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Problem Set 1 Solutions

**Problem Set 1 Solutions
**

Gibbons Problems

1.2 B is dominated by T. After eliminating B, C is dominated by R. Therefore 4 strategy pairs are rationalizable: (T, L), (M, L), (T, R), and (M, R). The pure strategy Nash equilibria are (T, R) and (M, L).

**1.6 Proﬁt for ﬁrm 1 is
**

2 π1 = q 1 ∗ P ( Q ) − c 1 q 1 = q 1 ( a − c 1 − q 2 ) − q 1 .

**The optimal choice of q1 given q2 satisﬁes the ﬁrst-order condition dπ1 /dq = 0 .
**

dπ1 /dq1 = a − c1 − q2 − 2q1 = 0 a − c 1 − q2 q1 = 2

Likewise, q2 = (a − c2 − q1 )/2. This gives us two equations and two unknowns (the quantity choices of each ﬁrm). Solving

a − c 1 − q2 ( q1 ) 2 a − c1 a − c 2 − q1 = − 2 4 3q1 a − 2c1 + c2 = 4 4 a − 2c1 + c2 q1 = 3 q1 =

**The solution for q2 just reverses the indexes 1 and 2.
**

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Problem Set 1 Solutions

As long as q1 > 0 and q2 > 0 our solution is satisfactory. If however a + c−i < 2ci , the solution for qi will be negative. Firms can’t produce negative output! Thus when 2c2 > a − c1, q2 = 0 and ﬁrm 1 operates as a monopolist: q1 = (a − c1 )/2.

1.10 For the Prisoner’s Dilemma and 1.1.1: mixed strategy equilibria only involve mixing between strategies that survive iterated elimination of dominated strategies. In both of these games, only one strategy for each player survives this process, so there cannot be an equilibrium where a player sometimes plays one strategy and sometimes plays another. For 1.1.4: a variety of arguments could work for this game. Here is one. Let us try to construct a mixed strategy equilibrium and show that something goes wrong. A mixed strategy equilibrium where player 1 places p weight on T, q weight on M, and r = 1 − p − q weight on B must make player 2 indifferent between L, C, and R (if she puts positive weight on them). Thus

U2 ((p, q, r), L) = 4p + 5(1 − p − q ) = 5 − p − 5q =

U2 ((p, q, r), M ) = 4q + 5(1 − p − q ) = 5 − 5p − q =

U2 ((p, q, r), R) = 3p + 3q + 6(1 − p − q ) = 6 − 3p − 3q

**The ﬁrst pair of equalities imply p = q . Then U 2 ((p, q, r), M ) = U2 ((p, q, r), R) implies
**

5 − 5p − q = 5 − 6p = 6 − 3p − 3q = 6 − 6p ,

which is impossible. Thus player 2 cannot be made indifferent between all three of her strategies. But perhaps she can be made indifferent between two strategies, such as M and R. In that case

5 − 5p − q = 6 − 3p − 3q

5 − 2p = 6 − 2q q − p = 1/2

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Problem Set 1 Solutions

If q = r = 1/2, player 2 is indifferent between C and R. However, for player 1 to play this mixed strategy, he must be indifferent between M and B. When player 2 never plays L, M is dominated by B for player 1 ( 0 < 3 and 5 < 6). Therefore a mixed strategy where player 2 plays M and R cannot be implemented. The argument for L and R is similar.

Other Problems

A Blotto Game The normal-form is

(3, 1) (2, 1) (1, 2) -2, 2 0, 0

(2, 2) -1, 1 -1, 1

(1, 3) 0, 0 -2, 2

Let p be the probability Baloney plays (2, 1). Baloney must mix to make Blotto indifferent between any of his strategies, so

2 p + 0(1 − p) = 1 = 0p + 2(1 − p)

p = 1/2 satisﬁes those equations, so Blotto plays (2, 1) half the time.

Let q be the probability that Blotto plays (2, 2). be the probability that Blotto plays (3, 1) and r Baloney must be indifferent between his strategies given q , or and r

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Problem Set 1 Solutions

−2q − r + 0(1 − q − r) = 0q − r − 2(1 − q − r) − 2q − r = − 2 + 2 q + r 4q + 2r = 2 q = (1 − r)/2

Blotto plays (2, 2) with probability r and when he doesn’t play (2, 2), mixes half the time on (3, 1) and half the time on (1, 3). For example, Blotto could play (1/3, 1/3, 1/3) or (1/4, 1/2, 1/4). Technically what happens here is that we have one equation and two unknowns. The equation tells us about the relationship between the unknowns but cannot pin down their exact values. Voting Game The game can be represented in matrix form by 3 3x3 matrices. Player 3 votes A Player 2 votes A Player 1 votes A Player 1 votes B Player 1 votes C 8, 0, 4 8, 0, 4 8, 0, 4 Player 2 votes B 8, 0, 4 4, 8, 0 8, 0, 4 Player 2 votes C 8, 0, 4 8, 0, 4 0, 4, 8

Player 3 votes B Player 2 votes A Player 1 votes A Player 1 votes B Player 1 votes C 8, 0, 4 4, 8, 0 8, 0, 4 Player 2 votes B 4, 8, 0 4, 8, 0 4, 8, 0 Player 2 votes C 8, 0, 4 4, 8, 0 0, 4, 8

Player 3 votes C

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Problem Set 1 Solutions

Player 2 votes A Player 1 votes A Player 1 votes B Player 1 votes C 8, 0, 4 8, 0, 4 0, 4, 8

Player 2 votes B 8, 0, 4 4, 8, 0 0, 4, 8

Player 2 votes C 0, 4, 8 0, 4, 8 0, 4, 8

For player i’s strategy s to be weakly dominated by s’ requires that for every possible combination of votes by the other players, i is never better off voting s’. For example, A weakly dominates C for player 1 because

Player 2 votes A B C A B C A B C A A A B B B C C C

Player 3 vote

Player 1 payoff if she votes A 8 8 8 8 4 0 8 0 0

Player 1 payoff if she votes C 8 0 0 0 4 0 0 0 0

Once you repeatedly eliminate the players’ weakly dominated strategies, you are left with one undominated set of strategies: (A, C, C). The order in which you eliminate them does not matter. Here is one order: • • • • C dominated by A for P1. A dominated by B for P2. B dominated by C for P3. A dominated by C for P3.

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Problem Set 1 Solutions

• B dominated by A for P1. • B dominated by C for P2. There are two interesting things about this result. First, iterated elimination of strictly dominated strategies would have gotten us nowhere. Second, there are several Nash equilibria in addition to (A, C, C) -- for example, (A, A, A) is a Nash equilibrium that gives a different outcome.

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