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You are allowed to work in groups of up to four people, but not to share answers with non-group members. If you do form a group, the group must turn in one shared solution set. All questions are equally weighted. If you have any questions please email me or stop by my ofﬁce.
Questions From Gibbons
Do questions 1.6, 1.8, and 3.6 in Gibbons. For 3.6 note that the probability that b1 is the highest bid is Pr(b1 is highest bid) = Pr(b1 > b2 ) ∗ Pr(b1 > b2 ) ∗ · · · ∗ Pr(b1 > bn ).
Question 4. Evolution and Institutions.
Consider a simple game where in each time period, two citizens meet, and play the following pairwise contest game. Citizens are paired randomly together and choose whether to support the party, or defect. If both express their loyalty, they each receive a payoff, normalized to 0. If they both “defect” they both receive a payoff of a > 0. But if one defects, and the other chooses the party line, the defector receives −b < 0, and the party liner receives 0. Def ect Def ect P artyLine A) Find the Nash equilibria of the game. B) Let x1 be the proportion of the population playing defect and x2 be the proportion of the population playing “party line.” Derive the replicator dynamics of the game, plot the dynamics, and ﬁnd all ﬁxed points of the game, and ﬁnd the Nash equilibria. C) Suppose b is chosen endogenously by the government, and that higher b are more costly. How might the government respond to changes in x1 , or to temporary or permanent changes in other parameters of the game? The government prefers for x1 to be low. a, a 0, −b P artyLine −b, 0 0, 0
Question 5. Double Auction.
A buyer and a seller are considering trading an object. The value of the object to the buyer is vb = 1 with probability 2/5 4 with probability 3/5
which is known only to the buyer, and the value of the object to the seller is vs = 0 with probability 5/9 3 with probability 4/9
They decide whether to trade by simultaneously naming prices pB and pS . If pB > pS , they exchange the good at the average price named, while if pB < pS , they do not exchange the good. A) Write the players’ payoffs as a function of their type and the other player’s strategy. B) Find a Bayesian Nash equilibrium of this game.