Degree in Economics and Finance AvancedMicroeconomics Problem set #2: Game Theory

Prof. Arguedas

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1. Consider the following normal-form game:

PLAYER 2 D A 7, 6 PLAYER 1 B 5, 8 C 0, 0 E 5, 8 7, 6 1, 1 F 0, 0 1, 1 4, 4

a) Find all the pure-strategy Nash equilibria (if any) b) Find the mixed-strategy Nash equilibrium in which each player randomizes just over the first two actions. c) Compare players expected payoffs in the equilibria found in parts a) and b). 2. In the following normal-form game:

PLAYER 2 L U 2, 0 PLAYER 1 M 3, 4 D 1, 3 M 1, 1 1, 2 0, 2 R 4, 2 2, 3 3, 0

a) What strategies survive after the elimination of strictly dominated strategies? b) Find all the Nash equilibria (both in pure and mixed strategies). 3. The mixed-strategy Nash equilibrium in the Battle of the Sexes may depend on the numerical values for the payoffs. To generalize this solution, assume that the payoffs matrix for the game is given by:

PLAYER 2 (husband) Ballet PLAYER 1 (wife) Ballet K, 1 Boxing 0, 0 Boxing 0, 0 1, K

where

1. Show how the mixed-strategy Nash equilibrium depends on the value of

Degree in Economics and Finance AvancedMicroeconomics Problem set #2: Game Theory

Prof. Arguedas

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4. The game of Chicken is played by two macho teens who speed toward each other on a singlelane road. The first to veer is branded the chicken, whereas the one who does not veer gains pergroup esteem. Of course, if neither veers, both die in the resulting crash. Payoffs to the Chicken game are provided in the following table:

TEEN 2 Veer TEEN 1 Veer 2, 2 Not veer 3, 1 Not veer 1, 3 0, 0

a) Find all the pure strategy Nash equilibria. b) Find the mixed strategy Nash equilibrium. What is the probability that both teenagers will survive? c) Suppose the game is played sequentially with teen 1 moving first and commiting to this action by throwing away the steering wheel. Write down the extensive form game and find the corresponding subgame perfect equilibrium. d) Does the equilibrium found in part c) coincide with any of the equilibria found in parts a) or b)? Why? 5. Two neighbouring homeowners, 1, 2, simultaneously choose how many hours , with to spend 1, 2 and

maintaining a beautiful garden. The average benefit per hour is 10

, and the (opportunity) cost per hour is 4. Homeowner s average benefit is increasing in the hours neighbour spends on his own garden because the appearance of ones property

depends on part on the beauty of the surrounding neighbourhood. a) Compute the Nash equilibrium of this game. b) Graph the best response functions and indicate the Nash equilibrium found in part a) in the figure. c) Show graphically how the Nash equilibrium would change if the opportunity cost of neighbour 1 increases. d) Compute the Subgame Perfect Equilibrium of this game (assume for example that neighbour went on holidays while neighbour worked on his garden in the meantime). e) Explain the differences between the results obtained in parts a) and d), both verbally and graphically. 6. Consider the following normal-form game:

Degree in Economics and Finance AvancedMicroeconomics Problem set #2: Game Theory

Prof. Arguedas

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PLAYER 2 A PLAYER 1 A 0, 0 B -1, 3 3, -1 1, 1 B

a) Verify that the Nash equilibrium is the usual one for the Prisoners Dilemma and that both players have dominant strategies. b) Suppose the stage game is repeated infinitely many times. Compute the discount factor required for the players to sustain the cooperative strategy (B,B). Outline the trigger strategies you are considering. 7. The simultaneous-move game (below) is played twice, with the outcome of the first stage observed before the second stage begins. There is no discounting. Can the payoff (4,4) be achieved in the first stage in a subgame-perfect equilibrium? If so, give strategies that do so. If not, prove why not.

PLAYER 2 L T 3, 1 PLAYER 1 M 2, 1 B 1, 2 C 0, 0 1, 2 0, 1 R 5, 0 3, 1 4, 4

8. Consider the following normal-form game of incomplete information:

PLAYER 2 C A 7, 6 PLAYER 1 B 5, 8 C 0, 0 D 0, 0 1, 1 t, 4

where t can take two possible values (t=4 or t=0) with equal probability. Assume player 1 knows his/her own type while player 2 only knows the probability distribution of player 1 types. a) Find all the pure-strategy Bayesian Nash equilibria of this game.

Degree in Economics and Finance AvancedMicroeconomics Problem set #2: Game Theory

Prof. Arguedas

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b) Now suppose that player 1 moves first and player 2 can observe player 1s action. Calculate the Perfect Bayesian equilibrium of the sequential game. Is the equilibrium pooling or separating? c) Solve parts a) and b) assuming that the normal-form game is now the following:

PLAYER 2 C A t, 6 PLAYER 1 B 5, 8 C 0, 0 D 0, 0 1, 1 t, 4

9. Consider the following normal-form game of incomplete information:

PLAYER 2 C A 7, h PLAYER 1 C 0, 0 D 0, 0 t, 4

a) Find all the pure-strategy Bayesian Nash equilibria assuming that t and h are independent and can take two possible values each with equal probability (t=4 or t=0 and h=6 or h=1). Assume each player knows his/her own type and the probability distribution of the other player types. b) Suppose player 1 moves first and player 2 can observe player 1s action. Draw the extensive form of the game. c) Assume h = 1 and calculate the Perfect Bayesian equilibrium of the sequential game. Is the equilibrium pooling or separating?