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Unofficial Solutions Manual To R A Gibbon S A Primer in Game Theory PDF
Unofficial Solutions Manual To R A Gibbon S A Primer in Game Theory PDF
Navin Kumar
Delhi School of Economics
2
This is strictly a beta version. Two thirds of it are missing and there are er-
rors aplenty. You have been warned.
- Navin Kumar
Static Games of Complete Information
For all i=1, ... ,n. We could solve this question using matrices and
Cramer’s rule, but a simpler method would be to observe that since
all firms are symmetric, their equilibrium quantity will be the same
i.e.
a−c
1 1 1
πmm = ( P − c) · qm = ( a − Q − c) · qm = a − − c · q1m
2
a−c a−c ( a − c )2
= · = = 0.13 · ( a − c)2
2 4 8
If both are playing the Cournot equilibrium quantity, than the prof-
its earned by Firm 1 (and Firm 2) are: 1 1
The price is determined by
P = a−Q
1 2( a − c ) a + 2c
πcc = ( P − c) · q1c = ( a − − c) · q1c = ( − c) · q1c = a − q1cc − q2cc
3 3
a−c
( a − c )2 = a−2·
= 3
9 a+c
=
= 0.11 · ( a − c)2 2
What if one of the firms (say Firm 1) plays the Cournot quantity
and the other plays the Monopoly quantity? 2 Firm 1’s profits are: 2
The price is given by
P = a−Q
1 5a 7c a−c 5
πcm = ( P − c) · q1c = ( + − c) · = · ( a − c )2 = a − q1c − q2m
12 12 3 36
a−c a−c
= 0.14 · ( a − c)2 = a− −
3 4
7
And Firm 2’s profits are: = a− · ( a − c)
12
5a 7c
5a 7c a−c 5 = +
2 12 12
πcm = ( P − c) · q2m = ( + − c) · = · ( a − c )2
12 12 4 48
= 0.10 · ( a − c)2
α ≡ ( a − c )2
Their profits are reversed when their production is. Thus, the pay-
offs are:
Player 2
qm qc
qm 0.13α, 0.13α 0.10α, 0.14α
Player 1
qc 0.14α, 0.10α 0.11α, 0.11α
π1 = ( P − c1 ) · q1 = ( a − Q − c1 ) · q1 = ( a − q1 − q2 − c1 ) · q1
Player 2
( p) Mum (1 − p) Fink
(q) Mum −1, −1 −9, 0
Player 1
(1 − q) Fink 0, −9 −6, −6
Prisoner’s Dilemma
−1 · q + −9 · (1 − q) = 0 · q + −6 · (1 − q) ⇒ q = −3.5
This is impossible.
9
(b)
Player 2
Le f t(q0 ) Middle(q1 ) Right(1 − q0 − q1 )
U p( p) 1, 0 1, 2 0, 1
Player 1
Down(1 − p) 0, 3 0,1 2, 0
Figure 1.1.1.
p · 0 + (1 − p ) · 3 = p · 2 + (1 − p ) · 1
⇒ p = 0.5
2 · p + 1 · (1 − p ) = 1 · p + 0 · (1 − p )
⇒ p = −0.5
Player 2
L ( q0 ) C ( q1 ) R (1 − q0 − q1 )
T ( p0 ) 0, 5 4, 0 5, 3
Player 1 M ( p1 ) 4, 0 0, 4 5, 3
B (1 − p0 − p1 ) 3, 5 3, 5 6, 6
Figure 1.1.4.
4 · p0 + 0 · p1 + 5 · (1 − p0 − p1 ) = 0 · p0 + 4 · p1 + 5 · (1 − p0 − p1 )
⇒ p0 = p1
Similarly,
0 · p0 + 4 · p1 + 5 · (1 − p0 − p1 ) = 3 · p0 + 3 · p1 + 6 · (1 − p0 − p1 )
⇒ p1 = 2.5 − p0
Which violates p0 = p1 .
