Pascal has an old car he would like to get rid of. The car is dented up and needs some serious body work, and it takes up space in his driveway. He’ll sustains a cost of $100 if it remains in the driveway (He could, alternatively, have it towed away, for $100, so he is indifferent between towing it way and leaving it there). Since Pascal has another car, this old car – whether repaired or not – has no other value to him and it is nothing but a nuisance. On the other hand, a friend of his, Stuart, needs a car. If the car had body work done, the car is worth $1000 to him; without it, it is worth $200. Stuart’s cousin, Emily, works in a body shop and can fix the brakes on her weekends off. Doing so, she sustains a personal cost of $500.
1) Now tweak the game: Suppose on Wednesday, Pascal and Stuart jointly decide on whether Pascal will sell the car to Stuart. If Stuart buys the car, he then jointly decides with Emily, on Friday, if she should repair the car and at what price.
Draw the extensive form for this modification of the game, assuming as we did in 4A, the parties have equal bargaining weights.
2) 4D. Determine the negotiation equilibrium for the game in 4C. Explain your answer.