Solution problem set 4

Ex 1) Represent the following situation using the normal form representation. Find all Nash
equilibria.
Two individuals are working on a join project. They can devote it either high effort or low
effort. If both devote high effort the outcome of the project is of high quality and they each
one receives 100$. If one or both devote low effort, the outcome of the project is of low
quality and each one will receive 50$. The opportunity cost to provide high effort is 30. The
opportunity cost to provide low effort is 0.
Solution:
• Players: individual 1 and individual 2
• Strategies: S1={High effort, Low effort}
• Payoff:

Individual 2
Low effort High effort
Low effort 50, 50 50, 20
Individual 1
High effort 20, 50 70, 70
Define the best responses

Individual 2
Low effort High effort
Individual 1 Low effort 50, 50 50, 20
High effort 20, 50 70, 70

Nash Equilibria:
{Low effort, Low effort}
{High effort, High effort}
Ex 2) Consider the following game:

Player 2
L R
Player 1 T 1, 1 2, 0
B 0, 2 2, 2

1) Find all Nash Equilibria and say if they are strict or not
2) Show that Iterated elimination of no strictly dominated strategies eliminates a Nash
equilibrium
Solution:
1) Define the best responses
Player 2
L R
T 1, 1 2, 0
Player 1
B 0, 2 2, 2
Nash equilibria: {T, L} and {B, R}
2) Consider Player 1. Strategy B is (weakly) dominated, deleting it we get:
Player 2
L R
Player 1 T 1, 1 2, 0
• The prediction of the outcome of this game is {T, L} and the process has eliminated the equilibrium {B,
R}.
• Therefore the elimination of weakly dominated strategy cannot be used to predict the outcome of
the game.
Ex 3) In the following normal form game, what strategies survive iterated elimination of strictly
dominated strategies? What are the Nash equilibria?

L C R
T 2,0 1, 1 4, 2
M 3,4 1, 2 2, 3
B 1, 3 0, 2 3, 0

Solutions:
B is dominated by T, the reduced game is:
L C R
T 2,0 1, 1 4, 2
M 3,4 1, 2 2, 3
C is dominated by R, the reduced game is:
L R
T 2,0 4, 2
M 3,4 2, 3

There are no dominated strategies to eliminate, Then we find the best responses:

L R
T 2,0 4, 2
M 3,4 2, 3

The Nash equilibria are:

• {T, R}
• {M, L}
Ex. 4) Two players (1 and 2) have to divide £10 between themselves using the following
procedure:
Each player names a integer number between 0 and 10.Denote by a1, a2 the number stated
respectively by player 1 and 2.
• If a1 + a2 ≤ 10, they get a1, a2.
• If a1+ a2 > 10 and a1 ≤ 5, player 1 gets a1 and player 2 gets 10 – a1.
• If a1+ a2 > 10 and a2 ≤ 5, player 2 gets a2 and player 1 gets 10 – a2.
• If a1 > 5 and a2 > 5, they both get 5.
1. Write the normal form
2. Determine the best response of each player to each of the other player’s actions
3. Plot the best responses of both players in a diagram where a1 is on the horizontal axis and
a2 is on the vertical axis.
4. Find all Nash equilibria.
Solution Player 2
a) 0 1 2 3 4 5 6 7 8 9 10
Player 1 10 10, 0 9, 1 8, 2 7, 3 6, 4 5, 5 5, 5 5, 5 5, 5 5, 5 5, 5
9 9, 0 9, 1 8, 2 7, 3 6, 4 5, 5 5, 5 5, 5 5, 5 5, 5 5, 5
8 8, 0 8, 1 8, 2 7, 3 6, 4 5, 5 5, 5 5, 5 5, 5 5, 5 5, 5
7 7, 0 7, 1 7, 2 7, 3 6, 4 5, 5 5, 5 5, 5 5, 5 5, 5 5, 5
6 6, 0 6, 1 6, 2 6, 3 6, 4 5, 5 5, 5 5, 5 5, 5 5, 5 5, 5
5 5, 0 5, 1 5, 2 5, 3 5, 4 5, 5 5, 5 5, 5 5, 5 5, 5 5, 5
4 4, 0 4, 1 4, 2 4, 3 4, 4 4, 5 4, 6 4, 6 4, 6 4, 6 4, 6
3 3, 0 3, 1 3, 2 3, 3 3, 4 3, 5 3, 6 3, 7 3, 7 3, 7 3, 7
2 2, 0 2, 1 2, 2 2, 3 2, 4 2, 5 2, 6 2, 7 2, 8 2, 8 2, 8
1 1, 0 1, 1 1, 2 1, 3 1, 4 1, 5 1, 6 1, 7 1, 8 1, 9 1, 9
0 0, 0 0, 1 0, 2 0, 3 0, 4 0, 5 0, 6 0, 7 0, 8 0, 9 0, 10
b)
Given that the game is symmetric we consider the best response of player 1.
• When a2 ≤ 5, player 1’s best response is a1 ≥ 10 – a2
• When a2 > 5, player 1’s best response is a1 ≥ 5
best response of player 2:
• When a1 ≤ 5, player 2’s best response is a2 ≥ 10 - a1
• When a1 > 5, player 2’s best response is a2 ≥ 5
c) b1 denotes the best response of player 1, b2 denotes the best response of player 2

