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Solution 247.hw1

Business Economics (Queens College)

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Prof. Gaoquan Liu Business Economics

Queens College, CUNY Bus247, Spring 2013

Solution to Homework 1

1. (Basic Game Theory)

Time magazine and Newsweek are considering which cover story to publish next week. Both of
them have two alternatives to choose from: “Impeachment” or “Financial Crisis”. Below there are
three versions of game.

A. (Time and Newsweek are equally matched.)

This corresponds to the case when the game is symmetric. (Time and Newsweek get the same
payoff when both magazines cover the same story.)

Newsweek
Impeachment Financial Crisis
Time Impeachment 45, 45 90, 40
Financial Crisis 40, 90 20, 20

 Does the game have dominant strategies for both players? If yes, describe them. Can the
game be solved by dominant strategies?

Answer: Yes, Time’s dominant strategy is “impeachment,” and Newsweek’s dominant

strategy is also “impeachment.” So the game can be solved by dominant strategies: both Time
and Newsweek will choose “impeachment.”
Analysis: For Time, who is the first player and the row player, we compare its rows: (45, 90)
to (40, 20). 45>40, 90>20, the first row (impeachment) is always the best, so impeachment is
the dominant strategy for Time. For Newsweek, who is the second player and the column
45 40
player, we compare its columns: ( ¿ to ( ¿ . 45>40, 90>20, the first column
90 20
(impeachment) is always the best, so impeachment is the dominant strategy for Newsweek.

 Determine all Nash equilibria.

Newsweek
Impeachment Financial Crisis
Time Impeachment 45, 45 90, 40
Financial Crisis 40, 90 20, 20
Answer: Using the double check method that I showed you in the class, from the above table,
(impeachment, impeachment) has the double check and so it is the Nash equilibrium.

B. (Time is less popular than Newsweek.)

This version of game corresponds to the assumption that Time is a less popular magazine (Time’s
payoff is less than Newsweek’s when both magazines cover the same story.)

Newsweek
Impeachment Financial Crisis
Time Impeachment 30, 60 90, 40
Financial Crisis 40, 90 10, 30

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Prof. Gaoquan Liu Business Economics

Queens College, CUNY Bus247, Spring 2013

 Can the game be solved by dominant strategies? If yes, describe them.

Answer: No, because Time doesn’t have a dominant strategy, although Newsweek has
“impeachment” as its dominant strategy. If the game can be solved by dominant strategies, it
must be the case that every player has a dominant strategy.
Analysis: For Time, now we compare its two rows (30, 90) to (40, 10). No row is always the best:
60 40
30<40, but 90>10. For Newsweek, we compare its columns ( ¿ to ( ¿ . The first
90 30
column is always the best, and the second column is always the inferior: 60>40 and 90>30. So
for Newsweek, impeachment is the dominant strategy and financial crisis is the dominated
strategy.

 Can the game solved by elimination of dominated strategies? If yes, describe them.

Answer: Yes. In the first step: we eliminate Newsweek’s dominated strategy “financial crisis.”
Now with the reduced game, impeachment is the dominated strategy for Time: 30<40. So in the
second step, we eliminate Time’s dominated strategy “impeachment.” So our solution is
(financial crisis, impeachment).

 Determine all Nash equilibria

Newsweek
Impeachment Financial Crisis
Time Impeachment 30, 60 90, 40
Financial Crisis 40, 90 10, 30

Answer: Using the double check method that I showed you in the class, from the above table,
(financial crisis, impeachment) has the double check and so it is the Nash equilibrium.

(Now Financial Crisis got more attention.)

This version of game corresponds to the assumption that “Financial Crisis” got more attention
from the public. (The total number of readers for “Financial Crisis” increased from 40 to 60.)

Newsweek
Impeachment Financial Crisis
Time Impeachment 45, 45 90, 60
Financial Crisis 60, 90 30, 30

 Can the game be solved by dominant strategies or elimination of dominated strategies?

Answer: No, in this example none of players has either dominant or dominated strategies.
Analysis: Time:45<60 but 90>30; Newsweek: 45<60 but 90>30.

 Determine all Nash equilibria.

Newsweek
Impeachment Financial Crisis
Time Impeachment 45, 45 90, 60
Financial Crisis 60, 90 30, 30
Answer: There are two Nash equilibria: (financial crisis, impeachment) and (impeachment,
financial crisis).

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Prof. Gaoquan Liu Business Economics

Queens College, CUNY Bus247, Spring 2013

2. (Monopoly)
Consider a monopolist in a market. The market demand is p=150-q and the monopolist’s total
cost is TC=30q.

 Find the monopolist’s MR and MC.

Answer: TC=30q→MC=30; P=150-q→MR=150-2q.
[As I showed you in class, to derive MR for this kind of linear demand function, you simply
double the value of the coefficient before the variable. This result comes from basic calculus.]

 Find the monopolist’s optimal quantity q and price p.

Answer: The optimal condition for monopolist is: MR=MC. Then MR=150-2q=30=MC
Therefore the monopolist’s optimal quantity is q M=60. Plug qM=60 into the market demand
function, and we can solve for the monopolist’s optimal price PM. PM=150-qM=150-60=90

 Find the monopolist’s profit.

Answer: The general formula for profit is π=TR-TC=(P-AC)Q. So for our problem π= (P M-30)
qM=(90-30)60=3600
[For the linear cost function in this problem, the average cost AC equals the marginal cost, i.e.,
AC=MC=10.]

 Find the consumer’s surplus and total social welfare.

Answer: If you draw the graph, the consumer’s surplus is the area below the demand curve and
above the market price. The general formula is CS=1/2×q×(vertical intercept-P). For our problem,
CS=1/2× qM ×(150- PM)=1/2×60×(150-90)=1800.
Total social welfare is the sum of firm’s profit and consumer surplus: SW=
π+CS=3600+1800=5400

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