Reference no: EM131104060

Amy and Ben are bargaining over a business opportunity that is worth $50,000. Amy has an outside option that will give her $10,000 if she does not reach an agreement with Ben, while Ben's outside option is $24,000. 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 $10,000 in value and Ben himself gets to propose a division. Finally, Amy accepts or rejects. If she accepts then the division is implemented (and the game ends). If she rejects then each player obtains their outside option (and the game ends). Assume that if a player is indifferent between accepting or rejecting a division, then the player always accepts the division. Using backward induction, the prediction is that

• Amy proposes $50,000 for herself and $0 for Ben.
• Amy proposes $20,000 for herself and $30,000 for Ben.
• Ben rejects Amy's proposal.
• None of the above