppose that CA moves first and makes an offer p. The union (U) may accept or reject the offer. If the offer is rejected neither party gets anything. If the offer is accepted the Union gets p and the CA gets 200 - p. How much better off or worse off would it be for CA if U moves firsts and makes an offer p which would give CA  a payoff of p and U a payoff of 200 – p if the offer is accepted and a payoff of 0 to each party otherwise? Assume that the possible offers to be made are $1, $100 or $199.

Question

Consider the wage negotiations between Cricket Australia (CA) and the union that represents the players. Assume that Cricket Australia and the union are bargaining over how much of a 200surpluswillbesplit.SupposethatCAmovesfirstandmakesanofferp.Theunion(U)mayacceptorrejecttheoffer.Iftheofferisrejectedneitherpartygetsanything.IftheofferisacceptedtheUniongetspandtheCAgets200−p.HowmuchbetterofforworseoffwoulditbeforCAifUmovesfirstsandmakesanofferpwhichwouldgiveCA apayoffofpandUapayoffof200–piftheofferisacceptedandapayoffof0toeachpartyotherwise?Assumethatthepossibleofferstobemadeare200 surplus will be split. Suppose that CA moves first and makes an offer p. The union (U) may accept or reject the offer. If the offer is rejected neither party gets anything. If the offer is accepted the Union gets p and the CA gets 200 - p. How much better off or worse off would it be for CA if U moves firsts and makes an offer p which would give CA  a payoff of p and U a payoff of 200 – p if the offer is accepted and a payoff of 0 to each party otherwise? Assume that the possible offers to be made are 1, 100or100 or 199.

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Solution

The outcome of the wage negotiation between Cricket Australia (CA) and the union largely depends on who makes the first move.

If CA moves first and makes an offer p, the union can either accept or reject the offer. If the offer is accepted, the union gets p and CA gets 200 - p. If the offer is rejected, neither party gets anything.

Now, let's consider the scenario where the union moves first and makes an offer p. In this case, CA would receive a payoff of p and the union would receive a payoff of 200 - p if the offer is accepted. If the offer is rejected, both parties would receive a payoff of 0.

To determine how much better or worse off CA would be if the union moves first, we need to compare the payoffs in both scenarios.

If the union offers 1,CAwouldreceiveapayoffof1, CA would receive a payoff of 1, which is worse than the 199itwouldreceiveifitmovedfirstandoffered199 it would receive if it moved first and offered 1.

If the union offers 100,CAwouldreceiveapayoffof100, CA would receive a payoff of 100, which is the same as what it would receive if it moved first and offered $100.

If the union offers 199,CAwouldreceiveapayoffof199, CA would receive a payoff of 199, which is better than the 1itwouldreceiveifitmovedfirstandoffered1 it would receive if it moved first and offered 199.

Therefore, whether CA is better or worse off if the union moves first depends on the offer made by the union. If the union offers 1or1 or 100, CA is worse off or indifferent, respectively. However, if the union offers $199, CA is better off.

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