Monica and Nancy have formed a business partnership to
provide consulting services in the golf industry. They each have to decide how
much effort to put into the business. Let m be the amount of effort put into
the business by Monica, and n be the amount of effort put in by Nancy. The
joint profits of the partnership are given by 4m 1 4n 1 mn, in tens of
thousands of dollars, and the two partners split these profits equally.
However, they must each separately incur the costs of their own effort; the
cost to Monica of her effort is m2, while the cost to Nancy of her
effort is n2 (both measured in tens of thousands of dollars). Each partner must
make her effort decision without knowing what effort decision the other player
(a) If Monica and Nancy each put in effort of m = n = 1,
then what are their payoffs?
(b) If Monica puts in effort of m = 1, then what is
Nancy’s best response?
(c) What is the Nash equilibrium to this game?