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econ440640pset1spr2013

# econ440640pset1spr2013

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05/05/2013

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Economics 440/640 Problem Set 1
Due 1/28/2013You are allowed to work in groups of up to four people, but not to share answers with non-groupmembers.
If you do form a group, the group must turn in one shared solution set.
All questions areequally weighted. If you have any questions please email me or stop by my ofﬁce.
Question 1. Geometry of Best Response Functions.
(This question is about material that will be covered on 1/23 or 1/25).
For this question, considertwo-person games with two strategies for each player:
1
=
{
Up
,
Down
}
and
2
=
{
Left
,
Right
}
We can represent a mixed-strategy combination as a point in the unit square where
x
is the prob-ability 2 plays Right and
y
is the probability that 1 plays Up. For example, the point (3/4, 1/3)represents player 1 playing Up
1
/
3
of the time and Down
2
/
3
of the time, and player 2 playingLeft
1
/
4
of the time and Right
3
/
4
’s of the time.
A)
Draw both players’ best response curves for the following game.L RU
2
,
2 0
,
3
D
1
,
0 1
,
1
B)
Find payoffs that would produce thefollowing best response diagram. (The solid line is player1’s best response and the dashed line is player 2’s).
Hint: you may want to work out numbersthat will give you the approximate shapes ﬁrst and only then focus on the point where thecurves intersect.
Pr. RightPr. Up
(0
,
0)(1
/
2
,
1
/
3)
C)
Find payoffs that would produce the following best response diagram.1

Pr. RightPr. Up
(0
,
0)(2
/
5
,
4
/
5)
Question 2. A Patent Race.
Firm 1 and ﬁrm 2 each decide on a research investment of
r
i
that is either \$0, \$1 million, or \$2million. If
r
i
> r
j
, ﬁrm
i
has a breakthrough worth \$5 million while ﬁrm
j
is too late and gets nobeneﬁt from its research expenditure. If
r
i
=
r
j
, neither ﬁrm gets the \$5 million gross proﬁt fromthe breakthrough because it is eaten up by patent disputes. For example, if
r
1
=
r
2
= \$1
million,then both ﬁrms have a payoff of
\$1
million.
A)
Find the matrix form of this game.
B)
Find the Nash equilibrum of this game.
C)
Now assume
r
i
can be \$
x
million, where
x
is any non-negative integer. Find the the resultingNash equilibrium.
Question 3. Group HW version 3.5
Consider three classmates working a group homework assignment, who simultaneously choose
s
i
=
=
{
S,
}
. Assume their ﬁnal grade is
# of W’s
0 1 2 3
0 30 70 100and
u
i
=
g
if
s
i
=
or
u
i
=
g
+ 35
if
s
i
=
.
A)
Write this game in matrix form.2