Exercise: Zero Sum Games

Course: GTM, Instructor: Sonia

Q. 1 Consider a game between two players where they will show one or two fingers at the same time. If the
fingers are the same, row player wins the sum and otherwise, column player wins the sum. Write the
game matrix if the winning amount is to be paid by the opponent. Solve the same.
Q. 2 Player 1 has two aircrafts, and player 2 has four missile batteries to cover four approaches to a target.
Each battery can shoot down with certainty one aircraft, if it attacks along that approach, but only
one aircraft since the reloading time is long. The payoff to player 1 is 1 if an aircraft gets through and
so destroys the target and 0 otherwise. Find the pay-off matrix to model this as a zero-sum game.
Q. 3 Two manufacturers currently are competing for sales in two different but equally profitable product
lines. In both cases, the sales volume for manufacturer 2 is three times as large as that for manufac-
turer 1. Because of a recent technological breakthrough, both manufacturers will be making a major
improvement in both products. However, they are uncertain as to what development and marketing
strategy to follow.
If both product improvements are developed simultaneously, either manufacturer can have them ready
for sale in 12 months. Another alternative is to have a crash program to develop only one product first
to try to get it marketed ahead of competition. By doing this, manufacturer 2 could have one product
ready for sale in nine months, whereas manufacturer 1 would require 10 months (because of previous
commitments for its production facilities). For either manufacturer, the second product could then be
ready for sale in an additional nine months.
For either product line, if both manufacturers market their improved models simultaneously, it is
estimated that manufacturer I would increase its share of the total future sales of this product by 8
percent of the total (from 25 to 33 percent). Similarly, manufacturer I would increase its share by 20,
30 and 40 percent of the total if it marketed the product sooner than manufacturer 2 by 2, 6, and 8
months, respectively. On the other hand, manufacturer 1 would lose 4, 10, 12, and 14 percent of the
total if manufacturer 2 marketed it sooner by 1, 3, 7, and 10 months, respectively.
Formulate this problem as a two-person, zero-sum game, and then determine which strategy the re-
spective manufacturers should use.
Q. 4 An enterprise has two companies, Fly-By-Night and Shady Dealings, which on average have tax bills
of $ 4,000,000 and $12,000,000, respectively, each year. For each company, the enterprise can either
admit (and pay) their true tax liability or falsify their accounts to show a zero tax liability. The
internal revenue service only has the resources to investigate one of the companies each year. If they
investigate a company with false returns, they will discover the fraud and the company will have to
pay the required tax plus a penalty of half as much again. Set this up as a zero sum game where the
payoffs are the money that the internal revenue service receives. Show that the enterprise will pay an
average of $14,000,000 to the IRS and find the optimal strategies for both players. Suppose the penalty
for fraud is increased to paying the required tax plus twice as much again. Solve this game and describe
the optimal strategies.
Q. 5 USA intelligence suspects that North Korea is thinking about starting a program to develop nuclear
missiles. This will dramatically affect the stability of the region. According to the testimony of fugitives
that abandoned the country, life conditions are very poor. This makes USA authorities propose the
following agreement to North Korea:
ˆ USA will give a 25 billion dollars aid to North Korea if it abandons its nuclear program.
ˆ The aid will be given once the agreement is signed, but North Korea promises to give it back if
the USA finds proof that the nuclear program is still on. Without the proof, North Korea will not
give the money back.
ˆ To get the proof, USA can make the International Atomic Energy Agency inspect North Korean
installations. The cost of the inspection is 10 billions and will be paid by the USA.
ˆ The USA finds that the stability of the region is worth 90 billion dollars, whereas for North Korea,
to give up its nuclear program has an estimated cost of 20 billion dollars.
Identify the set of strategies for each player, the payoffs and the normal form of the game. Find the
Nash equilibria of the game.