Homework 1

1. Consider the following public good provision game. Each of two players decides simultaneously whether to provide the public good. Providing the public good costs c 2 (0; 1). The benet to player i if the good is provided is 2 i with i uniformly distributed on [0; 1]. Find the unique Bayesian equilibrium. 2. Exercise 6.9 in Fudenberg-Tirole. 3. Exercise 8.E.1 in Mas Colell (p. 265). 4. Alice and Bob would like to meet but they have no way of communicating. Each of them can either go to the Park (xi = 0) or to the Pub (xi = 1). If they fail to meet (xA 6= xB ), they both get a payo of zero. Besides wanting to get together, Alice and Bob may have personal preferences between going to the park and going to the pub. The payo table is: xA = 0 xA = 1 1 xB = 0 A; 1 0; 0 xB = 1 0; 0 1 + A; 1 +

where A and B are two mutually independent random variables, both uniformly distributed on [ T; T ], where T > 0. Namely, the cumulative distribution function of i is 8 if i < T < 0 i +T if i 2 [ T; T ] : 2T 1 if i > T (a) Provide the denition of Bayesian equilibrium for this game. (b) If T < 1, nd three distinct Bayesian equilibria of this game. (c) If T > 1, give a formal proof that this game has a unique Bayesian equilibrium. (d) Would your result in Point 3 change if Alice could also observe and Bob could also observe A ?
B

Before play begins, Alice observes A only and Bob observes B only. Then, Alice and Bob select their x s simultaneously and independently.

5. Consider a three-card poker game. There are two players and they use a card deck with an Ace, a King, and a Queen. Each player picks up a card from the deck. Then each player simultaneously chooses whether to fold or to bid. If both players fold, they both get a payo of zero. If one player bids and the other folds, the one who bids gets 1 and the one who folds gets 1. If they both bid, they show their cards. The player with the higher card wins g and the other player gets g (Ace is highest, Queen is lowest). Assume that g > 2. What is the equilibrium of this game? 1

6. Consider the market for lemons discussed in lecture. Assume now that only the buyer observes the value of the car v . The seller does not. For the rest, the game is the same. For what set of prices p 0 does this game have an equilibrium in which high-quality cars are traded? 7. Consider again the market for lemons. The buyer has no information. The seller receives a signal ys with the following distribution Pr (ys = v jv ) = Pr (ys = ?jv ) = ; 1 ;

1 ; 1 is a parameter that denotes the precision of the signal. where 2 2 For what range of 2 1 2 ; 1 and p does there exist a Bayesian equilibrium where high-quality cars are traded?