Introduction to Game Theory

Quiz 2

Time Allowed: 40 minutes Total Marks 40

Attempt all questions. Show your working carefully.

Question 1 (20 marks)

Two firms are competing in a market for a homogenous product. They can each choose one
of three price levels and the payoffs are depicted in the matrix below.

1\2 Price=30 Price=50 Price=70

Price=30 1800,1800 1500,2000 900,1800
Price=50 2000,1500 1600,1600 800,1200
Price=70 1800,900 1200,800 0,0

a. Does either firm have a strictly dominant strategy in this game?

Ans. Player 1 has a strictly dominant strategy Price=50 which dominates
Price=70
And Player 2 has a strictly dominant strategy Price=50 which dominates
Price=70
b. Does either firm have a weakly dominant strategy?
Yes, Player 1 has a weakly dominant strategy Price=30 and Player 2 has a
weakly dominant strategy Price=30 both dominating Price=70
c. Is this game dominance solvable? If so solve the game using the IEDS method. If not,
reduce the game as much as possible.
Ans. Yes, it is solvable. IEDS {Price=30, Price=50} = (1500,2000)
d. Now, solve for Nash equilibrium using the method of best response
BR Nash Equilibrium = {Price=50, Price=50} = (1600,1600)
e. In general, what is the relationship between pure Nash found through IEDS and pure
Nash found using the method of best response?
The Pure Strategy Nash from the IEDS method is a subset of the Pure Strategy Nash
Equilibria found through the method of Best Response. The method of best response
may or may not give more than one pure strategy nash, whereas, the IEDS will always
(if solvable) lead to one pure strategy nash equilibrium.
f. Solve for a mixed strategy Nash equilibrium in this game.

Question 2 (10 marks)

Consider the following game.

 ½ L R
X 3,1 0,0
Y 0,0 3,1
Z 2,1 2,1

a. Is it possible to play a mixed strategy where player 1 plays X and Y with a 50%
probability each and does not play Z?
Ans. No, because the mixed strategy 1/2X 1/2Y is strictly dominated by the
strategy Z
b. Suppose player 1 believes that player 2 will play each one of his strategies with equal
probability. What is his (player 1’s) best response to this belief?
Ans. X: 3(1/2)+0(1/2)= 1.5
Y: 0(1/2)+3(1/2)= 1.5
Z: 2(1/2)+2(1/2)= 2
BR1(Q2) = {Z} = (2)

c. If players 1 and player 2 play each one of their strategy with equal probability, solve
for the expected payoff to player 1 in the game.
Ans. X: 1.5/3 = 0.5
Y: 1.5/ 3 = 0/5
Z= 2/3
X+Y+Z= 5/3

Question 3 (10 marks)

Twin brothers Alex and John have been asked to pick a number from 1-10. Their parents
have said that if the sum of chosen numbers exceeds 20, they will each not get anything. If
the sum of their numbers is greater than 10 but less than or equal to 20, they each get 5. If
their chosen numbers add up to less than or equal to10, they will each get 2.

a. Model as a strategic game and solve for all pure strategy Nash.

Ans.

½ 1 2 3 4 5 6 7 8 9 10
1 2,2 2,2 2,2 2,2 2,2 2,2 2,2 2,2 2,2 5,5
2 2,2 2,2 2,2 2,2 2,2 2,2 2,2 2,2 5,5 5,5
3 2,2 2,2 2,2 2,2 2,2 2,2 2,2 5,5 5,5 5,5
4 2,2 2,2 2,2 2,2 2,2 2,2 5,5 5,5 5,5 5,5
5 2,2 2,2 2,2 2,2 2,2 5,5 5,5 5,5 5,5 5,5
6 2,2 2,2 2,2 2,2 5,5 5,5 5,5 5,5 5,5 5,5
7 2,2 2,2 2,2 5,5 5,5 5,5 5,5 5,5 5,5 5,5
8 2,2 2,2 5,5 5,5 5,5 5,5 5,5 5,5 5,5 5,5
9 2,2 5,5 5,5 5,5 5,5 5,5 5,5 5,5 5,5 5,5
10 5,5 5,5 5,5 5,5 5,5 5,5 5,5 5,5 5,5 5,5
All bold are pure strategy nash