Andrew wants to purchase Adam's car. Andrew is prepared to pay a maximum of $2,000. Adam is not willing to accept anything lower than $1,000. Suppose that any failure to reach an agreement reduces Andrew's and Adam's gain from reaching an agreement by 10 percent and 5 percent, respectively. If there is no limit to the number of negotiating rounds, what percentage of the bargaining surplus will Andrew receive?
A) Around 28 percent.
B) Around 30 percent.
C) Around 31 percent.
D) Around 41 percent.
E) Around 49 percent.

Question

Quizplus · Accepted Answer

Andrew's gain decreases by 10% each round, while Adam's decreases by 5%. The Nash bargaining solution suggests that the party with a lower discount rate (Adam) will receive a larger share of the surplus. Calculating the shares based on these discount rates, Andrew receives around 31% of the bargaining surplus.

Andrew Wants to Purchase Adam's Car