10 Static Games of Complete Information
Player 2
L ( q0 ) C ( q1 ) R (1 − q0 − q1 )
T ( p0 ) 2, 0 1, 1 4, 2
Player 1 M ( p1 ) 3, 4 1, 2 2, 3
B (1 − p0 − p1 ) 1, 3 0, 2 3, 0
E2 ( L) = E2 (C )
⇒ 0 · p0 + 4 · p1 + 3 · (1 − p0 − p1 ) = 1 · p0 + 2 · p1 + 2 · (1 − p0 − p1 )
⇒ p1 = 2 · p0 − 1
Similarly,
E2 (C ) = E2 ( R)
⇒ 1 · p0 + 2 · p1 + 2 · (1 − p0 − p1 ) = 2 · p0 + 3 · p1 + 0 · (1 − p0 − p1 )
2
⇒ p1 = − p0
3
Combining these,
2 5
2 · p0 − 1 = − p0 ⇒ p0 =
3 9
5 1
∴ p1 = 2 · p0 − 1 = 2 · − 1 =
9 9
5 1 3
∴1 − p0 − p1 = 1 − − =
9 9 9
Now we must calculate q0 and q1 . Player 2 will set them such that
E1 ( T ) = E1 ( M )
⇒ 2 · q0 + 1 · q1 + 4 · (1 − q0 − q1 ) = 3 · q0 + 1 · q1 + 2 · (1 − q0 − q1 )
⇒ q1 = 1 − 1.5 · q0
And
E1 ( M) = E1 ( B)
⇒ 3 · q0 + 1 · q1 + 2 · (1 − q0 − q1 ) = 1 · q0 + 0 · q1 + 3 · (1 − q0 − q1 )
Qed
Answer 1.12
( q ) L2 (1 − q ) R2
( p) T1 2, 1 0, 2
(1 − p) B1 1, 2 3, 0
11
E2 ( L) = E2 ( R)
⇒ 1 · p + 2 · (1 − p ) = 2 · p + 0 · (1 − p )
2
⇒p=
3
Player 2 will set q such that
E1 ( T ) = E1 ( B)
⇒ 2 · q + 0 · (1 − q ) = 1 · q + 3 · (1 − q )
3
⇒q=
4
Answer 1.13
E2 (Firm 1) = E2 (Firm 2)
1 1
⇒ p · w1 + ( 1 − p ) · w1 = p · w2 + ( 1 − p ) · w2
2 2
2w1 − w2
⇒p=
w1 + w2
Which is true. And since the payoffs are symmetric, a similar analy-
sis would reveal that
2w1 − w2
q=
w1 + w2
Answer 1.14
Dynamic Games of Complete Information
IC ( A) + IP ( A)
This is maximized at
d( IC ( A) + IP ( A)) dI ( A) dI ( A)
=0⇒ C =− P
dA dA dA
The utility function of the parents is given by
V ( IP − B) + kU ( IC + B)
This is maximized at
dU ( IC + B) dV ( IP − B)
k + =0
dB db
dU ( IC + B) d( IC + B) dV ( IP − B) IP − B
⇒k · + · =0
d( IC + B) dB d ( IP − B ) dB
⇒ kU 0 ( IC + B) − V 0 ( IP − B) = 0
⇒ V 0 ( IP − B∗ ) = kU 0 ( IC + B∗ )
dIC ( A) dB∗ ( A)
⇒ U 0 ( IC ( A) + B∗ ( A)) · + =0
dA dA
dIC ( A) dB∗ ( A)
⇒ + = 0 ⇒ IC0 ( A) = − B0∗ ( A)
dA dA
We now have only to prove B0∗ ( A) = IP0 ( A)
dV ( IP ( A) − B∗ ( A))
=0
dA
14 Dynamic Games of Complete Information
dIP ( A) dB∗ ( A)
0
⇒V ( IP ( A)∗B ( A)) · − =0
dA dA
⇒ IP0 ( A) = B0∗ ( A)
V ( I p − B) + k(U1 ( IC − S) + U2 ( B + S)) + U1 ( IC − S) + U2 ( B + S)
= V ( I p − B) + (1 + k)(U1 ( IC − S) + U2 ( B + S))
V 0 BS0
⇒ U10 = U20 (1 + BS0 ) −
1+k
as opposed to U10 = U20 (1 + BS0 ), which is the equilibrium condition.
