1 ECON2033W1

UNIVERSITY OF SOUTHAMPTON ECON2033W1

SEMESTER 1 TAKE-HOME FINAL ASSESSMENT 2020-21

ECON2033 Microeconomics of Strategy
Duration: 24 HOURS:
START: 10:00 am, 26/01/2021 - END: 10:00 am, 27/01/2021

This paper contains 5 questions

- Answer all 5 out of 5 questions.

- An outline marking scheme is shown in brackets to the right of each question.
- Explain concisely all steps you undertake to answer the questions. Please write
clearly, only readable parts will be taken into account.
- This is an open book assignment. You may use notes, books, online resources or
software (e.g. Excel) when answering these questions. You must always use your
own words and calculations and you may not communicate to others or get help
from any person be it private or online.
- Once you have finished, you should upload your answers as a single pdf file on the
Assessment section of the ECON2033 Blackboard site.
- The submission deadline is 10:00 am on January 27th. Your work must be
uploaded onto the Blackboard website before this deadline.
- A submission is only complete with a submission number.
- See blackboard for detailed submission instructions.
- Submission of this work acknowledges that you have answered the questions
individually and in accordance with University guidance on Academic Integrity.

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Section A

A1 (Simultaneous Move Game, 25 Points)

Consider the following (simplified) situation of a penalty kick in a
football match. The kicker (from her point of view) can either aim
for the left or the right corner of the goal. The goalkeeper can
either jump left or right (from the point of view of the kicker). The
utility of scoring a goal is +1 for the kicker, and 0 else, while the
utility of the goalkeeper is −1 if conceding a goal, and 0 else. If the
goalkeeper jumps to the opposite direction of the kick, then a goal
is scored for sure. The goalkeeper is slightly better covering the left
corner such that if the kicker aims left and the goalkeeper jumps
into the left corner, then the shot gets blocked for sure. However,
if the kicker aims for the right corner and the goalkeeper jumps to
the right corner, then the shot gets blocked only with probability ρ
such that 0 < ρ < 1, i.e. with probability 1 − ρ a goal is scored
even if the goalkeeper and the kicker both aim for the right corner.
Both players are expected utility maximisers.
(a) Write down the game in strategic form. [4]
(b) Determine the unique Nash equilibrium. [6]
(c) Suppose the goalkeeper improves covering the right corner of the
goal such that he manages to block the kick with probability ρ0
such that ρ < ρ0 ≤ 1 if both aim for the right corner. In
the unique Nash equilibrium, how will the goalkeeper change his
behaviour in response to his improvement? How will the kicker
react to the goalkeeper’s improvement? Interpret and explain
your answer. [6]
(d) Suppose now ρ = 1 but the kicker discovered that there is also
an option to just kick into the centre (hoping that the keeper
will select one of the corners). However, when aiming for the
centre, the keeper blocks the penalty for sure if he just chooses

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to cover the centre, and even if he jumps into either corner, there
is a chance of σ that he blocks the penalty, where 0 < σ < 12 .
What is the unique Nash equilibrium here? [9]

A2 (Extensive-Form Games, 12 Points)

Two players play two different simultaneous move games one after
the other, the first game called game A, the second one called game
B, and the game where both are played one after the other is called
game C. After the game A has been played both players observe
what both players have chosen in game A before both players play
the game B. We will investigate subgame perfect Nash equilibria
of game C.

(a) Consider the following statement: “In each subgame perfect

Nash equilibrium of game C a Nash equilibrium must be played
in game B”. Is this statement true or false? Explain your
answer. [6]
(b) Consider the following statement: “In each subgame perfect
Nash equilibrium of game C a Nash equilibrium must be played
in game A”. Is this statement true or false? Explain your
answer. [6]

A3 (Alternating offers bargaining, 23 Points)

Consider the alternating offers bargaining game to divide a surplus
of £100 between Alexandra and Bill. Both can make one offer to
the other player starting with Alexandra. After Alexandra makes an
offer, Bill can accept or reject. If accepted, the £100 are divided as
proposed by Alexandra. If rejected, Bill makes an offer to Alexandra
that she can accept or reject. If Alexandra accepts, the division of
£100 is implemented as proposed by Bill. If Alexandra rejects, both
receive nothing. Alexandra and Bill discount each round by δ = .95.

