Introduction to Game Theory

Assignment 4 and Quiz 5

Attempt all questions. All questions will be graded

Total Marks: 20

Question 1 (10 marks)

Consider the first price auction scenario with two players having valuations
$100 and $50 respectively of a miniature painting that is being auctioned.
All assumptions remain the same as discussed in class (i.e. in case of a tie
the object is awarded to player 1) except, the difference being that the
loser also pays a price equal to his own bid. Model the game as a
strategic game and solve for all pure strategy Nash of this modified
version of the first price auction.

Question 2 (10 marks)

Consider the cournot duopoly scenario where two firms are operating in
the market with identical costs and products. The total output in the
market is the sum of the output produced by firm 1 and the output
produced by firm 2.

Let the inverse demand function and the cost function be given by

Market demand curve: P =60 − 2Q (Q= Q1 + Q2)

Cost per firm: C= 2Qi (i=1, 2)

a. Solve for the Nash equilibrium in the cournot duopoly model.

b. Plot the reaction function for each firm on a diagram.
c. What is the market price and profit to each firm?
d. Now suppose the firms agree to operate as a cartel. Calculate the
market price and profit to each firm.