V 0 BS0
Since 1+ k> 0, the equilibrium U10 is ‘too high’ which means that S
0
- the level of savings - must be too low (since dU
dS < 0). It should be
higher.
2
R
⇒δ≥ √ −1
V
y D0 − w D ≤ y E0 − wE ⇒ y D0 − y E0 ≤ w D − wE = p
If he does acquire the skill, the firm will promote if the returns to
the firm are such that:
y DS − w D ≥ y ES − wE ⇒ y DS − y ES ≥ w D − wE = p
y D0 − y E0 ≤ p ≤ y DS − y ES
Given this condition, the worker will acquire the promotion iff he
acquires the skill. He will acquire the skill iff the benefit outweighs
the cost i.e.
wD − C ≥ wE ⇒ wE + p − C ≥ wE ⇒ p ≥ c
That is, the premium paid by the company must cover the cost of
training. The company wishes (obviously) to minimize the pre-
mium, which occurs at:
C if C ≥ y D0 − y E0 ,
wD − wE = p =
y D0 − y E0 if C < y D0 − y E0
A final condition is that the wages must be greater than the alterna-
tive i.e. wE ≥ 0 and w D ≥ 0. The firm seeks to maximize yij − wi ,
which happens at wE = 0 and w D = p.
P ( Q ) = a − q1 − q2 − q3
π2 = ( a − q1∗ − q2 − q3 − c) · q2
16 Dynamic Games of Complete Information
which is maximized at
dπ2
= ( a − q1∗ − q2 − q3 − c) + q2 (−1) = 0
dq2
a − q1∗ − q3 − c
⇒ q2 =
2
Symmetrically,
a − q1∗ − q2 − c
q3 =
2
Putting these two together,
a−q1∗ −q2 −c
a − q1∗ − 2 −c a − c − q1∗
q2 = ⇒ q2 =
2 3
Which, symmetrically, is equal to q3 .
a − c − q1 a − q1 − c
∴ π1 = ( a − q1 − q2 − q3 − c ) · q1 = ( a − q1 − 2 · − c ) · q1 = · q1
3 3
This is maximized at
dπ1 a − q1 − c − q1 a−c
= + = 0 ⇒ q1∗ =
dq1 3 3 2
πi = ( p − w ) · Li
Which is maximized at
dπi d ( p − w ) · Li d ( a − Q − w ) Li
= = =0
dLi dLi dLi
d ( a − L1 − . . . − L i − . . . − L n − w ) · L i
⇒ =0
dLi
⇒ ( a − L1 − . . . − Li − . . . − Ln − w) + Li (−1) = 0
⇒ L1 + . . . + 2Li + . . . + Ln = a − w ∀ i = 1, . . . , n
Which resolves to
a−w
Li =
n+1
Thus, total labor demand is given by
a−w a−w n
L = L1 + L2 + . . . + L n = +...+ = · ( a − w)
n+1 n+1 n+1
The labor union aims to maximize
n n
U = (w − wa ) · L = (w − wa ) · · ( a − w) = · ( aw − awa − w2 + wwa )
n+1 n+1
The union maximize U by setting w. This is maximized at
dU n a + wa
= ( a − 2w + wa ) · =0⇒w=
dw n+1 2
Answer 2.8
Answer 2.9 From section 2.2.C, we know that exports from coun-
try i can be driven to 0 iff
a − c − 2t j a−c
ei∗ = = 0 ⇒ tj =
3 2
which, symmetrically, is equal to ti . Note that in this model c =
wi and we will only be using wi from now, for simplicity. What
happens to domestic sales?
a − wi
a − wi + t i a − wi + 2 a − wi
∴ hi = = =
3 3 2
Which is the monopoly amount. Now, in the monopoly-union bar-
gaining model, the quantity produced equals the labor demanded.
