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  Benrejects, 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

Solution: Amy proposes $45,000 for herself and $55,000 for Ben

Explanation: Amy proposes $25,000 + $10,000 = $45000 for herself; and remaining $55,000 (=$100,000 - $45,000)