Suppose that two players are bargaining over $1. The game takes place in rounds, beginning with Round
1. The game ends when an offer is accepted. Player 1 makes offers in odd-numbered rounds and Player 2 makes offers in even-number rounds. The players can either ‘accept' or ‘reject' the offer. At the end of each round $0.20 is removed from the pool of money (as punishment for not reaching agreement). If an agreement is reached in Round 2, the total pool of money is £0.80. Find the subgame perfect Nash equilibrium through backward induction.
2. Which are the different coordination games you know? Create a matrix for each of these games and explain the game's main characteristics.
3. What is the Tit-for-tat strategy?
4. What is the Folk Theorem?
5. Explain the prisoner's dilemma and provide a matrix-form representations. Outline three solutions to the prisoner's dilemma.