Midterm Exam

Econ 159a Ben Polak Fall 2010

This is a closed-book exam. There are 4 pages including this one. The exam lasts for 75 minutes. There are 75 total points available. There are three questions, worth 15, 25 and 35 points respectively. Please put each question into a di erent blue book.

Question 1. [15 total points: use blue book 1]. Short-Answer Questions. State whether each of the following claims is true or false (or can not be determined). For each, explain your answer in (at most) one short paragraph. Each part is worth 5 points, of which 4 points are for the explanation. Explaining an example or a counter-example is su cient. Absent this, a nice concise intuition is su cient: you do not need to provide a formal proof. Points will be deducted for incorrect explanations. (a) [5 points] \The argument that says that I should not play a strictly dominated strategy depends on my knowing that the other players in the game are rational." (b) [5 points] \In the candidate-voter model (people on a line between zero and one choosing whether or not to stand for o ce), if there are two candidates standing and they are 1 symmetric around 2 , then it is an equilibrium." (c) [5 points] \If (^; s) is a strict Nash equilibrium of a symmetric, two-player game then s s ^ ^ is evolutionarily stable."

Question 2. [25 total points: use blue book 2] \Domination games". The Cambridge city police department and Cambridge university police department must each decide simultaneously whether to raid a pub where they know some Cambridge students are holding a party. The city police would like this to be a show of force so they would most prefer both police departments to raid; that is, having both raid is the outcome that yields the city police the highest payo . If only one department were to raid, then the city police would, for political reasons, prefer it to be the university police. The worst thing for the city police would be for neither department to raid. The university police is worried that perhaps there might be rather too much force so they would most prefer that only they raid; that is, having only the university police raid is the outcome that yields the university police the highest payo . Failing this, the university police would prefer to have no-one raid than to have the city police raid alone. And the worst thing for the university police would be to raid the pub together with the city police. (a) [8 points] Write down a payo matrix consistent with the preferences above. (b) [10 points] Given these preferences, does either police department have a dominated strategy. Brie y explain what you predict will happen. Suppose that, prior to these decisions being made, a student who is on the city council proposes a new law under which the city police will not be allowed to raid this particular pub on this particular night. The proposed law is so badly written that the city police could easily get it defeated in council. (c) [7 points] Explain using game theory whether or not you would you advise the city police department to get the proposed law defeated. (Don't worry about precedent: assume that even if it passed, the law would not create any precedent beyond this particular night.)

Question 3 [35 total points: use blue book 3] \Talking About My Girls." Each of two sisters must decide simultaneously which of two room to play in: the sitting room or their (shared) bedroom. The younger sister, Florence, does not care which room she plays in, but she really wants to play with her elder sister. Florence's payo is 1 if they play in the same room, but it is 1 if they play in di erent rooms. The elder sister, Nelly, also does not care which room she plays in, but she really wants to play alone. Nelly's payo is 1 if they play in the same room, but it is 1 if they play in di erent rooms. Nelly
sitting bed

Florence

sitting bed

1; 1 1; 1

1; 1 1; 1

(a) [4 points] Use the payo matrix above and nd the Nash Equilibrium. Suppose for the remainder of this question that the family has moved to a larger house. Each sister must now decide simultaneously which of three rooms to play in: the sitting room, Florence's bedroom or Nelly's bedroom. Each sister's concerns and payo s are the same as before. (b) [8 points] Carefully write down the payo matrix for this game. Find an equilibrium of this game, and (given your nding) explain which sister is likely to say she wants to move back to her old house. [Hint: try guess and check.] (c) [4 points] (Harder.) Explain succinctly whether or not there is an (other) equilibrium in which Nelly puts zero weight on the strategy `sitting room'. Their mother claims that as Nelly comes to like her own room better: (i) Nelly will choose to play in her bedroom more often, (ii) Florence will thus be able `to nd her more easily' so they will end up playing together more, and hence (iii) Florence will be happier. Suppose, for example, that Nelly's payo was 2 from playing alone in her room; it was 1 from playing alone in either other room; and it was still 1 from playing in the same room as Florence (in which ever room it is); and that Florence's payo s remained unchanged. (d) [8 points] Read these payo s carefully and use them to explain their father's skepticism about all three parts of their mother's claim. Suppose that Nelly, as she gets older, does not in fact get extra payo from playing in her own room but instead that Nelly starts to worry about Florence being in Nelly's room without her. Nelly's payo is still 1 if they play in di erent rooms when Florence is in not in Nelly's room, but Nelly's payo is now 1 if they play in di erent rooms when Florence is in Nelly's room. It is still 1 if they play in the same room (whichever room it is). Florence's payo s are still unchanged. (e) [8 points] Read these payo s carefully and explain whether or not there is pure-strategy Nash equilibrium in this game. Explain [harder] whether or not there is a Nash equilibrium in which neither player plays a pure strategy. (f ) [3 points] (For nerds only) Describe all the Nash equilibria of this game.