Lahore University of Management Sciences Mushtag Ahmad Gurmani, Schoo! of Humanities and ‘Social Sciences Roll #: Total Pages: _11___ (including this page) Nam Quarter: "Summer Semester Course Title: Introduction to Game Theory Academic Year: 2016-2017 Course Code: “ECON 233 Date: —10 July 2017 Instructor: "Amin Hussain Time Allowed: — 90 minutes Exam: “Midterm Total Marks: 64 \structions below must be followed strictly. Failure to do so can result in serious grade loss. => DO_NOT OPEN THIS EXAM UNTIL, = Keep your eves on your own paper. TOLD TO DO SO. = Youmay not = Read all questions very carefully before answering . talk to anyone once the exam begins. them, * leave the examination room and then renan. = Check the number of papers in the question sheet and make sure the paper is complete. Specific instruetions: i | Open/Closed book!noies, help sheet / | Calculator usage: | Write in pen/pencil | ‘Any other instruction(s): f 7 a3] i9T 7 | wap 2017 Gass] sf 7 jap 4 161 | z i S| wee) ifr feel sf 7 Z l | Z2. Consider the following simultaneous game. (20 marks) eae seen a CG a [st [se [35 ‘ B (32 (45 [87 -fe—_}as—[e [aap for elimination and the reduced game for each elimination. “A State whether itis dominance solvable using IESDS. What are the rationalizable strategies? State any pure strategy Nash Equilibria. For any Nash Equilibria, also state whether its also a Dominant Strategy Equilibrium. Key thu No Srabegen fr gee | a ee i dee kp Heke, endl gol ee ae ieee dla 2, Keratively eliminate all strictly dominated strategies; state the eliminated strategy, it’s reason v ( i Le p74 e+ Flr p> 2. Be FEL g) 743 ye — es S-Se > ap bbe? 855 e 8 te <3 a teak ec™%H eo ts. gre ied 3, , oe 1 Cs 4), ‘ 5, ta = od WM. eat ‘ i & fi <¢ 8 convod ise © Gh lett) ye founabed* 4 * ett. 3q46 op o gh 34 gu aL, : cy ot wthe : ee f 4 pt i é seedTae Joker has kidnapped Rachel Dawes and has to decide where to hide her. His options are @ warehouse (W) or a factory (F). Batman wants to save her but he doesn’t know where she’s hidden. He knows that it is one of the two locations — warehouse (W} or factory (f). if he chooses ‘the wrong location, his percentage probability of success is zero. ‘The time in minutes that it would take Batman to get to a location is given by t. If he chooses the right location then the percentage probability of Batman saving Rachel is given by 100 ~¢. It ‘would take Batman 70 minutes to get to the warehouse and 40 minutes to get to the factory (ie. £ = 70 if Batman decides to go to the warehouse and t = 40 if he goes to the warehouse). Both the Joker and Batman know his travel time and his chances. Batman needs to decide which ONE of the two places he is going to go to (he cannot go to both!) Batman's payoff is his percentage probability of success while The Joker's payoff is Batman's percentage probability of failure. (10+1 marks) Drew the extensive form of this game. Draw the normal form of this game. \ Find the Pure Strategy Nash Equilibria ofthis game, any Find the Mixed Strategy Nash Eaulibris of this game, i any. : hat ae the expected poyots for Batman and The Joker atthe Nash Equa (2) Plot the Best Responses for both piayers on the same axes and highlight the equilibria. QD onus Does make sense forthe The okerto be ‘anagentotehaos? — ([) Bey 10 430 \oo 2 oO +4ay fn 3 bh \ cdifhod- - Eu Cus). ye loog + Holt-g). TOF + oo a4 Tog {po 100g = 100% +o HOOK. fs = 08. 4 2x ‘ a iy ['b: »), wba bill Fa B & : E (ve Gd = E (acl) yo Glee PE nk ays 3Dg= fo- CBP 4op 2 66 eo hee ry = (%-%) a ete oot * wake Neha To (2) x (00 (t ») : Au £122 3 Ar oo 30 @) s =o ‘3. An Incumbent is currently operating alone in @ market where revenue are zero, C, = 0. lable, R = 3.His costs Consider the market entry game as follows: A Challenger decides whether to Enter(E} or Stay Out(S) of the market. Cost of Entry for the Challenger is 1.e. Co = 1. If Challenger stays out he incurs no cost, i. Ce = 0. Ifthe Challenger enters the market, the total revenue gets split between the two players, ie. Ry = Re = R/2, otherwise the Incumbent keeps the entire revenue, R and the Challenger gets nothing, Ry RR =0. After the Challenger makes his decision, the Incumbent then has the option to keep prices high (H) oF low (L). fhe sets prices high, then the total revenue to be shared remains 3 (ie. R = 3), bout if he sets prices low, then the total revenue