Thus,
a − wi
Lie=0 =
2
The profit earned by firm i in this case is given by
2
a − wi a − wi a − wi
πie=0 = ( pi − wi )hi = ( a − wi − hi )hi = a − wi − =
2 2 2
a − wi wi a − wa − wi2 + wi wa
U e =0 = ( wi − w a ) L i = ( wi − w a ) =
2 2
18 Dynamic Games of Complete Information
The union sets wages to maximize utility with the following condi-
tion:
dU e=0 a − 2wi + wa a + wa
= = 0 ⇒ wi =
dwi 2 2
Now, tariffs decline to zero. In this situation, t j = 0 and therefore
a − wi
h j = hi =
3
and
a − wi
e j = ei =
3
Due to this, prices fall:
a − wi a − wi a + 2wi
Pi = Pj = a − Q = a − hi − e j = a − − =
3 3 3
So what happens to profits?
a − wi a − wi
a + 2wi a + 2wi
πit=0 = ( pi − wi )hi + ( p j − wi )e j = − wi + − wi
3 3 3 3
2
a − wi
⇒ πit=0 =2 = 2 · πie=0
3
Thus, profits are higher at zero tariffs. What happens to employ-
ment?
a − wi
t =0 2 4 4
L i = q i = h i + ei = · ( a − wi ) = · = · Lie=0
3 3 2 3
Employment rises. And what happens to the wage? That depends
on the payoff the union now faces:
2 2
U t =0 = ( wi − w a ) · L i = (w − wa )( a − wi ) = · (wi a − wa a − wi2 + wa wi )
3 i 3
This is maximized at
dU t=0 2 a + wa
= ( a − 2wi + wa ) = 0 ⇒ wi =
dwi 3 2
Which is the same as before.
P2 Q2 R2 S2
P1 2, 2 x, 0 -1, 0 0,0
Q1 0, x 4, 4 -1, 0 0, 0
R1 0, 0 0, 0 0, 2 0, 0
S2 0, -1 0, -1 -1, -1 2, 0
j
So what are player 1’s payoff from playing the strategy? Let POi ( X1 , X2 )
denote player i’s payoff in round j when player 1 plays X1 and
19
PO11 ( Q1 , Q2 ) + PO12 ( P1 , P2 ) = 4 + 2 = 6
PO11 ( P1 , Q2 ) + PO12 ( R1 , R2 ) = x + 0 = x
PO11 ( P1 , P2 ) + PO12 ( P1 , P2 ) = 2 + 2 = 4
4<x<6
L C R
T 3,1 0,0 5,0
M 2,1 1,2 3,1
B 1,2 0,1 4,4
Unfortunately, the payoff (4,4) - which comes from the actions (B,R)
- cannot be maintained. Player 2 would play R, if player 1 plays B -
player 1 however would deviate to T to earn a payoff of 5. Consider,
however, the following strategy for player 2:
• In Round 1, play R.
• In Round 2, if Round 1 was (B,R), play L. Else, play M.
Player 1’s best response in Round 2 is obviously T or M, depend-
ing on what player 2 does. But what should he do in Round 1? If
he plays T, his playoff is: 3 3
If you do not understand the nota-
tion, see Answer 2.10
PO11 ( T, R) + PO12 ( M, C ) = 5 + 1 = 6
If he plays B:
PO11 ( B, R) + PO12 ( T, L) = 4 + 3 = 7
a−c
a+c
P = a−Q = q− =
2 2
The payoff from sticking to the strategy (in which both firms pro-
duce a− c
4 ) the payoff is
a−c a−c ( a − c )2
1 1
= · · = ·
1−δ 2 4 1−δ 8
πdeviate ≤ π f ollow
( a − c )2 ( a − c )2
1
⇒ ≤ ·
4 1−δ 2
1
⇒δ≥
2
Q.E.D.
aH − c
a +c
pH = aH − = H
2 2
21
This is the price that the firms have to maintain when demand is
high. Conversely, when demand is low
aL + c
pL =
2
Let p M be the monopoly price, defined as
p
H if ai = a H
pM =
pL if ai = a L
( a i − c )2 ( a H − c )2 ( a L − c )2
π f ollow = +δ· π· + (1 − π ) · +...
