Reference no: EM133064069

A supplier delivers a product to a government priced at 400. The supplier can either deliver a low quality product, or a high quality one. However, the government may decide to either employ or not employ quality checks that cost the government 20. If quality checks are employed, and low quality product is discovered, then the supplier will have to pay back the whole payment. In case of high quality product, or no checks, it keeps the payment. If the product is of high quality, then the government gets a value of 1000, but does not get any value in case of a low quality product. Similarly, the cost of producing a low quality product is zero, whereas the cost of producing a high quality product is 80 to the supplier.

a) What would it look like if writing down the situation as a normal form game and presenting it in a table?

b) What is the pure strategy Nash equilibrium?

c) Let (??, 1- ??) be the mixed strategy played by the supplier - where ?? is the probability to supply high quality; and (??, 1- ??) be the mixed strategy played by the government where ?? is the probability to employ checks. What would it look like if deriving the best response correspondences of the players?

d) What would look like if plotting the best response functions that we received in (c) on a diagram and derive the equilibrium strategies?