The following two policy proposals are currently being debated in Washington, D.C., in order to get the country out of this recession.(a) Cut taxes for middle-class American families; and(b) Inject capital into major commercial banks.The congress likes proposal (a), and the president likes proposal (b). Because the proposals are not mutually exclusive, either or both or neither may become law. Thus there are four possible outcomes, and the rankings of the two sides are as follows, where a larger number represents a more favored outcomOutcomeCongressPresident(a) becomes law41(b) becomes law14Both (a) and (b) become law33Neither (status quo prevails)22(a) The moves in the game are as follows. First, the Congress decides whether to pass a bill and whether it is to contain (a) or (b) or both. Then the president decides whether to sign or veto the bill. Congress does not have enough votes to override a veto, so the president’s decision will be final. Draw a game tree for this game and find the rollback equilibrium.(b) Now suppose the rules of the game are changed in only one respect: the president is given the extra power of a line-item veto. That is, if the Congress passes a bill containing both (a) and (b), the president may choose not only to sign or veto the bill as a whole, but also to veto just one of the two items. Show the new tree and find the rollback equilibrium.
