Principles of Economics

Problem Set No.2

 
  
Q1 ANS:
When strategy y is strictly dominated by strategy x, the payoff for playing strategy x will always
be more than strategy y. The same is applied when u say that strategy x strictly dominates
strategy y. the only difference between the concepts is that they are reversed to each other.
Weak dominance would be different in the sense that the payoff of playing strategy does not
always have to be higher than strategy y, sometimes, the payoff can be equal. However, it can
never be lower than y.

Q2 ANS:
The concept of elimination involves picking strictly and weakly dominated strategies and
removing them from the game as a player would not choose them if they were rational. We keep
doing this until there are no more dominated strategies; if the player is only left with 1 strategy,
we would pick the best response to it in expectation of that strategy being played. The
'equilibrium outcome by dominance' is formed by these two chosen strategies.

Q3 ANS:
FALSE. Some games have no dominated strategies. And even in some of those that do
a unique
equilibrium cannot be derived.
FALSE. Some games have no dominated strategies. And even in some of those that do
a unique
equilibrium cannot be derived.
FALSE. Some games have no dominated strategies. And even in some of those that do
a unique
equilibrium cannot be derived.
FALSE. Some games have no dominated strategies. And even in some of those that do
a unique
equilibrium cannot be derived.
FALSE. Some games have no dominated strategies. And even in some of those that do
a unique
equilibrium cannot be derived.
False. Some games have no dominated strategies, and even in those that do equilibrium cannot
be achieved in the rest of the game using the same strategy.

Q4 ANS:
D. as it states that the 3 options above it are correct which they are. There is more than 1 best
response and the 3 options state both b and d provide equally best outcomes, and that they
produce a better result than playing c. which is all correct.
Q5 ANS:

A. There are no dominated strategies.

B. As there are no dominated strategies, the “elimination of dominated strategies” doesn't give
you any answers.
C. There are two pure strategies NE (Nash equilibria), the (chicken, rooster) and (rooster,
chicken) strategies. The 1st one in the brackets indicates the row player's action, while the 2nd
one represents the column player's action.
There are two pure strategy Nash equilibria (NE), (chicken, rooster) and (rooster, chicken).
Note that by convention the first one in the brackets denotes the the row player’s action, the
second one to the column player’s action.
To prove that for example (chicken, rooster) is a NE, two conditions need to hold: (i) if
James plays chicken it is Buzz’s best response to play rooster, and (ii) if Buzz plays rooster it
is James’s best response to play chicken.
As they are symmetric, neither NE is likely than the other, so we do not know how the
game would be played (there is also a mixed-strategy Nash equilibrium, similarly to the Rock,
Scissors, Paper game, but we said we would not discuss this concept).
There are two pure strategy Nash equilibria (NE), (chicken, rooster) and (rooster, chicken).
Note that by convention the first one in the brackets denotes the the row player’s action, the
second one to the column player’s action.
To prove that for example (chicken, rooster) is a NE, two conditions need to hold: (i) if
James plays chicken it is Buzz’s best response to play rooster, and (ii) if Buzz plays rooster it
is James’s best response to play chicken.
As they are symmetric, neither NE is likely than the other, so we do not know how the
game would be played (there is also a mixed-strategy Nash equilibrium, similarly to the Rock,
Scissors, Paper game, but we said we would not discuss this concept).
There are two pure strategy Nash equilibria (NE), (chicken, rooster) and (rooster, chicken).
Note that by convention the first one in the brackets denotes the the row player’s action, the
second one to the column player’s action.
To prove that for example (chicken, rooster) is a NE, two conditions need to hold: (i) if
James plays chicken it is Buzz’s best response to play rooster, and (ii) if Buzz plays rooster it
is James’s best response to play chicken.
As they are symmetric, neither NE is likely than the other, so we do not know how the
game would be played (there is also a mixed-strategy Nash equilibrium, similarly to the Rock,
Scissors, Paper game, but we said we would not discuss this concept).
To demonstrate that (chicken, rooster) is a NE for e.g., two conditions must be met: Buzz’s best
response being to play rooster if James plays chicken and James’s best response being to play
chicken if Buzz plays rooster. Because these two are symmetric, neither NE is likely than the
other, so we do not know how the game would be played.
D. I would play chicken in this situation. But if we do that, the opponent will have incentive to
play rooster.
Before the game, James is told by Buzz that Buzz likes him, and is then taught how to play the
game by the individual. They may have made an implicit agreement, based on mutual respect, to
both play Chicken, it would not be an explicit agreement, because that would make the game no
longer non-cooperative. Unfortunately, the YouTube movie shows that Buzz's leather jacket
sleeve is caught on the door handle of his car. He was unable to jump, even though James can do
so. Both cars, as well as Buzz, are thrown off the cliff.
Q6 ANS:
A. As Firm 1, I can see that Offer discount is my unique strategy in comparison to Firm 2.
Furthermore, the outcomes appear to be significant. Moreover, if I play Offer discount, the rival
Firm's outcomes will be reduced. So I play Offer discount.
As Firm 2: As the matrix shows, even if I do nothing, I will benefit. Because Firm 1 has more
options, it is reasonable for me to do nothing. Then I can look for other actions in later games. So
I play Do Nothing.
B. For Firm 1, doing nothing is weakly dominated by Offer discounts and strictly dominated by
Advertising campaigns. Firm 2 has a dominated strategy.
C. When Do nothing for Firm 1 is eliminated, the rest of Do nothing for Firm 2 become weakly
dominated by the rest of the Advertising campaign, and we remove it. Firm 1 is aware that Firm
2 will conduct an advertising campaign, and as a result, Firm 1 will offer discounts. As a result,
dominance creates a one-of-a-kind equilibrium (Offer discounts, Advertising campaign).
D. You are aware that (Offer discounts, Advertising campaign) is a NE because it is a one-of-a-
kind result of dominance. There are no additional Nash equilibria.
In a., the game is played [Offer discount, Do nothing]. Meanwhile, in c., the game
is played [Advertising Campaign, Do nothing]
The different appears because when I play as Firm 1 in a., I chose to limit Firm 2
outcomes rather than maximizing my own outcome.
In a., the game is played [Offer discount, Do nothing]. Meanwhile, in c., the game
is played [Advertising Campaign, Do nothing]
The different appears because when I play as Firm 1 in a., I chose to limit Firm 2
outcomes rather than maximizing my own outcome.
In a., the game is played [Offer discount, Do nothing]. Meanwhile, in c., the game
is played [Advertising Campaign, Do nothing]
The different appears because when I play as Firm 1 in a., I chose to limit Firm 2
outcomes rather than maximizing my own outcome.
In a., the game is played [Offer discount, Do nothing]. Meanwhile, in c., the game
is played [Advertising Campaign, Do nothing]
The different appears because when I play as Firm 1 in a., I chose to limit Firm 2
outcomes rather than maximizing my own outcome.
E. The game is played in A (Offer discount, Do nothing). Meanwhile, the game is being played
in C (Advertising Campaign, Do Nothing). The difference appears because when I play as Firm
1 in a., I chose to limit Firm 2 outcomes rather than maximize my own.