PROBLEM SET 1

1. Formulate the following as a normal form game:

Ann and Beth are not on speaking terms but have a lot of common friends. Both want to
invite the common friends to a dinner party this weekend, either Friday or Saturday evening.
Both slightly prefer Saturday. If both set the party at the same time, this will be considered a
disaster with a negative payoff (-10) for both. If one plans the party on Friday and the other
on Saturday, the one having the Saturday party gets a payoff of 5, and the other of 4.
2. There are two players. Each player is given an unmarked envelope and asked to put in it
either nothing or $300 of his own money or $600 of his own money. A referee collects the
envelopes, opens them, gathers all the money, then adds 50% of that amount (using his own
money) and divides the total into two equal parts which he then distributes to the players.
(a) Represent this game frame with table showing the change in wealth of each player
(money received minus contribution). (b) Suppose that Player 1 has some animosity towards
the referee and ranks the outcomes in terms of how much money the referee loses (the
more, the better), while Player 2 is selfish and ranks the outcomes in terms of her own net
gain. Represent the corresponding game using a table.
3. The French philosopher Jean-Jacques Rousseau presented the following situation that
describes a trade-off between playing it safe and relying on others to achieve a larger gain.
Two hunters, players 1 and 2, can each choose to hunt a stag, which provides a rather large
and tasty meal, or hunt a hare—also tasty, but much less filling. Hunting stags is challenging
and requires cooperation. If either hunts a stag alone, then the stag will get away, while
hunting the stag together guarantees that the stag will be caught. Hunting hares is an
individualistic enterprise that is not done in pairs, and whoever chooses to hunt a hare will
catch one. The payoff from hunting a hare is 1, while the payoff to each from hunting a stag
together is 3. The payoff from an unsuccessful stag hunt is 0. Represent this game as a
matrix.
4. On the eve of a problem-set due date, a professor receives an e-mail from one of her
students who claims to be stuck on one of the problems after working on it for more than an
hour. The professor would rather help the student if he has sincerely been working, but she
would rather not render aid if the student is just fishing for hints. Given the timing of the
request, she could simply pretend not to have read the e-mail until later. Obviously, the
student would rather receive help whether or not he has been working on the problem. But
 if help isn’t coming, he would rather be working instead of slacking, since the problem set is
due the next day. Assume payoffs.
5. Consider two competing firms in a declining industry that cannot support both firms
profitably. Each firm has three possible choices, as it must decide whether or not to exit the
industry immediately, at the end of this quarter, or at the end of the next quarter. If a firm
chooses to exit, then its payoff is 0 from that point onward. Each quarter that both firms
operate yields each a loss equal to −1, and each quarter that a firm operates alone yields it a
payoff of 2. The payoff for each firm is the sum of its quarterly payoffs. Write down this
game in matrix form.