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NATIONAL UNIVERSITY OF SINGAPORE

EC3312: GAME THEORY AND APPLICATIONS TO
ECONOMICS
Semester I, AY 2012/2013
FINAL EXAMINATION
November 2012
Time Allowed: 2 hours
INSTRUCTIONS TO CANDIDATES
1. This examination paper comprises five (5) printed pages, including
this page.
2. This examination comprises four (4) questions.
3. Answer all four questions.
4. This is an CLOSED book exam.
5. The total mark for this paper is 50. Questions I and III are worth 10
marks each. Questions II and IV are worth 15 marks each.
EC3312
I. Consider the following Bayesian game:
• Nature selects t = (t
1
, t
2
), (t
1
, t

2
), and (t

1
, t
2
) with equal probabilities
1/3.
t
2
t

2
t
1
1/3 1/3
t

1
1/3 0
Note that nature never selects (t

1
, t

2
).
• Player 1 learns whether nature has selected t
1
or t

1
; player 2 learns
whether nature has selected t
2
or t

2
.
• Players 1 and 2 simultaneously choose their actions: player 1 chooses
either T or B, and player 2 chooses either L or R. Payoffs are given by
the following game:
L R
T 4, 4 2, 5
B 5, 2 0, 0
Note that nature’s choice does not affect payoffs directly.
• All of this is common knowledge.
1. (5 marks) Give either a normal-form or agent-normal-form representa-
tion of this game.
2. (5 marks) Find all pure-strategy Bayesian Nash equilibria.
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EC3312
II. Consider a first-price, sealed-bid auction with two bidders: bidders submit
their bids simultaneously, and the bidder with the highest bid gets the object
and pays his own bid. Bidder 1’s valuation v
1
is uniformly distributed on
[0, 1], with density
f
1
(v
1
) =
{
0 if v
1
< 0 or v
1
> 1,
1 if 0 ≤ v
1
≤ 1,
and cumulative distribution
F
1
(x) = Prob(v
1
≤ x) =





0 if x < 0,
x if 0 ≤ x ≤ 1,
1 if x > 1,
and bidder 2’s valuation v
2
is distributed on [0, 1] with density
f
2
(v
2
) =
{
0 if v
2
< 0 or v
2
> 1,
2v
2
if 0 ≤ v
2
≤ 1,
and cumulative distribution
F
2
(x) = Prob(v
2
≤ x) =





0 if x < 0,
x
2
if 0 ≤ x ≤ 1,
1 if x > 1.
We assume that v
1
and v
2
are stochastically independent.
1. (5 marks) Suppose that each bidder i follows a linear strategy
b
i
(v
i
) = a
i
+ c
i
v
i
with a
i
≥ 0 and c
i
> 0. Conditional on that bidder i’s valuation is v
i
,
compute bidder i’s expected payoff when he submits bid b
i
and player
j follows b
j
(v
j
) = a
j
+ c
j
v
j
.
2. (5 marks) Find an asymmetric (!) Bayesian Nash equilibrium of this
auction.
3. (5 marks) Compare first- and second-price auctions. Which auction
format allocates the good more efficiently in equilibrium?
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EC3312
III. Consider the infinite repetition of prisoner’s dilemma
Don’t Confess (D) Confess (C)
Don’t Confess (D) 4, 4 0, 5
Confess (C) 5, 0 1, 1
with discount factor δ ∈ (0, 1).
1. (5 marks) We define the “trigger” strategy as follows:
• In period 1, play D.
• In period t ≥ 2, if outcomes of all t − 1 preceding periods are
(D, D), play D; otherwise (i.e., if some player played C at least
once before), play C.
Find the condition on δ under which the pair of trigger strategies is a
subgame-perfect Nash equilibrium.
2. (5 marks) We define the “tit-for-tat” strategy as follows:
• In period 1, play D.
• In period t ≥ 2, if the opponent played D in the previous period
(i.e., the (t−1)-th period), play D; otherwise (i.e., if the opponent
played C in the previous period), play C.
Find the condition on δ under which the pair of tit-for-tat strategies is
a subgame-perfect Nash equilibrium.
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EC3312
IV. Consider a Bertrand duopoly with differentiated products. Demand for
firm i is
q
i
(p
i
, p
j
) = 1 −p
i
+ p
j
.
Costs are zero for both firms. The game proceeds as follows:
• In period 1, firm 1 chooses price p
1
. We assume that firm 1 is committed
to this plan thereafter.
• In period 2, firm 2 sends an industrial spy to firm 1. Espionage succeeds
with probability θ, in which case firm 2 observes firm 1’s planned price
p
1
and chooses p
2
= p
2,s
(p
1
). With the remaining probability 1 − θ,
espionage fails, in which case firm 2 chooses p
2
= p
2,f
without observing
p
1
.
• In period 3, both markets open, and demands are realized.
1. (10 marks) Find all pure-strategy perfect Bayesian equilibria in this
game.
2. (5 marks) Compare equilibrium payoffs for various values of θ. Does
firm 1 prefer larger θ or smaller θ? Does firm 2 prefer larger θ or smaller
θ? Explain economic intuitions.
—— END OF PAPER ——
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