becomes zero, R = 0. Both players are looking to maximize their profits, 7; = Ry — C; where i = {1,C}. Le. thelr payorts are their profits oO Draw the Extensive Form of this eame. Find the Nash Equilibria of this game. LU 7 What is the Subgame Perfect Equilibrium of this game. What should the Challenger do? 0) Now suppose that before the Challenger makes his decision, the incumbent has the option to flood (F} the market or not (N}. If he decides not to flood the market, then the situation remains ‘the seme as before. If the Incumbent does flood the market, the same rules apply as before, except thet the total revenue to be shared in the case of High prices becomes 1.5 (Le. R = 3). Inthe case of Low prices it remains zero, R = 0. @, Draw the Extensive Form of this game. % {. What is the SPE for this game using Backward Induction, wy g. What should the Challenger do? ® h. Comment on this result as compered to the previous situation. (() * Baler k& (12 marks)4. Consider the following game, Player 1 first decides whether to play the simultaneous games, A or B. Player 1 and Player 2 then play the selected games, The payotfs for each game are given as below. ! A 8 Player? Player 2 sr Player 1 tt et ov Player? Pet Tor Hoo Rtn ar D133 | 3, Draw the Extensive Form of this game. © , Identify the subgames in this game y c._ State the strategy space of each player. © oi 4. Drew the Normal Form and find the purestrategy Nash Equilibria ofthis game, any. ("| Find the Subgame Perfect Equilibria in pure stretegies for this game, (12 marks) nb \ i o.\ | \ \ ine 7 ¢ zw By= | ASU BSDy OG HED, PMs OSS Ge, GROY s.+ th sd, ch tal :a : ges FE tasn, chY® CASO, sly (AR Hr) . E . (azo ch) (Bstbsdy CBSH AY (650 wi (Bey sd)” ey h et i YL (3 8) (A cud) 0-8). : (no et) (RED, + h> cast 3) (ew rd) | (BRO) rh5. Consider the sequential version of the Partnership game we studied in class, The players have set pa firm. Player 1 decides the amount of effort he is going to put in, x. After observing x, Player 2 then decides the amount of effort he is going to putin, y. The total revenue of the firm is given by 4x + 40+ xy. The cost of effort for Player 1 is x7, and the cost to player 2 is y*, Both players salt the revenve of the firm equally. = 3. Write own the payoff function for each player effectively the profit for each player, D Draw the Extensive Form of this game ; Find the Subgame Perfect Equilibrium for this game. SZ b « 4. What is the payoff for each player at SPE? c @. Which of the two players is better off? What is this situation called? (10 marks) 7Z) 6 % % 6 Sees me a ie Guemy +e - 40 Z. 20Sie bm BL we Fem. BR whe fi Restos (2% ea Bye be + ee). — a ee egy os = Uy te em + acee a ue = Yu lar = Ate. fu Fees coe ps Vv ey ee we Y zs urén ee oh 43-2y-0 * a .- ee 74.) > 1D 1m BPO pee hg es lt SF - BT ee yet 7 a A (ley. e a i. “oo 1Zi47- TT ot “EF, ae oe A otaer odlan Bee6. Consider @ one-stage Ultimatum geme. 1 unit of utility can potentially be shared between two players. Player 1 makes and offer m to Player 2, such that m € [0,1]. Player 2 then decides whether to accept or reject this offer. If Player 2 accepts the offer, then Player 1 gets 1 ~ m and Player 2 gets m. If Player 2 rejects the offer then both players get 0. (20 marks) a. Drew the extensive form of this game. %) b, Which of the following are Nash Eoullbria of Bargatring Game (make sure you remember the definition of @ Nash Equilibrium). Explain. ce i. Player — m= 04 Player 2 ¥, mB04 aa{k, meos ii, Player m=04 Player 2 yy m20 = ly, m<0 il, Player m Player 2 ine = ly m< 04 c. Find the Subgeme Perfect Equilibrium of this game. Explain.6. Consider a one-stage Ultimatum game. 1 unit of utility can potentially be shared between two players. Player 1 makes and offer m to Player 2, such that m € [0,1]. Player 2 then decides whether to accept or reject this offer. If Player 2 accents the offer, then Player 1 gets 1— m and Player 2 gets m. If Player 2 rejects the offer then both players get 0. (20 marks) 2. Draw the extensive form of this game. 'b. Which of the following are Nash Equilibria of Bargalmiing Game [make sure you remember the definition of @ Nash Equilibrium). Explain. i Player m=04 Player 2 Y, m204 a=W, m<04 ii, Playera m=04 Player 2 Y, m20 aati mo i, Player Player 2 a(t meo4 aay meod ewtin (3) Find the Subgame Perfect Equilibrium of this ga rv a ey Wr seal eeelem, uy