Universidad Carlos III de Madrid – Department of Economics

Principles of Economics - Course 2020-2021 - Problem Set 3

Conceptual Questions
Write down a short and concise answer. When you are asked to solve the question in class,
explain the concept clearly and give examples or pieces of evidence.
1. Using the news headlines from last week: identify a social dilemma that has been reported
and specify how it satisfies the definition of a social dilemma.

2. Many people consider political advertising (campaign advertisements) to be a classic

example of a prisoners’ dilemma. Using examples from a recent political campaign with which
you are familiar, explain whether this is the case.

3. Imagine you are the mayor of a small town and wish to motivate your citizens to get
involved in ‘City Beautiful Day’, in which people spend one day to help cleaning parks and roads.
How would you design the day to motivate citizens to take part?

4. Suppose that the fairness norm in this society is 50–50. Can you imagine anyone offering
more than 50% in such a society? If so, why?

Problems
1. A strike over pays or working conditions may be considered an example of an
ultimatum game.
a. To model a strike as an ultimatum game, who is the Proposer and who is the Responder?
 the Proposer are the people striking (because if they don’t get what they want, they won’t return
to their working spaces) and the Responder is the firm or government;
b. Draw a game tree to represent the situation between these two parties.

Demand for
a pay rise

They are They're not

offered a offered a
pay-rise pay-rise

The pay-rise The pay-rise

is isn't Refuse
satusfactory satisfactory

Accept Refuse

c. Research a well-known strike and explain how it satisfies the definition of an ultimatum
game.

1
 d. In the book, you have been presented with experimental data on how people play the
ultimatum game. How could you use this information to suggest what kind of situations might lead
to a strike?

2. What is the likely result of the game in Figure 4.16b if:

a. Astrid can choose which language she will
use first, and commit to it (just as the Proposer in
the ultimatum game commits to an offer, before the
Responder responds)?  If Astrid chooses Java
(which is the most probable option, as it’s the most
beneficial for her), Bettina will choose Java, too.
However, if Astrid chooses C++ (which is
doubtable), Bettina will surely go for C++, too.
b. The two can make an agreement, including
which language they use, and how much cash can
be transferred from one to the other?  They
surely wouldn’t pick the 0-0 option, which is the
dominated strategy.
c. They have been working together for many
years, and in the past, they used Java on joint
projects?  They would probably pick it again, as
it’s the most beneficial option for the two of them.

3. Return to the prisoners’ dilemma

pest control game that Anil and Bala
played in Figure 4.3b, but now suppose
that the game is played sequentially, like
the ultimatum game. One player (chosen
randomly) chooses a strategy first (the first
mover), and then the second moves (the
second mover).
a. Suppose you are the first mover
and you know that the second mover has
strong reciprocal preferences, meaning the
second mover will act kindly towards
someone who upholds social norms not to
pollute and will act unkindly to someone
who violates the norm. What would you do?  IPC
b. Suppose the reciprocal person is now the first mover interacting with the person she
knows to be entirely self-interested. What do you think would be the outcome of the game?
– T-T (2-2)

2
 Other Questions

1. Select the correct answer:

a. The outcome (I, T) is attained as the
dominant strategy equilibrium if Anil is
completely selfish and Bala is somewhat
altruistic.
b. The outcome (I, T) is attained as the
dominant strategy equilibrium if Anil is
somewhat altruistic and Bala is very altruistic.
c. The outcome (I, T) cannot be attained as
the dominant strategy equilibrium.
d. The outcome (I, I) is attained as the
dominant strategy equilibrium only if both
Anil and Bala are somewhat altruistic.

2. Bruce owns a cooperative project with two other members. Any member that
chooses to put in a full day of work faces a cost of £50 but produces a total income of
£120, which is shared amongst the three. So, for example, if Bruce and one other member
do a full day of work, then the income per member is (£120 x 2)/3 = £80, leaving Bruce
with a net income of £80 - £50 = £30. Assume that a member must either put in a full day
of work or none at all. Based on this information, we can conclude that:
a. The socially optimal outcome (one with the highest total net income) is when no
one works.
b. The dominant strategy equilibrium of this public goods game is when everyone
works.
c. Bruce is better off not working, irrespective of the actions of the other
members. (In all the three cases, not working is a preferred option; to come to this
conclusion, we need to fix the positions of the other two players, and only change the
position of our own player).
d. Bruce’s net income when all three members work is £80.

3. The following game represents the interaction

between two software engineers, Astrid and Bettina,
who are working together to write code as a part of a
project. Astrid is better at writing Java code, while
Bettina prefers C++. The numbers represent the pay
in thousands of dollars for completion of the project.
Based on this information, which of the following are
true?
a. There are two Nash equilibria: (Java, Java)
and (C++, C++)  to see the Nash equilibrium, we

3
fix the best responses of the other player, and then see our own responses, according
to theirs.
b. If Astrid can choose the format first and commit to it, then (Java, C++) will be
chosen.  no, because if Astrid chooses Java, Bettina would also choose Java;
c. If the two can make an agreement beforehand, including a transfer of $500 from
Bettina to Astrid, then (C++, C++) will be chosen.
d. If the two can make an agreement beforehand, including a transfer of $3,500 from
Bettina to Astrid, then (C++, C++) will be chosen.

4. You are the Responder in an ultimatum game. The social norm is a (100 - x*): x*
split, meaning the Proposer keeps 100 - x* and the Responder receives x*. Let R represent
the strength of your private reciprocity motive, so your payoff from rejecting an offer of y
is R(x*-y). Based on this information, we can conclude that:
a. A higher R implies that you are more likely to accept a relatively low offer.
 the higher R, the bigger the probability that we’ll reject  because we receive more
from rejecting;
b. If R = 1, then you would reject any offers of less than x*. 
c. If R = 1, then you would reject any offers of less than half of x*.
d. If R = 0, then you would reject all offers of less than 100.  if R is 0, we
would always accept because we would always win more than 0 (which is what we would
get if R is 0)

R=1
Value of accepting is y
Value of rejecting: x – y
X is a fixed social norm  it is known and is fixed and any lower value would be
probably rejected;
x – y > y  x > 2y; y < x/2  this is the norm our guy would reject for sure;

O N
O 6-3 1-2
N 2-1 3-5

Nash equilibrium  the best response for A;

If A puts 6, the best response for B is 3. If B puts 5, the best response for A is 3. 
There are two Nash equilibria.