Solutions Exercises Methods of PPE 3: Week 4, Seminar 4-2

Exercises Book Osborne (Chapter 10): see solutions manual or seminar

Extra 1

a)
b) In information set (2:1), sequential rationality requires that player 2
chooses action ‘E’.
Suppose that the belief of player 2 that player 1 chose ‘M’ (if information
set (2:2) is reached) is 𝜇 ∈ [0,1].
Then in this information set (2:2), playing ‘E’ is optimal for player 2 iff 𝜇 −
2
2(1 − 𝜇) ≥ 0 ⟺ 𝜇 − 2 + 2𝜇 ≥ 0 ⟺ 𝜇 ≥ 3. We distinguish the following
cases:
2
Case 1: 𝜇 > 3. Then player 2 chooses ‘E’ in (2:2), and thus player 1 chooses
‘F’. But if player 1 chooses ‘F’ then by consistency 𝜇 should be 0, which is
2
a contradiction with 𝜇 > 3.
2
Case 2: 𝜇 < 3. Then player 2 chooses ‘S’ in (2:2), and thus player 1 chooses
‘M’. But if player 1 chooses ‘M’ then by consistency 𝜇 should be 1, which is
2
a contradiction with 𝜇 < .
3
2
Case 3: 𝜇 = 3. Since player 1 plays ‘A’ with probability 0 (by sequential
2
rationality), by consistency player 1 plays ‘M’ with probability 3, and ‘F’
1
with probability 3. By sequential rationality, player 1 should be indifferent
between playing ‘M’ or ‘F’.
Let 𝜎𝐸 by the probability with which player 2 chooses ‘E’ in information
set (2:2) (and thus with probability (1 − 𝜎𝐸 ) plays ‘S’). Since player 1
should be indifferent between playing ‘M’ or ‘F’, it should hold that 2𝜎𝐸 +
2
3(1 − 𝜎𝐸 ) = 3𝜎𝐸 + (1 − 𝜎𝐸 ) ⟺ 𝜎𝐸 = 3.
So, the WSE is:
 2 1
Strategy player 1: play ‘M’ with probability 3, play ‘F’ with probability 3,
play ‘A’ with probability 0.
2
Strategy player 2: In information set (2:1) play ‘E’ with probability 3, and
1
play ‘S’ with probability 3. In information set (2:2) play ‘E’.
2
Belief player 2: 𝜇 = 3.