316–210: C OMPETITION AND S TRATEGY

A SSIGNMENT O NE

• This assignment is worth 10% of your final mark.

• The document containing your answers to this assignment must be submit-

ted online no later than 4.00pm on Tuesday, 19 August 2008.a

• The preferred format is PDF, but word documents are allowed as well.

• Please make sure that you add your name and your ID as well as the subject
title on your document.

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a
Students who strongly prefer to submit a hard copy can do so, but only on Monday, 18 August,
directly after the lecture.

Question 1 (Decision Tree and Expected Payoffs)

Anna can choose between taking the train or the car to go to work. When taking the train,
after arriving a Flinders Street Station she can decide whether to walk or to take the tram.
She gets a payoff of 10 when taking the train and then walking, and a payoff of 5 when taking
the train and then the tram. When taking the car, there is a traffic jam with probability 60%.
In this case, her payoff is -5. When taking the car and there is no traffic jam, her payoff is 25.

(a) Present Anna’s situation in a decision tree.

(b) Derive Anna’s expected payoff when taking the car.

(c) Use backward induction to find Anna’s optimal decisions.

2+1+1 = 4 MARKS

Question 2 (Backward Induction)

There are three players who take turns choosing numbers: player A can choose 1 or 2; player
B can choose 2 or 3; and player C can choose 1, 2 or 3. The number chosen is always added
to the running cumulative total, which starts at zero. A chooses first, then B, then C, then
again A followed by B and then C, and afterwards again A etc etc. The player who takes the
cumulative total to 66 (or more) is the winner.
Use the logic of backward induction to determine whether there is a player who can
ensure his victory by playing the appropriate strategy, and describe this strategy (if it exists).

3 MARKS
Question 3 (Subgame Perfect Nash Equilibrium)
Suppose two players play “Guessing the average” sequentially. That is, first player A chooses
a number x between 0 and 100 (inclusive). Player B observes this number and then chooses
a number y between 0 and 100 (inclusive). Each player who correctly guessed the average,
i.e. x+y x+y
2 , gets paid 2 dollars. Each player who guessed wrong receives nothing.

(a) What is player B’s best response to player A’s guess x?

(b) What guess x is optimal for player A given that player B will play his best response?

(c) What strategies are played in the Subgame Perfect Nash Equilibrium of this game?

1+1+1=3 MARKS

Question 4 (Understanding and Solving a Game)

Players A and B both write either North or South on a paper, thereby making sure that their
opponent does not see what direction they wrote down. They then give this paper to the
organizer (who is not a player himself). If the two players wrote down a different direction,
the one who chose South gets two dollars and the other player gets nothing. If they both
wrote down North, they both get nothing. If they both wrote down South, they both get one
dollar.

(a) Determine whether this is a zero-sum game.

(b) Determine whether the game has sequential or simultaneous moves.

(c) Determine whether the information is perfect or imperfect.

(d) Determine all possible actions of player A.

(e) Determine all possible strategies of player A.

(f) Present this game using a game tree or a game table, whatever is more appropriate.

(g) Derive the Nash Equilibrium or the Subgame Perfect Nash Equilibrium, whatever is
more appropriate.

1+1+1+1+1+1+1=7 MARKS

Question 5 (Strategic thinking)

Consider the following situation which could have occurred during the cold war: The USA
can choose whether or not to invade Eastern Europe; and if Eastern Europe is invaded, the
USSR can then choose either to accommodate or to start a nuclear war. For the USA, the
best outcome is if they invade and the USSR accommodates, and the second best outcome
is if they do not invade. For the USSR, the best outcome is if the USA does not invade, and
the second best outcome is if the USA invades and the USSR itself accommodates. For both
countries, a nuclear war is by far the worst possible outcome.
Suppose the USSR has the possibility to install an automatic nuclear response system (at
negligible costs), which leads to a nuclear war if and only if the USA invades Eastern Europe.
(a) Explain what we should expect to happen if the USSR does not install this automatic
nuclear response system.

(b) Explain what we should expect to happen if the USSR installs this automatic nuclear
response system.

(c) Explain whether and why the USSR should install this automatic nuclear response
system.

1+1+1=3 MARKS