Problem Set 3, MIEG (Part II), Winter Term, 2016

1. Find all pure strategy perfect Bayesian equilibria of the following signalling game. Do you
think all of them are reasonable? Give reasons.

(2, 1) (3/2, 0)
u u
t1
L R

.4
d d (3, 1)
(1, 0)

Receiver Nature Receiver

(5/2, 0)
(1, 0) u u
.6

L t2 R
d d
(1, 0)
(2, 1)

(1, 1) (0, 1)
dual dual
t1
Q B

.1
not not (2, 0)
(3, 0)

Receiver Nature Receiver

dual (1, -1)

dual
(0, -1) .9

not Q t2 B
not
(3, 0)
(2, 0)
2. Consider a Cournot duopoly operating in a market with inverse demand P(Q) = a − Q, where
Q = q1 + q2 is the aggregate quantity on the market. Both firms have total costs ci(qi) = c.qi ,
but demand is uncertain: it is high, a = aH, with probability θ and low, a = aL, with probability
(1 − θ). Furthermore, information is asymmetric: firm 1 knows whether demand is high or low,
but firm 2 does not. All of this is common knowledge. The two firms simultaneously choose
quantities. What are the strategy spaces for the two firms? Make assumptions concerning aH,
aL and c such that all equilibrium quantities are positive. What is the Bayesian Nash
equilibrium of this game?

3. Consider a job market signalling problem. There are two types of workers with ability high
(ƟH) and (ƟL), where ƟH > ƟL. A worker with education level e knows his productivity Ɵ(1+e)
while his potential employer firm does not know Ɵ (although the potential employer observes
the level of education e). Firms are behaving competitively. The proportion of the high ability
workers in the market is half. The worker chooses the level of education e which the firms can
observe. The worker’s payoff is w-(e2/Ɵ), where w is the wage offered by his employer.
Assume ƟH =3 and ƟL =2.

i. What would be the equilibrium under symmetric information?

ii. Under asymmetric information, what is the minimum level of education e the high
type worker acquires in separating equilibria? What is the level of education
acquired by the low type worker in such equilibria? Specify separating equilibrium
where high type worker acquires the level of education e.