SVKM'S NMIMS

SARLA ANIL MODI SCHOOL OF ECONOMICS

Academic Year= 2019-2020

Program: B.Sc.Economics Year:Ill Semester:V

Subject: Game Theory Batch: 2017-20
Date: 16th January, 2020 Time: 01:00 pin to 03:00 pin (2 hrs.)
Marks: 50 No`ofp;gesitry,
Re - Examination

Attempt any five

10

The following matrix represents a Prisoners' Dilemma game:

Deny
Confess
a.ab.theliC. Find the pure strategy Nash equilibrium for the

1 Ilowing game: (2)

Deny With the help of the above game, also prove that
-2, -2 -5, -1
e Nash equ.ilibrium strategy survives iterated

mination of strictly dominated strategy. (3)

Confess -1, -5 -4, -4
Find the mixed strategy Nash Equilibrium for the

above game. Give appropriate explanation for your answer. (5)

10
1. The following pay-off matrix represents a strategic interaction.o.f_an employer and

an employee -represented as a simultaneous move game. The employee can

either decide to work or shirk, given the cost of his effort is g. In case the employee

works, the employer receives a pay-off of v, or else receives 0. However, let v >

w+h, such that even the employer always earns a profit if the employee works. In
 case the employer investigates and catches him shirking (which the employer

surely does in case he investigates), there will be no wage payment W to the

employee. On the other hand, if employer does not investigate before wage

payment, then employee receives wage irrespective of his own decision. The cost
of investigation is h.

a. Find the Nash Equilibrium in pure strategies, given the assumption that w > g > h >

0. (5)

b. Assuming appropriate values for v, w, g, h such that w > g > h > 0 holds, find the

mixed strategy Nash equilibrium. (5)

Employer Investigate Not

Employee investigate

shirk 0,-h W'-W

work w-g' v-w-h W-g,V-IN

3 a. Elaboratethe cournot Duopolygameandthe optimal solution tothe game. (5) 10

b. Explain how a sequential quantity competition, as in the Stackelberg game, changes

the final outcome. (3)

c. Explain, why in a Stackelberg duopoly game, the Stackelberg outcomes are strictly

dominated by the Cournot quantity outcomes? (2)

4 a)Letthedemandand supplycurvefacingcompaniesAand Bare 10

QA = 24-2PA + PB

QB = 24-2PB + PA

Find out the reaction functions of the two firms and the optimal strategies.

In this case will it be possible for the firm with the lowest price to get all customers?

Explain. (5)

b) Consider two parties negotiating a contract whereby a service is exchanged for price.

It is common knowledge between them that the buyer is willing to pay upto Rs. 300 and

the seller will not accept anything below Rs. 200. Model this as a dynamic game in which

the buyer makes the first move and offers a price for the service Pi . Consider that the

negotiation ends with the buyer. Explain how the game is dependent on the number of

:-.--::--:;
 rounds of offers and the sequence of moves.

If there is a cost associated with the delay in reaching the agreement and if we suppose

that the cost of delaying reduces the gain for both the players by 3% then find out the

optimal strategies. (5)

5 a)The prices and discountsfordance classes are summarized as follows: 10

Number of Students 1

Nrityam 12 10 10

Rockers 17 14 11

Three friends Anindita, Sudeshna and Partha are considering one of the classes. But

they have different valuations for the class. Their valuations are as follows:

nindita udeshna Partha

Nrityam 20 19 17

Rockers 23 1 24

Find the Nash Equilibrium of the game. What strategy has the highest social

welfa re? (3)

Draw the extensive form of the game considering Anindita to be the first mover

followed by Sudeshna and Partha. Provide the subgame perfect equilibrium. What

change in the game will be observed if there is a change in Patha's valuation for Nrityam
-i.t is 18 for both?Justify the change in Subgame Perfect Equilibrium.