8 8 8
( a i − c )2 ( a − c )2 ( a − c )2
δ
⇒ π f ollow = + · π· H + (1 − π ) · L
8 1−δ 8 8
πdeviate ≤ π f ollow
( a i − c )2 ( a − c )2 ( a − c )2 ( a − c )2
δ
⇒ ≤ i + · π· H + (1 − π ) · L
4 8 1−δ 8 8
a−c
qm
n =
2n
Therefore, the profit earned by one of these companies is
2
a−c a−c a−c
1
πm = ( p − c)qm
n = (a − Q − c)qm
n = a− −c = ·
2 2n n 2
a−c
The Cournot oligopoly equilibrium quantity5 is 1+ n which means 5
See Answer 1.4
that the profit earned at this equilibrium is
a−c
0 0 n+1
π = ( a − Q − c)q = a − · ( n − 1) − q − c q 0 =
0
· ( a − c ) q 0 − q 02
2n 2n
Which is maximized at
dπ 0 n+1 a+1
0
= · ( a − c) − 2q0 = 0 ⇒ q0 = ( a − c)
dq 2n 4n
If the firm deviates, it earns the cheating gain for one round and
Cournot profits for all future rounds i.e. the gain from deviating
from the strategy is
2 2 2
a−c a−c
n+1
πdeviate = · ( a − c) +δ + δ2 +...
4n 1+n 1+n
" 2 2 #
n+1 δ 1
⇒ πdeviate = + ( a − c )2
4n 1+δ 1+n
If the firm follows the strategy, it’s payoff is πm for all rounds:
2 2 2 2
a−c a−c a−c a−c
1 1 1
2 1 1
π f ollow = +δ· +δ · +... = ·
n 2 n 2 n 2 1−δ n 2
π f ollow ≥ πdeviate
2 " 2 2 #
a−c
1 1 n+1 δ 1
⇒ · ≥ + ( a − c )2
1−δ n 2 4n 1−δ n+1
n2 + 2n + 1
⇒ δ∗ ≤
n2 + 6n + 1
Thus as n rises, δ∗ falls. If you want to know more, see Rotember
and Saloner (1986).
Answer 2.16
Answer 2.17
game, if the two players can’t agree, the game goes to the second
stage, at which point, player 2 gets 1 and player 1 gets 0. This pay-
off of 1 in the second round is worth δ to player 2 in the first round.
If player 1 offers δ to player 2 in the first round, player 2 will accept,
getting a payoff of 1 − δ i.e. (1 − δ, δ).
In a three period game, if player 2 rejects the offer in the first
round, they go on to the second round, at which point it becomes
a two period game and player 2 gets a payoff of 1 − δ and player 1
gets δ. This payoff (δ,1 − δ) is worth (δ2 ,δ[1 − δ]) to the players in
the first round. Thus, if player 1 makes an offer of (1 − δ[1 − δ],δ[1 −
δ])=(1 − δ + δ2 ,δ − δ2 ), player 2 would accept and player 1 would
secure a higher payoff.
1 δ
Answer 2.20 In round 1, player A offers ( 1− δ , 1+δ ) to player B,
∗
which player B accepts since 1+δ ≥ δs = δ 1−δ .