a2
b2 b1

10
9
8
7
6
5
4
3
2
1
0 a1
0 1 2 3 4 5 6 7 8 9 10

The Nash equilibria are all strategy profiles where all players strategies are best response. Then all possible
strategy profiles satisfying 𝑎1 ≥ 5 and 𝑎2 ≥ 5 . In total 36 Nash equilibriums.
Ex. 5) Watch the video at: https://www.youtube.com/watch?v=p3Uos2fzIJ0
• Write the normal form
• Find best responses and the Nash equilibrium
• who is rational? The man or the women?
a)

Sara
Split Steal
Steve Split 50.075, 50.075 0, 100.150
n Steal 100.150, 0 0, 0
 Sara
Split Steal
Steve Split 50.075, 50.075 0, 100.150
n Steal 100.150, 0 0, 0

b) Best responses (underlined in the table):

• If Sara plays Split, Steven’s best response is Steal
• If Sara plays Steal, Steven’s best response is either Steal or Split.
• If Steven plays Split, Sara’s best response is Steal
• If Steven plays Steal, Sara’s best response is either Steal or Split.
Three Nash equilibria: (Split, Steal) (Steal, Split) (Steal, Steal).
c) Sara is rational because has played a best response. Steven could be considered rational if he
believed that Sara played Steal, but it seems that he was convinced that Sara played Split.
Ex. 6) Consider the following situation: 𝑛 participants are asked to simultaneously submit a
integer number between 0 and 10. The winner of the contest is the person(s) whose number is
closest to 𝑝-times the average of all numbers submitted. The winner gets a prize of 100, the
others participants get 0. If there are more winners, the prize is split between them.
1) Assuming a 𝑝 < 1 and 𝑛 = 2 represent the normal form game and find the Nash
equilibrium.
2) Find the Nash equilibrium when 𝑛 > 2 and 0 < 𝑝 < 1
3) Find the Nash equilibrium when 𝑝 > 1
Solution
Player 2
0 1 2 3 4 5 6 7 8 9 10
0 50,50 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0
1 0,100 50,50 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0
2 0,100 0,100 50,50 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0
3 0,100 0,100 0,100 50,50 100,0 100,0 100,0 100,0 100,0 100,0 100,0
4 0,100 0,100 0,100 0,100 50,50 100,0 100,0 100,0 100,0 100,0 100,0
Player 1

5 0,100 0,100 0,100 0,100 0,100 50,50 100,0 100,0 100,0 100,0 100,0
6 0,100 0,100 0,100 0,100 0,100 0,100 50,50 100,0 100,0 100,0 100,0
7 0,100 0,100 0,100 0,100 0,100 0,100 0,100 50,50 100,0 100,0 100,0
8 0,100 0,100 0,100 0,100 0,100 0,100 0,100 0,100 50,50 100,0 100,0
9 0,100 0,100 0,100 0,100 0,100 0,100 0,100 0,100 0,100 50,50 100,0
10 0,100 0,100 0,100 0,100 0,100 0,100 0,100 0,100 0,100 0,100 50,50
The strategy combination where each player submits 0 is the only one where players have not incentive
to deviate.
Suppose a combination where the two players submit the same number 𝑥. Then there is an incentive to
submit a number strictly smaller than 𝑥.
Suppose a strategy combination where the two submitted numbers are 𝑦 > 𝑥. Who submits 𝑦 has an
incentive to submit a number strictly smaller than 𝑥.
 b) Best responses of player 𝑖 is to submit a number that is equal to p times the average of all
submitted numbers, i.e.:
𝑛
𝑗=1 𝑠𝑗
𝑠𝑖 = 𝑝
𝑛
Then her best response is
𝑝 𝑗≠𝑖 𝑠𝑗
𝑠𝑖 =
𝑛−𝑝
(note that the right hand side is smaller than the average of the number submitted by others because
𝑝 < 1) Then the best response is to play a number that is smaller than p times the average of the
others' numbers
We can directly check that:
A strategy profile where all players play the same number 𝑠 and 𝑠 > 0 is not a NE. Any player
has an incentive to play a small number
A strategy profile where there are at least two players playing different numbers is not a Nash
equilibrium. Indeed the player(s) with the submitted number(s) above p times the average
has(have) an incentive to play a smaller number.
So we can conclude that only a strategy profile where all players play the same number 𝑠=0 is a
NE
c) By similar considerations we can say that the unique Nah equilibrium is a strategy profile
where all players submit 10