(4)

b) Formulate the following game as a LPP:

(3)

B's Strategy
's Strategy
81 B2 83

t 8 9

2 2 5 6

3 1 7

--:- -I i-
6 a. Suppose the prisoners dilemma is repeated over two time periods, with zero 10

discounting across the periods. Is there any chance of enforcing a promise to 'not

confess' and collude for mutual gain among the two players? Elaborate with the help of

a prisoners' dilemma game, with appropriate pay-off structure. (5)

b. Does this result change if there is infinite repetitions of the above game? (2)

c. A company makes two products (X and Y) using two machines (A and a). Each unit of

X that is produced requires 50 minutes processing time on machine A and 30 minutes

processing time on machine a. Each unit of Y that is produced requires 24 minutes

processing time on machine A and 33 minutes processing time on` machine a. At the
start of the current week there are 30 units of x and 90 units of Y in stock. Available

processing time on machine A is forecast to be 40 hours and on machine a is forecast

to be 35 hours. The demand for X in the current week is forecast to be 75 units and for

Y is forecast to be 95 units. Company policy is to maximise the combined sum of the

units of x and the units of Y in stock at the end of the week. Formulate the above

problem in linear programming form and state the optimization problem for the
company. (3)

-
\
sv"'s Nn"s
SARLA ANHj MODI SCHOOL OF ECONOMICS
AcademicYear:2017-18
Year: IHsemester : V
Program: B.Sc. q]conomics)
Batch: 2015-18 ~
Subject: Game Theory r
Date : 04 May 2018~ Time: 11.00 am to 1.00 pin(2 Hrs)'

Marks: 50,
RE EXLAENATION

Instructions:

1. You have to attempt ANY FIVE questions in this paper, each carrying a maximum of ten
marks. All sub-questions are compulsory.

2. Figures to the right indicate maximum marks.

3. Answer each question on a fresh page.

ANSWER ANY FIVE OF TIIE FOLLOWING SK QUESTIONS: (5*10 = 50 marks)

1. Given the following payoff matrix:

Column player
WXYZ
3,6 4,10 5,0 0,8
Row
2,6 3,3 4,10 4,11
player 1,5 2,9 3,0 1,6

(a)Findtheequilibriumbythemethodofiterativeeliminationofdominatedstrategies.
Compare your answer to any pure-strategy Nash equilibria, and briefly compare the
merits of the two methods. (3)

(b) Define a pure-strategy Nash equilibrium for a normal-form game, and the
assumptions under which it holds. (3)

(c) Consider the following scenario: Players 1 and 2 are bargaining over how to split
$10. Both players simultaneously name integer shares they would like to have,
Stand S2, Where 0 S: Si,S2 S; 10. If Si + S2 S 10, then both the players receive the
share they named; if s[ + s2 > 10, then both players receive zero.
What are the pure-strategy Nash equilibria of this gane? - Logically explain your
answer.

2. (a) Define a subgame-perfect Nash equilibrium.

(b) Prove the following statement:

`A subgame-perfect Nash equilibrium (SPNE) is a more robust concept as compared to (5)
1/3
 the Nash equilibrium' .
Use the detailed example of the one-stage `Battle of the Sexes' game with perfect
information to substantiate your proof.
(c) If a) were a game of imperfect in.formation, how would the payoffs in equilibrium
be determined? -provide only the logical answer. (2)

3. (a) Three oligopolists operate in a market with inverse demand given by

P(y) = ci -y, viJhere y = yi + y2 + y3
- and yi is the quantity produced by firm j..
Each firm has a constant marginal cost of production c, and no fixed cost. The firms
choose their quantities as follows:
- Attime I:Firm I choosesy{ 20;
- At time 2: Firms 2 and 3 observe y{ and then simultaneously choose y2and y3
respectively.
- At the end of both time periods, market price is determined.
What is the subgame-perfect outcome (output of each firm, market output and price)?
Briefly explain your answer. (5)

(b) Given the following information:

ly

PO'|jy2) = CZ-y i/y < Cl;y=yi+y2,C{0/i) = Cy!