δ 1
Answer 2.21
Answer 2.22 In the first round, investors can either withdraw (w)
or not (d). A strategy can represented as x1 x2 where x1 is what the
investor does in the first round and x2 is what the investor does in
the second round. The game can be represented by the following
table:
ww wd dd dw
ww r,r r,r D,2r-D D,2r-D
wd r,r r,r D,2r-D D,2r-D
dd 2r-D,D 2r-D,D R,R D,2R-D
dw 2r-D,D 2r-D,D 2R-D,D R,R
v + I − p − I2 ≥ − I2 ⇒ p ≤ v + I
24 Dynamic Games of Complete Information
Thus, the highest possible price that the buyer will pay at this point
is p = v + I. If, however, the buyer doesn’t invest, the buyer will
buy if
v−p ≥ 0 ⇒ v ≥ p
1
v+ 2 v
1
2, A − 41 , v + 1
2
1
4, v
1
2, R − 14 , 0 − 41 , 0
0, A − 21 , v + 1
2 0, v
0, R 0, 0 0, 0
1
(q)v + 2 (1 − q ) v
1
( p) I = 2 Accept − 14 , v + 21 1
4, v
(1 − p) I = 0Reject 0, 0 0, 0
The only pure Nash Equilibrium is for the buyer to not invest and
the
Static Games of Incomplete Information
π1 = ( p − c ) q1 = ( a i − c − q1 − q2 ) q1
Which is done by
dπ1 a − c − q2
= ai − c − q1 − q2 + q1 (−1) = 0 ⇒ q1 = i
dq1 2
π2 = ( p − c ) q2 = ( a − c − q1 − q2 ) q2
This is maximized at
dπ2 a − c − q1 θa + (1 − θ ) a L − c − q1
= a − c − q1 − q2 + q2 (−1) = 0 ⇒ q2 = = H
dq2 2 2
Plugging in q1 , we get
h i
θa H +(1−θ ) a L −c−q2
θa H + (1 − θ ) a L − c − 2
q2 =
2
θa H + (1 − θ ) a L − c
⇒ q2 =
3
Now, we need to find out what firm 1’s output would be. If ai =
aH ,
θa H +(1−θ ) a L −c
aH − c − (3 − θ ) a H − (1 − θ ) a L − 2c
q1H = 3
=
2 6
But what if ai = a L ?
θa H +(1−θ ) a L −c
aL − c − (2 + θ ) a L − θa H − 2c
q1L = 3
=
2 6
26 Static Games of Incomplete Information
c − aL
q2 ≥ 0 ⇒ θa H + (1 − θ ) a L − c ≥ 0 ⇒ θ ≥
aH − aL
θ ≤ 1 ⇒ 1 ≥ c − aL ⇒ aL ≥ c − 1
Furthermore,
(2 + θ ) a L − θa H − 2c ≥ c − aL
q1L ≥ 0 ⇒ ≥ 0 ⇒ θ ≤ 2·
6 aH − aL
2c − 3a H + a L
q1H ≥ 0 ⇒ θ ≤
aH − aL
π1 = ( p1 − c)q1 = ( p1 − c)( a − p1 − b1 p2 )
This is maximized at
dπ1 a − b1 p2 a − b1 [θ p H + (1 − θ ) p L ]
= a − p1 − b1 p2 + p1 (−1) = 0 ⇒ p1 = =
dp1 2 2
a − b H [ θ p H + (1 − θ ) p L ] a − (1 − θ ) b H p L
pH = ⇒ pH =
2 2 + θb H
And if b1 = bL :
a − b L [ θ p H + (1 − θ ) p L ] a − θbL p H
pL = =
2 2 + b L (1 − θ )
a (1 − [1 − θ ] b H )
⇒ pH =
4 + 2(1 − θ )bL + 2θb H
Similarly,
a(1 − θbL )
pL =
4 + 2(1 − θ )bL + 2θb H
L R
(q)T 1,1 0,0
(1-q)B 0,0 0,0
27
L R
(q)T 0,0 0,0
(1-q)B 0,0 2,2
Answer 3.5
" !#n−1 ! n −1
n −1
bi − a j bi − a j
⇒ πi = (vi − bi ) · [P(bi > a j + c j v j )] = ( v i − bi ) · P v j < = ( v i − bi )
cj cj
This is maximized at
! n −1 ! ! n −2
dπi bi − a j n−1 bi − a j
= (−1) · + ( v i − bi ) =0
dbi cj cj cj
! n −2 !
