ECND: Advanced Microeconomics Hee Yeul Woo

Spring 2020 wooheeyeul@xjtu.edu.cn

Short Answer key: Problem set 1

1. Consider the following two-player game-frame where each player is given a set of cards and each card
has a number on it. The players are Antonia (Player 1) and Bob (Player 2). Antonia’s cards have the
following numbers (one number on each card): 2, 4 and 6, whereas Bob’s cards are marked 0, 1 and
2. Antonia chooses one of her own cards and Bob chooses one of his own cards: this is done without
knowing the other player’s choice. The outcome depends on the sum of the numbers of the chosen
cards. If the sum of the numbers on the two chosen cards is greater than or equal to 5, Antonia gets
$10 minus that sum; otherwise if the sum is less than 5, she gets nothing; furthermore, if the sum of
numbers is an odd number, Bob gets as many dollars as that sum; if the sum of numbers turns out to
be an even number and is less than or equal to 6, Bob gets $2; otherwise he gets nothing.

(a) Represent the game-frame described above by means of a table. Assign the rows to Antonia and
the columns to Bob.
ˆ The game-frame is shown in the below table. The outcomes are pairs of two numbers, which
are the amounts of money Antonia and Bob get, respectively.
0 1 2
2 0, 2 0, 3 0, 2

4 0, 2 5, 5 4, 2

6 4, 2 3, 7 2, 0

(b) Using the game-frame of part (a) obtain a reduced-form game by adding the information that
each player is selfish and greedy. This means that each player only cares about how much money
he/she gets and prefers more money to less.
ˆ When the outcomes are the amounts of money and Player i is selfish and greedy, we can
take as Player i’s utility function Ui ($x) = x (other utility functions would do too: the only
requirement is that the utility of a larger sum of money is larger than the utility of a smaller
sum of money). Thus the reduced-form game is shown in the above table.
(c) Find the Nash equilibria.
ˆ The only Nash equilibrium for this game is (4, 1), which returns payoff 5 to both players.

2. Alice (Player 1), Bob (Player 2), and Charlie (Player 3) play the following simultaneous game. They
are sitting in different rooms facing a keyboard with only one key and each has to decide whether or
not to press the key. Alice wins if the number of people who press the key is odd, Bob wins if exactly
two people press the key and Charlie wins if nobody presses the key.

(a) Represent this situation as a game-frame. Note that we can represent a three-player game with
a set of tables: Player 1 chooses the row, Player 2 chooses the column and Player 3 chooses the
table.
Bob Bob
P NP P NP
P A wins B wins P B wins A wins
Alice Alice
NP B wins A wins NP A wins C wins

Charlie P Charlie NP

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ECND: Advanced Microeconomics Hee Yeul Woo
Spring 2020 wooheeyeul@xjtu.edu.cn

(b) Using the game-frame of part (a) obtain a reduced-form game by adding the information that
each player prefers winning to not winning and is indifferent between any two outcomes where
he/she does not win. For each player use a utility function with values from the set {0, 1}.
Bob Bob
P NP P NP
P 1, 0, 0 0, 1, 0 P 0, 1, 0 1, 0, 0
Alice Alice
NP 0, 1, 0 1, 0, 0 NP 1, 0, 0 0, 0, 1

Charlie P Charlie NP

(c) Find the Nash equilibria.

ˆ The only Nash equilibrium of this game is (N P, P, N P ) in which only player 2 chooses a
strategy P , while the others choose P .

3. There are three players. Each player is given an unmarked envelope and asked to put in it either
nothing or $3 of his own money or $6 of his own money. A referee collects the envelopes, opens them,
gathers all the money and then doubles the amount (using his own money) and divides the total into
three equal parts which he then distributes to the players. Each player is selfish and greedy, in the
sense that he ranks the outcomes exclusively in terms of his net change in wealth (what he gets from
the referee minus what he contributed).

(a) Represent this game by means of a set of tables. (Do not treat the referee as a player.)
Player 2 Player 2 Player 2
0 3 6 0 3 6 0 3 6
0 0, 0, 0 2, -1, 2 4, -2, 4 0 2, 2, -1 4, 1, 1 6, 0, 3 0 4, 4, -2 6, 3, 0 8, 2, 2
Player 1 3 -1, 2, 2 1, 1, 4 3, 0, 6 3 1, 4, 1 3, 3, 3 5, 2, 5 3 3, 6, 0 5, 5, 2 7, 4, 4

6 -2, 4, 4 0, 3, 6 2, 2, 8 6 0, 6, 3 2, 5, 5 4, 4, 7 6 2, 8, 2 4, 7, 4 6, 6, 6

Player 3: 0 Player 3: 3 Player 3: 6

(b) For each player and each pair of strategies determine if one of the two dominates the other and
specify if it is weak or strict dominance.
ˆ For Player 1, 0 strictly dominates 3 and 6, 3 strictly dominates 6 (the same is true for every
player). Thus 0 is a strictly dominant strategy.
(c) Is there a strictly dominant-strategy equilibrium?
ˆ The strictly dominant-strategy equilibrium is (0,0,0).
(d) Find the Nash equilibria.
ˆ The only Nash equilibrium is (0,0,0).

4. Follow the instructions below

Player 2 Player 2
d e f d e f
a 8, 6 0, 9 3, 8 a 2, 3 2, 2 3, 1
Player 1 b 3, 2 2, 1 4, 3 Player 1 b 2, 0 3, 1 1, 0
c 2, 8 1, 5 3, 1 c 1, 4 2, 0 0, 4

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ECND: Advanced Microeconomics Hee Yeul Woo
Spring 2020 wooheeyeul@xjtu.edu.cn

(a) Apply the IDSDS procedure to both games. Is there a strict iterated dominant-strategy equilib-
rium?
ˆ In the left game, the iterated deletion process (of strictly dominant-strategies) ends at the
fourth round.
– At the first round, c of player 1 is deleted.
– At the second round, d of player 2 is deleted.
– At the third round, a of player 1 is deleted.
– At the forth round, e of player 2 is deleted.
– A strictly iterated dominant-strategy equilibrium is (b, f ).
ˆ In the right game, the iterated deletion process (of strictly dominant-strategies) ends at the
second round.
– At the first round, c of player 1 is deleted.
– At the second round, f of player 2 is deleted.
– A strict iterated dominant-strategy equilibrium does not exits.
– Outcomes of iterated deletion of strictly dominant-strategy are (a, d), (a, e), (b, d), and
(b, e).
(b) Apply the IDWDS procedure to the right game. Is there an iterated weakly dominant-strategy
equilibrium?
ˆ In the left game, the iterated deletion process (of weakly dominant-strategies) goes the same
as the iterated deletion process (of strictly dominant-strategies).
– A weakly iterated dominant-strategy equilibrium is (b, f ).
ˆ In the right game, the iterated deletion process (of weakly dominant-strategies) ends at the
third round.
– At the first round, c of player 1 and f of player 2 is deleted.
– At the second round, a of player 1 is deleted.
– At the third round, d of player 2 is deleted.
– A weakly iterated dominant-strategy equilibrium is (b, e).
(c) Find the Nash equilibria of the left game.
ˆ The only Nash equilibrium is (b, f ).