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Use the attached pdf file “PS4 – P1.pdf.” Fill in the missing payoffs in the game trees and hand them in with this problem set. You will need the following information:• Costs (C) are low (0) with probability p, and high (1.4) with probability 1 – p.• “Inv(H)”? P invests 1 and relies 1. If A cooperates, P will earn 0.7 in surplus and A will earn 0.4 – C. You will solve for P’s and A’s payoffs if A breaches.• “Inv(L)” ? P invests 1 and relies 0. If A cooperates, P will earn 0.4 in surplus and A will earn 0.4 – C. You will solve for P’s and A’s payoffs if A breaches.
[Hint: In the Social Planner’s slide, I’m looking for the joint payoff for each outcome, just like we did in class. To derive the joint payoffs for the Social Planner’s problem slide, first solve for the individual payoffs in the ”Without Contract” slide. Sum P’s and A’s payoffs under each outcome in “Without Contracts” and you will have the joint payoffs applicable for the Social Planner’s slide.]
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