bi − a j a j + (n − 1)vi − nbi
· =0
cj cj
Or that
a j + (n − 1)vi − nbi aj n−1
= 0 ⇒ bi = + · vi
cj n n
28 Static Games of Incomplete Information
n −1
Now, we know that bi = ai + ci vi . Here, we know that ci = n and
aj a a an
ai = ⇒ a1 = 2 = 3 = . . . =
n n n n
Which is only possible if a1 = a2 = . . . = an = 0. Thus,
n−1
bi = · vi
n
Answer 3.7
Answer 3.8
Dynamic Games of Incomplete Information
(q)L’ (1-q)R’
L 4,1 0,0
M 3,0 0,1
R 2,2 2,2
π2 ( L 0 ) = 1 · p + 0 · (1 − p ) = p
π2 ( R 0 ) = 0 · p + 1 · (1 − p ) = 1 − p
π1 ( L) = 4 · q + 0 · (1 − q) = 4q
π1 ( M ) = 3 · q + 0 · (1 − q) = 3q
π1 ( L) > π1 ( M ) ⇒ 4q > 3q
L0 M0 R0
L 1,3 1,2 4,0
M 4,0 0,2 3,3
R 2,4 2,4 2,4
30 Dynamic Games of Incomplete Information
π2 ( L0 ) = 3 · p + 0 · (1 − p) = 3p
π2 ( M 0 ) = 2 · p + 2 · (1 − p ) = 2
π2 ( R0 ) = 0 · p + 3 · (1 − p) = 3 − 3p
π1 ( R ) = 2
π1 ( L) = 1 · q1 + 1 · q2 + 4 · (1 − q1 − q2 ) = 4 − 3q1 − 3q2
π1 ( M) = 4 · q1 + 0 · q2 + 3 · (1 − q1 − q2 ) = 3 + q1 − 3q2
Answer 4.2
(q) L0 (1 − q ) R 0
( p) L 3,0 0,1
(1 − p ) M 0,1 3,0
R 2,2 2,2
31
Answer 4.3 (a) Let’s start with the pooling equilibrium ( R, R). In
this situation, p = 0.5. Now, the payoff to the receiver is
Thus, if the sender plays R, the receiver will play d. We have to test
two strategies for the receiver: (u, d) and(d, d). Under the strategy
(d, d)
π1 ( L, d) = 2 and π1 ( R, d) = 3
π2 ( L, d) = 3 and π2 ( R, d) = 2
π1 ( L, u) = 1 and π1 ( R, d) = 3
π2 ( L, u) = 0 and π2 ( R, d) = 2
1 1 1
π R ( L, u) = ·1+ ·1+ ·1 = 1
3 3 3
1 1 1
π R ( L, d) = ·0+ ·0+ ·0 = 0
3 3 3
There are two strategies: (u, u) and (u, d). Under (u, u):
π1 ( L, u) = 1 and π1 ( R, u) = 0
π2 ( L, u) = 2 and π2 ( R, u) = 1
π3 ( L, u) = 1 and π3 ( R, u) = 0
1
[( L, L, L), (u, u), p = , 1 ≥ q ≥ 0]
3
Let’s examine ( L, R). The best response to this is (u, d). In re-
sponse to this,
• For type 1, π1 ( L, u) = 1 < π1 ( R, d) = 3 i.e. type 1 will play R
which violates the equilibrium
• For type 2, π2 ( L, u) = 0 < π2 ( R, d) = 2 i.e. type 2 will play R
which doesn’t violate the equilibrium.
Let’s examine ( R, L). The best response to this is (u, d). In re-
sponse to this,
• For type 1, π1 ( L, u) = 1 < π1 ( R, d) = 3, i.e. type 1 will play R.
• For type 2, π2 ( L, u) = 0 < π2 ( R, d) = 2, i.e. type 2 will play R,
violating the equilibrium.
The perfect Bayesian Equilibrium is
Answer 4.6 Type 2 will always play R since πS (2, R, a) > πS (2, R, u) and πS (2, R, a) >
πS (2, R, d). Thus if the Receiver gets the message L, he knows that
it can only be type 1. In such a case, the Receiver plays u14 , creating 14
in fact, π R ( x, L, u) > π R ( x, L, d) for
both types, so the Receiver will always
play u
36 Dynamic Games of Incomplete Information
a payoff of (2, 1). This gives type 1 a higher payoff than if he played
R, which would have given him a payoff of 1. Thus, the perfect
Bayesian Equilibrium is