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Two banks share 50% of a country's domestic banking deposits. Each bank can invest these deposits with either a risky or a safe investment strategy. With a fifty percent chance, the risky investment strategy will succeed, and the bank will earn £200M. With a fifty percent chance, the risky investment strategy will fail, and the bank will lose £100M. With the safe strategy, a bank will make £25M for sure. 5. What is a given bank's expected value from the risky investment? 6. A bank's decision over investment strategy depends on the actions of the other bank. If they both choose the safe strategy, they will both earn the safe return on their investments. If they both choose the risky strategy, they will both earn the risky return on their investments. However, if only one bank chooses the risky strategy, they can steal all of the other bank's deposits - in this case, the risky bank invests twice as much, and the safe bank gets zero as all its customers are gone. Represent this strategic situation as a simultaneous move game, and find all dominant or Nash equilibria. 7. The government realises that both banks have invested in the same risky assets. Both banks might fail simultaneously, sinking the economy. The government responds by implementing a lump sum tax of £50M on any bank using a risky investment strategy. Would recommend this policy? you

Two banks share 50% of a country's domestic banking deposits. Each bank can invest these deposits with either a risky or a safe investment strategy. With a fifty percent chance, the risky investment strategy will succeed, and the bank will earn £200M. With a fifty percent chance, the risky investment strategy will fail, and the bank will lose £100M. With the safe strategy, a bank will make £25M for sure. 5. What is a given bank's expected value from the risky investment? 6. A bank's decision over investment strategy depends on the actions of the other bank. If they both choose the safe strategy, they will both earn the safe return on their investments. If they both choose the risky strategy, they will both earn the risky return on their investments. However, if only one bank chooses the risky strategy, they can steal all of the other bank's deposits - in this case, the risky bank invests twice as much, and the safe bank gets zero as all its customers are gone. Represent this strategic situation as a simultaneous move game, and find all dominant or Nash equilibria. 7. The government realises that both banks have invested in the same risky assets. Both banks might fail simultaneously, sinking the economy. The government responds by implementing a lump sum tax of £50M on any bank using a risky investment strategy. Would recommend this policy? you

Microeconomics: Principles & Policy
Microeconomics: Principles & Policy
14th Edition
ISBN:9781337794992
Author:William J. Baumol, Alan S. Blinder, John L. Solow
Publisher:William J. Baumol, Alan S. Blinder, John L. Solow
Chapter9: The Financial Markets And The Economy: The Tail That Wags The Dog
Section: Chapter Questions
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Q5, Q6 and Q7 Good Afternoon can you please help me resolve the following questions so I can compare them to my own awnsers? Thank you
C: If Northern Rock jumped off a cliff, would you follow them too? Two banks share 50% of a country's domestic banking deposits. Each bank can invest these deposits with either a risky or a safe investment strategy. With a fifty percent chance, the risky investment strategy will succeed, and the bank will earn £200M. With a fifty percent chance, the risky investment strategy will fail, and the bank will lose £100M. With the safe strategy, a bank will make £25M for sure. 5. What is a given bank's expected value from the risky investment? 6. A bank's decision over investment strategy depends on the actions of the other bank. If they both choose the safe strategy, they will both earn the safe return on their investments. If they both choose the risky strategy, they will both earn the risky return on their investments. However, if only one bank chooses the risky strategy, they can steal all of the other bank's deposits – in this case, the risky bank invests twice as much, and the safe bank - gets zero as all its customers are gone. Represent this strategic situation as a simultaneous move game, and find all dominant or Nash equilibria. 7. The government realises that both banks have invested in the same risky assets. Both banks might fail simultaneously, sinking the economy. The government responds by implementing a lump sum tax of £50M on any bank using a risky investment strategy. Would you recommend this policy?
Transcribed Image Text:C: If Northern Rock jumped off a cliff, would you follow them too? Two banks share 50% of a country's domestic banking deposits. Each bank can invest these deposits with either a risky or a safe investment strategy. With a fifty percent chance, the risky investment strategy will succeed, and the bank will earn £200M. With a fifty percent chance, the risky investment strategy will fail, and the bank will lose £100M. With the safe strategy, a bank will make £25M for sure. 5. What is a given bank's expected value from the risky investment? 6. A bank's decision over investment strategy depends on the actions of the other bank. If they both choose the safe strategy, they will both earn the safe return on their investments. If they both choose the risky strategy, they will both earn the risky return on their investments. However, if only one bank chooses the risky strategy, they can steal all of the other bank's deposits – in this case, the risky bank invests twice as much, and the safe bank - gets zero as all its customers are gone. Represent this strategic situation as a simultaneous move game, and find all dominant or Nash equilibria. 7. The government realises that both banks have invested in the same risky assets. Both banks might fail simultaneously, sinking the economy. The government responds by implementing a lump sum tax of £50M on any bank using a risky investment strategy. Would you recommend this policy?
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