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University-statement-on-Plagiarism-and/
Question:
A real estate agent is considering renting an apartment. Two potential tenants are available.
One is an old-age pensioner who will take care of the apartment but who can only afford a
low rental. The other is a group of university students who are prepared to pay more for a
group house rental. It is costly for the agent to continuously monitor the behaviour of the
tenants (especially the students) and how well they care for the apartment. With this in mind
she wants to offer the two tenants contracts so that whichever one is successful the tenant
takes care of the apartment. The following facts are pertinent: ? The agent remembers when
she was a student in a group house. A party got out of hand causing $3000 damage but the
students thought it was $5000 worth of fun and left the state before the owner could recoup
the costs. She assumes it is possible that young students may behave in a similar way. ? If she
lets the apartment to the pensioner there is no risk of property damage and the annual rental
(the reservation price for the pensioner) is $5000. ? If she lets the apartment to the students,
the annual rental is $7000 ? An option open to the agent is to require the students to post a
bond, which is fully refundable if there is no party and therefore no damage (ignore any
interest on the bond).
1 Complete the decision tree below showing the two sets of payoffs if the students rent the
apartment, including the value of a non-refundable bond sufficient to induce good behaviour
by the students. Explain your reasoning. The entries for the pensioner have been completed ?
the agent's return is equal to the pensioner's reservation price.
ANS-
Context header: Game Theory

Context explanation: Game theory is the study of strategies that have given. In game theory
one had make various strategies depending on the player involves and make decision which
fulfill their maximum wants. In the field of economics it has wide use in analyzing economic
theory and parameter credibility.

Answer and explanation:

There I as problem in taking decision on the renting house. There are two potential tenants.
1. First is group of student
2. Second is pensioner
Both the group has opposite characters. Pensioner is not able to pay higher rent, but they can
take proper care of the house. So it will be maintained well without damage. But student are
not so efficient to do like pensioner. They may be careful and goods student but there is
possibility of loss. However they can pay higher amount of rent.
Therefore three possible decisions are available:
1. Pensioners, agent will charge rental of $5000. It is affordable to the pensioner. This
implies that they will be satisfied with rent amount of $5000 and agent will also
receive commission amount of $5000
2. Students, as they are ready to $7000. This implies that students are getting satisfied
with this amount charged by agent.
3. Finally, consider the party students. As they are capable of paying 47000 this amount
will be charged. But students believe a satisfaction of $5000 from party. So their
satisfaction is $5000. Here agent will get $7000 but there is a chance of suffering
damage because student is risky and less efficient to manage house. Damage would be
$3000. Thus agent is expected to get a net amount of $4000.
Therefore, value of bond to be taken is $3000. If there is no damage then it will refunded
in full.