Assignment-1

Game Theory-II
BA (H) Economics, Sem III – Sec A and B
Instructor: Ankush Garg, JSGP

Follow the instructions below strictly:

1. Allocation of questions: look at the MS Excel file attached for the allocation of questions.
Each student is required to attempt two questions allocated to them.
2. This assignment has 10% weight in your total assessment.
3. Each question carries 5 marks.
4. The front page of the assignment must include your name, roll no. and section.
5. Assignment must be hand-written neatly and a single scanned pdf file must be uploaded.
6. The deadline for submission is 9pm, Monday 25 th September.
7. Late submission will not be accepted. Two days for two questions is more than enough.
No excuse will be tolerated. Finish your work well before the deadline and submit.
8. You can reach me through email for any query regarding the questions.

Questions:

Q1. Consider the scene from the movie, ‘The Dark Knight’. Joker has issued a public threat to blow
up Gotham city. Consequently, residents of the city try to leave the city. The city is surrounded by
water body from all directions and taking a boat is the only way out of the city. Joker wants to
prove to Batman that the common people are selfish and have no care or regards for each other.
In order to prove it, joker puts detonators in two boats (B1 and B2), one with ‘civilians’ as
passengers and another with ‘prisoners’ as passengers. Midway of their rides, Joker makes a
simultaneous announcement via the radio on the two boats that each of these two boats has a
detonator and pressing the detonator on one boat will blow up the other boat. Each boat has to
decide whether to press the detonator or not. If both press the detonator, the lives on both boats
are lost. If both do not press, then the lives on both the boats are saved. If only one presses the
detonator, the lives on the other boat are lost making the people on the boat that pressed the
detonator, the sole survivors. Suppose, there are two types of people – the ones who have
‘survivor’s gloat’ (SGL)1 and the ones who have ‘survivor’s guilt’ (SGT). Assume, on a boat, people
have homogeneous type. The types are independently and identically distributed such that SGT
and SGL types are equally likely for each player. The payoffs of each state-game are given as
follows:

B2 (prisoners) B2 (prisoners)
press not press not
B1 press 10, 10 80, 0 B1 press 10, 10 80, 0
(civilians) not 0, 80 50, 50 (civilians) not 0, -10 50, 50
(SGL, SGL) (SGL, SGT)

1Survivor’s gloat is the feeling of malign pleasure on one’s own success on surviving or another’s inability to
survive a fatal situation
 B2 (prisoners) B2 (prisoners)
press not press not
B1 press 10, 10 -10, 0 B1 press 10, 10 -10, 0
(civilians) not 0, 80 50, 50 (civilians) not 0, -10 50, 50
(SGT, SGL) (SGT, SGT)

a. Define type set and strategy set for each player. 1 mark
b. Derive the best responses of each player. 1 mark
c. Derive the pure strategy Bayesian Nash equilibria of the game. 2 marks
d. Is the Joker right about the nature of common people? 1 mark

Q2. Suppose Harry and Ron find a mysterious box. They both are curious about what’s inside the
box. The instructions written on the box says that the box opens when the big red button on the
box is pressed. However, two people simultaneously have to press the button for it to open. If
only one presses it, then the box is destroyed. Furthermore, since none of the two know what’s
inside the box, they are worried that they might unleash something dangerous by opening the
box. Suppose, they think with probability ‘q’, opening the box is safe and with the remaining prob.
(1-q), opening the box is dangerous. The payoff of each player is given as follows:

P2 P2
press not press not
P1 press 100, 100 40, 30 P1 press 20, 20 30, 40
not 30,40 50, 50 not 40,30 50, 50
Safe (q) dangerous (1-q)

a. Formally write the game. 2 mark

b. Derive the pure strategy Bayesian Nash equilibria of the game. 3 marks

Q3. Country X and Y are at the brink of a war. Country X is a superpower in defence, while country
Y is small and lacks resources to defend itself if it is attacked by X. There’s a coalition of countries
that consider country X as their enemy. The coalition offers country Y to join them and in return
they will provide protection to Y against attack by X. Country X anticipates this and announces an
open threat that if country Y joins the coalition, then it will definitely attack Y in most aggressive
manner that even the additional protection by the coalition will not save country Y. Country Y
realizes that joining the coalition does provide protection but is unsure of credibility of country X’s
threat. Suppose with prob. ‘p’ country Y thinks that the threat given by X is not credible and with
remaining ‘1-p’ prob., it is credible. Suppose the following payoff are realized to each country in
different scenario.
 X X
Attack Not Attack Attack Not Attack
(A) (NA) (A) (NA)
Y Join (J) 80, 30, 30 Y Join (J) 10, 30, 30
20 100
Not Join 0, 40 40, 30 Not Join 30, 50 40, 40
(NJ) (NJ)

Threat is not credible (p) Threat is credible (1-p)

a. Write formally the strategies of each player. 2 mark

b. For which values of ‘p’, country Y joins the coalition in equilibrium? 3 marks

Q4. Taxpayers evade some amount of their lax liability even if they face some positive chance of
getting caught punished. The tax department can randomly audit taxpayer’s accounts but it is a
costly exercise. Consider a tax compliance game.
Suppose the taxpayer has a taxable income of 100. The tax liability of the tax payer is 20. The
taxpayer has two options, either to ‘evade (E)’ the tax fully or ‘not evade (NE)’ at all. The tax
department can choose either to ‘audit (A)’ the account of the taxpayer or ‘not audit (NA)’.
Auditing has a cost 𝑐 ∈ {30, 80}. The tax department knows its own cost of auditing but the
taxpayer does not. Taxpayer believes that the two values of the audit cost are equally likely.
Furthermore, if the department audits and if the taxpayer has evaded the tax, then it is caught
with certainty. When caught, not only the taxpayer has to pay the full tax, it has to also pay a fine
that is equal to double of the tax amount. The net revenue of the tax department is sum of the
tax collection and the fine minus the cost of auditing. Whereas, the net payoff of the taxpayer is
the net income post tax (if paid) and the fine (if any).

a. Write the payoff matrices and the strategy sets of each player. 2 marks
b. Does there exist a pure strategy BNE? If, yes derive the equilibrium. 3 marks