Answers
When neither hires a lawyer, each side win half the time. So, payoff of each side = 0.5(3 million) = 1.5 million = 1,500,000
When both hires a lawyer, each side win half the time. So, payoff of each side = 0.5(3 million) - 100,000 = 1,500,000 - 100,000 = 1,400,000
When one side hires a lawyer,
Payoff of the side that hires = 0.8*(3,000,000) - 100,000 = 2,400,000 - 100,000 = 2,300,000
Payoff of the side that does not hire = (1-0.8)*(3,000,000) = 0.2*(3,000,000) = 600,000
| M: No lawyer | Lawyer | |
| L: No Lawyer | L: $1,500,000 M: $1,500,000 | L: $600,000 M: $2,300,000 |
| Lawyer | L: $2,300,000 M: $600,000 | L: $1,400,000 M: $1,400,000 |
hire; hire
(Given that L hires no lawyer, M's best response is to hire a lawyer.
Given that L hires lawyer, M's best response is to hire a lawyer.
Given that M hires no lawyer, L's best response is to hire a lawyer.
Given that M hires lawyer, L's best response is to hire a lawyer.
So, the Nash equilibrium is for both to hire a lawyer.)
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