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You are on page 1of 5

**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.

2

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?

3

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.

4

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 ——

5

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