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ECON-SHU 216 Problem Set 2: Fall 2018 Due Oct 9th in Class

This document contains instructions for 5 problems on a economics problem set. Problem 1 involves analyzing a 2-player game in terms of pure and mixed strategy Nash equilibria and levels of reasoning. Problem 2 involves identifying Nash equilibria in a 2-player game presented in a payoff table. Problem 3 presents another 2-player game and asks to find Nash equilibria. Problem 4 models voter turnout as a game and asks questions about whether certain strategy profiles are Nash equilibria. Problem 5 presents a game involving two firms' investment choices and asks to analyze best responses and Nash equilibria.

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152 views3 pages

ECON-SHU 216 Problem Set 2: Fall 2018 Due Oct 9th in Class

This document contains instructions for 5 problems on a economics problem set. Problem 1 involves analyzing a 2-player game in terms of pure and mixed strategy Nash equilibria and levels of reasoning. Problem 2 involves identifying Nash equilibria in a 2-player game presented in a payoff table. Problem 3 presents another 2-player game and asks to find Nash equilibria. Problem 4 models voter turnout as a game and asks questions about whether certain strategy profiles are Nash equilibria. Problem 5 presents a game involving two firms' investment choices and asks to analyze best responses and Nash equilibria.

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ECON-SHU 216 Problem Set 2

Fall 2018

Due Oct 9th in class

Problem 1. The final problem revisited

Holmes
Dover Canterbury
Dover 2, −2 0, 0
Moriaty
Canterbury −1, 1 2, −2

Table 1: Problem 1

(1) Identify all the pure strategy Nash Equilibria in this game.

(2) Identify all the mixed strategy Nash Equilibria in this game.

(3) What’s the relationship between maximin strategies and mixed equilibrium strategies
in this game?

(4) Now we will analyze the game in the framework of levels of reasoning. Let’s call a player
who uses 1 level of reasoning an “L1 player’, and assume that an L1 player believes that
his opponent could use the two available strategies with equal probability. (Obviously,
the naive L1 players fail to take into consideration that their opponents would also
think strategically.) What would an L1 Moriaty and an L1 Holmes choose?

(5) Now consider L2 players, who believe that the opponents would reason like L1. What
would an L2 Moriaty choose? How about an L2 Holmes?

(6) L3 believes that the opponents would reason like L2. What would an L3 Moriaty
choose? How about an L3 Holmes?

(7) In the story, Moriaty went to Dover and Holmes got off the train at Canterbury. Suppose
humans reason up to 5 levels, what does this suggest about their reasoning levels?
(There could be multiple answers.)

Problem 2. Ann and Bob

(1) Identify all the pure strategy Nash Equilibria in this game.

(2) Identify all the mixed strategy Nash Equilibria in this game. (Hint: an action that
does not survive Strict IEDS will never be used in a Nash equilibrium with positive
probability. The same is not true for Weak Dominance.)

1
Bob
B1 B2 B3 B4
A1 6, 4 7, 3 5, 5 6, 4
A2 7, 3 3, 7 3, 6 5, 5
Ann
A3 8, 2 7, 4 3, 7 7, 8
A4 3, 7 5, 5 4, 6 5, 5

Table 2: Problem 2

Problem 3. Chris and David


David
D1 D2 D3
C1 2, 4 6, 1 7, 2
C2 6, 1 6, 4 3, 2
Chris
C3 1, 7 4, 3 5, 6

Table 3: Problem 3

(1) Identify all the pure strategy Nash Equilibria in this game.

(2) Identify all the mixed strategy Nash Equilibria in this game.

(3) Given an example from Problem 2 or Problem 3 in which an action does not survive
Weak IEDS, but is used in a Nash equilibrium.

Problem 4. Voter Turnout (Textbook 5.17)


Two candidates, X and Y, are running for mayor in a town with n residents. The value
(denoted by v) for each resident for having his candidate win is 4, for having him tie is 2,
and for having him lose is 0. Going to vote costs each resident 1 (denoted by c). The payoff
of each voter could be calculated as the value from the result of the election minus voting
cost, denoted by v − c.

(1) Suppose n = 2. That is, there are only two registered voters in this town, Ann and
Chris. Ann supports X, and Chris supports Y. Each voter has two strategies: to vote
or not to vote. Write down this game as a matrix and solve for all pure strategy Nash
equilibria, if they exist.

Starting from part (2), let n = 4. There are four voters, Ann, Bob, Chris and David.
Ann and Bob support X. Chris and David support Y. Each voter has two strategies: to
vote (ai = 1, i = 1, 2, 3, 4) or not to vote (ai = 0). So their strategy profiles could be
represented by (a1 , a2 , a3 , a4 ).

(2) Is (1, 1, 1, 1) a Nash equilibrium? In other words, is “everyone votes” a Nash equilib-
rium? Give a brief explanation of why or why not.

(3) Is (0, 1, 1, 1) a Nash equilibrium? Give a brief explanation of why or why not.

2
(4) Is (0, 0, 1, 1) a Nash equilibrium? Give a brief explanation of why or why not.

(5) Is (0, 0, 0, 1) a Nash equilibrium? Give a brief explanation of why or why not.

(6) Is (0, 0, 0, 0) a Nash equilibrium? Give a brief explanation of why or why not.

(7) Find all pure strategy Nash equilibria in this game.

Problem 5. (Textbook 5.13)


Two high-tech firms (1 and 2) are considering a joint venture. Each firm i can invest in
a novel technology and can choose a level of investment xi ∈ [0, 5] at a cost of ci (xi ) = x2i /4.
The revenue of each firm depends on both its investment and the other firm’s investment.
In particular, if firm i and j choose xi and xj , respectively, then the gross revenue to firm
i is 
0,

 if xi < 1

Ri (xi , xj ) = 2, if xi ≥ 1 and xj < 2


x x , if x ≥ 1 and x ≥ 2

i j i j

Each firm tries to maximize its profit (or payoff):

ui (xi , xj ) = Ri (xi , xj ) − ci (xi ).

(1) Firm 1’s payoff function u1 (x1 , x2 ) is a piecewise function. Write down u1 (x1 , x2 ) when
x2 ∈ [0, 2).

(2) Give Firm 1’s best response function BR1 (x2 ) when x2 ∈ [0, 2).

(3) Write down Firm 1’s payoff function u1 (x1 , x2 ) when x2 ∈ [2, 5].

(4) Give Firm 1’s best response function BR1 (x2 ) when x2 ∈ [2, 5].

(5) Plot BR1 (x2 ) and BR2 (x1 ) on the same diagram.

(6) Identify all pure strategy Nash equilibria in this game.

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