1 ECONG01: Game Theory Solution to 2008 sample exam

Solution to Problem no. 1

N={1,2} A1=A2={r,p,s} U1(a,b)=-U1(b,a) U1+U2=0 U1(r,s)=U1(s,p)=U1(p,r)=1 There exists a unique Nash equilibrium, which is mixed and symmetric: each player plays each action with probability 1/3.

Solution to Problem no. 2

Let us solve by the backward induction method. If no agreement has been reached before T=4, player 2 proposes the extreme partition (0,1) and player 1 accepts it. This implies that if no agreement has been reached before t=3, player 1 will propose the partition (c2,1-c2), and player 2 will accept this offer. This implies that if no agreement has been reached before t=2, player 1 will accept any offer that player 2 makes in t=2. The reason is that if player 1 rejects the offer, he will receive c2 in t=3 and pay the delay cost c1>c2. Thus, in t=2 player 2 will propose the partition x=(0,1) and player 1 will accept it. Anticipating this, in t=1 player 1 will propose the partition (c2,1-c2), and player 2 will accept it. Solution to Problem no. 3

The incomplete information game is as follows.

N={1,2} A1=A2=[0,)

2 ={y,n}, p(y)=p(n)= T1={y,n}, T2={t*}, 1()= for every

The payoffs are as follows. When the drilling result is negative,

U1(x,y) = -x U2(x,y) = -y When the drilling result is positive,

U1(x,y) = x/(x+y) x for (x,y)(0,0) U2(x,y) = y/(x+y) y for (x,y)(0,0) U1(0,0) = 1 U2(0,0) = 0 Let us find Nash equilibrium in this Bayesian game. When the state is n (negative drilling results), player 1 chooses x=0 because this is a dominant action. Let x* denote player 1s action in the state y (positive drilling results), and let y* denote player 2s action (this player is uninformed of the true state). Then:

x* = argmax x x/(x+y*) x y* = argmax y [0 + y/(x*+y)] y

Therefore, x*=2/9 and y*=1/9.