= 0 otherwise.

a-yj-C
y!= wh.ere yi - best response of a Firm i to crny yj .

(i) What is the steady state output if the firm's cost function were to change to:
cikyi) = F + cyt
- Briefly explain your answer.
(ii) Is the equilibrium symmetric? Is it a pure or mixed strategy equilibrium? - Briefly
justify your answer.

4. (a) Consider the static Bertrand duopoly model (with homogenous products) - firms
name prices simultaneously; demand for firm I.'s product is cl -pf if p£ < pj, is 0 if -/
p[ > pj, and is 0.5 (cz -pi) if p{ = pj; marginal costs are c < ci and there are no fixed
costs.
Consider the infinitely repeated game based on this stage game. Show that the firms
can use trigger strategies (that switch forever to fierce undercutting after any deviation,
to try and drive the firm out of the market) to sustain the monopoly price level in a
subgame-perfect Nash equilibrium if and only if 6 2 0.5. (4)

(b) Consider the differentiated-goods case of the Bertrand duopoly, where the demand
function facing each firm is -
Oi = 30 -2Pi + P2, and 02 = 30 -2P2 + Pi
Costs of production for each firm are: Fixed costs = 10, Marginal costs = 0.
(i) Model this as a one-stage sequential game of perfect information, where each fim's
strategies are to compete or collude, payoffs are profits. Find the subgane-perfect
Nash equilibrium (SPNE).
(ii) How many of the possible outcomes can be considered Pareto-efficient?
5. Consider a situation involving two firms -"Oldstore" and "Newstore". Newstore is
deciding whether to open a store in a location already serviced by Oldstore. Newstore
is worried about two things -whether the economy will be in a recession or not, which
will affect how much consumers are willing to pay, and also whether Oldstore will
respond to entry with a price war, or.by keeping its initial high prices. 01dstore is a
wellrestablished firm, and so would suivive any price war, although its profits would
fall.
Suppose the payoff matrices for the above scenarios were as follows:
(Note: Payoffs in `000s of currency units)

Scenario 1 : Normal Economv

Oldstore
Low price Highprice
Enter -100, -50 100,100
Newstore
Stay Out 0,50 0, 300

Scenario 2: Recession
Oldstore
Low price H_jgf a_p±c±
Erlter -160, -1'10 40, 40
Newstore 0, 240
Stay Out 0, -10

(a) Find the Nash equilibrium in each of the above cases. Are they strict? - Briefly (3)
explain your answer.

a) Model the above scenario as a sequential game of perfect information, with the
order of moves as follows:
- Newstore chooses its entry decision from /E77fer, Sfq; Oztfj
- Oldstore chooses its price from /Zroi4;, Hz.gfe;
- Nature picks demand to be j2eccssz.o77 with probability 0.3, or IVo777ccz/ with
probability 0,7.
(i) Find the resulting subgame-perfect Nash equilibrium. What are the payoffs for each
player in this equilibrium?
(ii) What if there was a 50-50 chance that Oldstore would choose.High or Low, after
Nature makes its move. Does the equilibrium change?

6. (a) An electronics dealer wants to purchase a combined total of no more than 100
charging cables of various compatibilities, and selfie sticks for inventory. Cables
weigh 5 gins each, and sticks weigh 7 gins each. Suppose that the dealer is limited to a
total of 50 gins of storage capacity for these two items. A profit of Rs. 15 for each
cable and Rs.10 on each stick is projected.
(i) Explain how this situation is a strategic interaction. Also write it as a in;thematical
formulation of a linear progfamming problem. (3)
(ii) Assume all that is purchased by the dealer is sold. How many of each should be
purchased and sold to make the largest profit? Can this be considered an equilibrium?
- explain your answer. (3)

a) Consider:
Player 2
AB
Player X
IY
mixed-
Define a mixed strategy. Derive the equilibritm in the above © as a pun and al
(4)
strategy Nash equilforiun.