Introduction to Game Theory

Muhammad Hafi Wadgama

Quiz 3
2022-10-0133
Roll No: ------------------- Time Allowed: 50 mins

Total Marks: 30

Question 1: (10 marks)

John and Bernie start with $16 in each of their piles. They take turns choosing one of
two actions, continue or stop, with John choosing in the first round of the game. Each
time a player says continue, half of the amount in his pile will move to the other player’s
pile, and then extra $16 will be added to his own pile. If a player chooses stop then the
game ends with each player’s payoffs equal to the amount of money their individual
piles. The game automatically stops after the fourth round and the payoff to choosing
continue at the end of the fourth round is zero.

(a) Draw the game tree of this game and write down the strategies for each player.

(b) Use backward induction to solve the game and write down the backward induction
equilibrium.

Player 2 is at the final decision node. He will chose to stop (payoff of 46) over continue
(Payoff of 0)
Player 1 will chose to stop (payoff of 36) over continue (payoff of 34)
Player 2 will chose to continue (payoff of 28) over stop (payoff of 24)
Player 1 will chose to continue (payoff of 24) over stop (payoff of 16)
Backward induction equilibrium is therefore:
CS,CS = (36,28)
Question 2 (10 marks)

a. List the conditions a subgame must fulfil for it to qualify as a subgame.

b. How many subgames are there in the game above? How many proper subgames
are there?
c. Solve for the backward induction equilibrium to the game.
d. Explain briefly why backward induction equilibria must be sequentially rational.

a. Each subgame must start from a single node and must include all successors to this
node. If it includes an information set, it must include the entire information set.
b. 5 subgames. 4 proper subgames.
c. Starting from the end.
Player 1choses G (payoff of -5) over H (payoff of -10)
Player 1 choses J (Payoff of 5) over I (payoff of -1)
Player 2 choses d (payoff of 3) over c since if he plays c player 1 will chose C and player
2 will get a payoff of 2.
Player 2 choses e (payoff of 5)over f because if we choses f player 1 will chose J and
player 2 will get a payoff of -1.
At the first decision node, player 1 will chose A (payoff of 1) over B (payoff of -12)
therefore backward induction equilibria = AGJ,de = (1,3)
d. This is because solving via backward induction equilibria we know each player at his
decision node will want to chose the optimal strategy implying that he will be
sequentially rational at any point in the game
Question 3 (5 marks)

Suppose the game depicted above is played for 3 rounds. Devise a subgame perfect
strategy where the players play (M1, M2) in Rounds 1 and 2. Show your working
carefully.
Working out the Nash equilibria for the game:
L1,L2 = (1,1) and R1,R2 = (3,3)

Subgame perfect strategy: Play (M1,M2) in rounds 1 and 2. Good behavior is rewarded
by playing (R1,R2) in round 3. Bad behavior is punished by playing (L1,L2) from that
point onwards in the game.
Player 1 follows: 4 + 4 + 3 = 11
Player 1 deviates in round 1: 5 + 1 + 1 = 7
Player 1 deviates in round 2: 4 + 5 + 1 = 10
Player 1 deviates in round 3: no incentive to do so as no strategy offers anything better

Player 2 follows: 4 + 4 + 3 = 11
Player 2 deviates in round 1: no incentive to do so as no strategy offers anything better
Player 2 deviates in round 2: no incentive to do so as no strategy offers anything better
Player 2 deviates in round 3: no incentive to do so as no strategy offers anything better
Question 4 ( 5 marks)

Suppose the game is played for 3 rounds. Can you think of a strategy where the players
can play H, B in round 1? Support your answer with proper reasoning.

Working out the Nash equilibrium for this game:

L,N = (0,0) is the Nash equilibrium.

There cannot be a strategy where players play H,B in round 1 because in a finitely repeated
game with a unique Nash like here, the only subgame perfect strategy is to play the unique
Nash in every round.