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(a) Suppose that both players can only make integer division proposals.
Characterise all subgame perfect Nash equilibria (SPNE). [15]
(b) Now suppose the bargaining protocol is changed such that i) all
proposals (a, 100 − a) are allowed where a is a real number
with a ∈ [0, 100] and ii) the deadline is set to 41 periods
where one period consists of one proposal and one decision
to accept or reject. Alexandra and Bill still make alternating
offers which can be accepted or rejected and Alexandra always
makes the first proposal. In the unique SPNE of this game
Alexandra proposes the division (57.54, 42.46) in period 0 which
Bill accepts. Suppose now the deadline is increased by 1 period
to 42 periods. What will Alexandra propose in period 0 in the
unique SPNE? Explain your answer. [8]

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Section B

B1 (Games with incomplete information, 16 Points)

Two workers witnessed an act of bullying. They can report what they
saw to the superiors or they can keep quiet. Reporting is costly;
a commonly known parameter c ∈ [0, 1] denotes the individual
cost of reporting. However, both workers want to work in a bully-
free environment so they want the bully to be reported, although
how much they like the bully-free environment is not equal across
workers. Specifically, worker i = 1, 2 derives payoff vi if bullying is
reported (regardless of who reports). In fact, this is their private
information: i knows her own vi, but knows only that the other
worker’s vj comes from the uniform distribution on the unit interval,
vj ∈ [0, 1], where j = 1, 2 and j 6= i. If bullying is not reported by
anyone, then the payoff is zero.
(a) Find a Bayes Nash equilibrium in which worker 1 never reports,
and worker 2 reports only if her v2 is high enough. [8]
(b) Find a symmetric Bayes Nash equilibrium, that is, one in which
both workers use the same strategy. [8]

B2 (Games with incomplete information, 24 Points )

An owner wants to sell her car. Since she knows the car, she knows
its precise quality, denoted by x. However, a potential buyer only
knows that x comes from a uniform distribution on the unit interval,
[0, 1]. The seller is willing to sell quickly at a price not lower than
9x thousand pounds. If x is known to the buyer, then the buyer
will be willing to buy the car for a price not exceeding 10x thousand
pounds.
The seller posts a price p and the buyer either accepts or rejects
it. If the car is sold, the buyer’s payoff is 10x − p, and the seller’s

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payoff is p − 9x. If the car is not sold, the payoffs are zero. (Players
are risk-neutral; that is, when they face uncertainty, they maximize
expected payoff).
(a) For what realizations of the seller’s type is selling the car efficient?
[8]
(b) Is there a Perfect Bayesian equilibrium which is efficient (that
is, the transaction occurs if and only if it is efficient)? What
is the difference between this situation and the First Welfare
Theorem? (Maximum two sentences). [8]
(c) Find a Perfect Bayesian equilibrium (Hint: pay attention to
strategies and the belief system). [8]

END OF PAPER

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Social Sciences Examination Feedback
2020/2021

Module Code & Title: ECON2003 Microeconomics of Strategy

Module Coordinator: Max Kwiek, Tim Hellmann

Mean Exam Score: 56.1% (module mean including absentees 58.3%)

Percentage distribution across class marks:

UG Modules (module) PGT Modules

1 st (70% +) 26% 70% +
2.1 (60-69%) 23% 60-69%
2.2 (50-59%) 24% 50-59%
3rd (40-49%) 16% <50%
Fail (25-39%) 6%
Uncompensatable Fail 7%
(<25%)

Overall strengths of candidates’ answers:

As every year, the distribution is quite wide. Students who worked early were able to get very high
marks, even into 80-ties and 90-ties. Those who did not invest time in this module early in the
semester, could have problems catching up.

Overall weaknesses of candidates’ answers:

More complicated issues such as sequential rationality and Bayesian games caused some problems;
they are hard to answer using only intuition.

Pattern of question choice: n.a.

Issues that arose with particular questions:

A1a) and b) went well. A1c) went quite well, but some interpretations and explanations were
unclear, some did give answers which were not asked for, some forgot about one of the involved
players. A1d) many were able to translate the situation into a game, but then some failed to derive
the Nash equilibrium.

A2a) went well. A2b) Often failed to see that the statement is false, and even if it was claimed to be
false, failed to provide a counterexample

A3a) Many missed two out of three SPNE’s and many also did not fully define the strategies in the
SPNE. A3b) Many did see that the 41-period bargaining game is a subgame of the 42-period
bargaining game, but then failed to see that the roles of the first proposer switched in that
subgame.

B1a) generally went well, although many students forgot to check if player 1 behaviour not to report
is optimal. B1b) those who understood types and that the probability of reporting is endogenous did
well.

B2 generally did not go too well. In B2a, many students did not realise that this question was about
“what should happen”, which is a normative question, while they tried to answer “what is likely to
happen” in an equilibrium, which is a positive question. The latter was the subject of B2b and B2c.
Few students obtained full credit, but partial credit was awarded for noticing that there is adverse
selection, noticing the lemons market, and high partial credit was awarded for giving a correct
description of Bayesian updating when pooling and separating strategies are used.
Further comments not covered above:
N.a.

Discipline vetting completed By (Name): Christian Kellner Date: