Molde University College – Specialized University in Logistics

GAME THEORY

2-6 October 2017

PROBLEM SET 1

Due: Thursday, 5.10.2017, 9:15 (hand-in before the lecture)

Problem 1

There are two competing firms, each making a choice which product to develop. Firm 1 has
four products under consideration, Firm 2 has only three. Profits of both profits depending on
their product choices are estimated as follows:

Firm 1
a b c d
x 2,1 1,4 2,5 3,2
Firm 2
y 2,2 5,3 4,4 4,0
z 1,5 3,3 0,7 0,3

1. When Firm 1 plays d, what is the Firm 2’s best response?

2. Are there any strictly dominant strategies for Firm 1?
3. Are there any strictly dominated strategies for Firm 2?
4. Find all pure strategy Nash equilibria.

Problem 2

A planning committee with three members, A, B, and C, is trying to decide whether or not to
propose two new projects for the city, a library and a movie theatre. Each member feels that the
required increase in taxes for financing of each of the two projects would create a disutility of
10; the theatre would generate a benefit of 40 for A, while the library would generate a benefit
of 40 for B; C is not interested in either option. A majority vote will determine which, if any,

1
projects should be proposed. Since C does not value the library or the theatre, it would never
be rational for him to vote for either project. Thus, the support of both A and B is required for
a proposal to pass under majority voting.

• From the set {Library Only, Theater Only, Library and Theater, Neither}, which voting
strategies are rationalizable for A and B? What are the corresponding payoffs?
• If A and B could cooperate on their voting decision, what would they do?
• If binding agreements between A and B were not possible, explain why your answer in
(b) cannot be a Nash equilibrium.

Problem 3

Consider the following game:

Player 1
B1 B2 B3 B4
A1 10, 7 8, 8 0, 6 2, 6
Player 2 A2 6, 5 2, 3 5, 1 7, 4
A3 0, 4 5, 8 3, 7 5, 10
A4 4, 6 9, 8 6, 9 1, 1

Using iterative elimination of never-best responses, find the set of rationalizable strategies. Find
the Nash equilibrium.

Problem 4

A king is deciding where to hide his treasure (location X, Y or Z). A pirate is deciding where
to look for the treasure. The payoff to the king from successfully hiding the treasure is 5 and
from having it found is 2. The payoff to the pirate from finding the treasure is 9 and from not
finding it is 4. Is there any pure strategy Nash Equilibrium in this game?

2
Suppose the pirate has two pure strategies: inspect both X and Y (they are close together), or
just inspect Z (it is far away). Find a mixed strategy Nash equilibrium where p is the probability
the treasure is hidden in X or Y and 1 - p that it is hidden in Z (treat the king as having two
strategies) and q is the probability that the pirate inspects X and Y.

Problem 5

Find all pure strategy Nash equilibria in the following simultaneous-move game of three
players. Each player has two strategies. Payoffs are defined as follows (Player 1, Player 2,
Player 3).

Player 1 Player 3
A1 C1 C2
Player 2 B1 4,1,1 2,0,1
B2 2,1,0 1,5,5
Player 1 Player 3
A2 C1 C2
Player 2 B1 5,6,2 1,7,1
B2 2,0,5 2,6,3

Problem 6

Consider a game between a worker (player 1) and his boss (player 2). The worker can either
shirk (S) or work (W). Working costs the worker 𝑔 and produces output of value 𝑣 for the boss.
The boss can either inspect (I) or not inspect (NI). An inspection costs ℎ to the boss but provides
evidence of whether the worker shirks. The boss pays the worker a wage 𝑤 unless he has
evidence that the agent has shirked. (The boss cannot condition the wage on the observed level
of output). If the worker is caught shirking, he gets 0. The two players choose their strategies
simultaneously. Assume that 𝑔 > ℎ > 0, and 𝑤 > 𝑔.

Is there any pure-strategy Nash equilibrium? If not, try to find a mixed-strategy equilibrium.

3
Problem 7

Consider the following two-player game. You and an opponent must decide how to divide $100.
The rules stipulate that you each must write down your proposed division and give it to the
referee. If the divisions match, then you and your rival are paid according to the division. If the
suggestion divisions do not match, then you and the other person receive nothing. What are the
Nash equilibria? How would you play? What does this have to do with focal points?

Problem 8

Consider the following game:

a) Identify the strategies for both players.

b) Derive the normal form for this game and find all of the Nash equilibria.
c) Identify all of the subgames.
d) Find the unique SPNE.
e) Explain why the SPNE provides a better prediction. What Nash equilibrium depends on
a noncredible threat?

4
Problem 9

Consider the following game:

Player 1
B1 B2 B3
A1 3,2 2,1 1,a
Player 2
A2 2,2 b,4 0,2
A3 c,d 3,2 e,4

a) Give a condition on b such that A2 is strictly dominated by A1

b) Given that a) holds, find a condition on d such that B1 strictly dominates B2.
c) Given that a) and b) hold, find conditions on a and c such that (A1, B1) is a Nash
equilibrium.
d) Given that a) - c) hold, find conditions on d, e such that (A1, B1) is the unique Nash
equilibrium.

Problem 10

Consider the game between an employee (player 1) and an employer (player 2):

(10; -10)
Increase

Demand salary
2 Leave the job (-15; -15)
increase
Reject
1 1

Remain
Patiently wait (X; 5)
(0; 5)

1. How many strategies does each player have?

5
 2. Find the values of X, which give the following subgame perfect equilibrium:
((patiently wait, remain); (reject)).
3. Find the values of X, which give the following subgame perfect equilibrium: ((demand
salary increase, remain); (reject)).

Problem 11

Consider the following instance of a routing game:

𝑑2 = 2 ↓

𝑙1 (𝑥) = 𝑥 𝑙2 (𝑥) = 1

𝑙5 (𝑥) = 0 → 𝑑1 = 1
𝑑1 = 1 →
→ 𝑑2 = 2

𝑙3 (𝑥) = 1 𝑙4 (𝑥) = 𝑥

where 𝑑1 and 𝑑2 are the total flows, 𝑙𝑖 (𝑥), 𝑖 = 1, … ,5 are the costs of using the arc, which can
depend on the number of users 𝑥 choosing this arc.

𝑥{1,2} = 0.5; 𝑥{3,4} = 0.2; 𝑥{1,5,4} = 0.3;

Show that { is not a Wardrop equilibrium, but that
𝑥{2} = 1.5; 𝑥{5,4} = 0.5

𝑥{1,2} = 0.6; 𝑥{3,4} = 0; 𝑥{1,5,4} = 0.4;

{ is a Wardrop equilibrium.
𝑥{2} = 1.4; 𝑥{5,4} = 0.6

Problem 12

There are three rows of matches on the table in front of the two players, containing respectively
1, 2, and 3 matches. In turn, the players take any (positive) number of matches from one row.
The player taking the last match loses. Sketch a game tree (you do not have to expand every
branch of the tree because several subtrees are similar). Show that the second player has a sure
win. How would you advise the first player to play if the amount paid by the loser to the winner
is equal to the total number of turns that have been played until the last match is taken?

6
Problem 13

Three firms need new warehouses for storing of a particular good. Each firm can build its own
warehouse, or they can cooperate and build common warehouses. Firm1 needs a warehouse of
100m2, firm 2 needs 200m2, firm 3 needs 300m2. The costs of construction depending on the
size of warehouses is presented in the following table.

100 m2 200 m2 300 m2 400 m2 500 m2 600 m2

10 18 25 30 34 36

If the firms decide to cooperate, how can they fairly split the costs of construction? Is this
coalition stable?

Problem 14

Ann and Ben are two farmers, who graze their animals on a common land. They can choose to
use the common resource lightly or heavily. Their interaction can be described as the
following simultaneous-move game:

Ben
Light Heavy
Ann Light 8, 8 4, 11
Heavy 11, 4 6, 6

1. Find the Nash equilibrium of the game and show that it is an example of a prisoners’
Dilemma.
2. Suppose that the same game is repeated infinitely. Can {light, light}be sustained as an
equilibrium if both players play a Grim strategy and have a discount factor of 0.7?

Problem 15

Consider the following game:

7
 Player 2
L R
Player 1 T a, - a 0, 0
B c, c 1, - 1

a) Solve for a and c such that there is a mixed-strategy equilibrium in which Player 1 plays
T with probability 2/3, B with probability 1/3, and Player 2 plays L with probability 1/3,
R with probability 2/3.
b) Are there any pure-strategy equilibria?