Amy and Ben are bargaining over a business opportunity that

Amy and Ben are bargaining over a business opportunity that is worth $100,000. Amy has an outside option that will give her $10,000 if she does not reach an agreement .  Ben\'s outside option is also $10,000. Bargaining proceeds as follows: First Amy proposes a division, then Ben accepts or rejects. If Ben accepts, the division is implemented (and the game ends). If Ben rejects, then the business opportunity drops to $50,000 in value and  Ben himself gets to propose a division. Then Amy accepts or rejects. If she accepts then the division is implemented (and the game ends). If she rejects then the business opportunity drops to $25,000. Amy makes one final proposal. If Ben rejects then each player obtains their outside option (and the game ends). Assume that if a player is indifferent between accepting or rejecting a proposed division, then the player always accepts the division. Using backward induction, the prediction is that

A)Amy proposes $45,000 for herself and $55,000 for Ben.

B)Amy proposes $50,000 for herself and $50,000 for Ben.

C)Amy  proposes $65,000 for herself and $35,000 for  Ben .

D)Amy  proposes $90,000 for herself and $10,000 for  Ben .

Solution

As Amy can propose first and Ben is indifferent between accepting and rejecting the proposal, Amy should propose more for himself. But for Ben, he should propose greater os equal to $10000.

$90000 for himself and for Ben $10000 can maximize Amy\'s profit.

Option D is correct.