ECON 145 Problem Set 3

Winter 2025. Due March 12.

1. Consider the two-player game with the following matrix form representation

x y
a 3, 2 −1, 0
b 1, 3 1, −1
c −1, 1 4, 2

where player 1 is the “row player,” player 2 is the “column player,” and, for every cell, the left-most
number is the utility that player 1 obtains from the corresponding (pure) strategy profile and the
right-most number is the utility that player 2 obtains from the corresponding (pure) strategy profile.

(a) Find the pure-strategy Nash equilibria of this game.

(b) Find the other Nash equilibria of this game.
Now, consider the three-player game with the following matrix form representation

L x y M x y R x y
a 2, 3, 3 3, 1, 0 a −1, 0, 1 0, −2, 5 a 0, −1, 1 2, −3, −5
b 0, 0, 1 1, 3, 7 b −7, 2, −4 −2, 4, 10 b 8, 4, −2 4, 0, 6
c 0, 7, 4 3, −1, −2 c 3, 6, 7 −1, 4, 0 c 0, 7, 0 6, −2, −4

where player 1 is the “row player,” player 2 is the “column player,” player 3 is the “table” player, and,
for every cell, the left-most number is the utility that player 1 obtains from the corresponding (pure)
strategy profile, the middle number is the utility that player 2 obtains from the corresponding (pure)
strategy profile, and the right-most number is the utility that player 3 obtains from the corresponding
(pure) strategy profile.
(c) Find the pure-strategy Nash equilibria of this game.
(d) Find the remaining Nash equilibria of this game.
2. Consider a Cournot competition environment with one good and two firms, Firm 1 and Firm 2. The
(pure) strategy space of Firm 1 is S1 = [0, 1], and the strategy s1 of Firm 1 corresponds to the amount
of the good they produce. Similarly, the (pure) strategy space of Firm 2 is S2 = [0, 1], and the strategy
s2 of Firm 2 corresponds to the amount of the good they produce. If Firm 1 were to produce quantity
s1 and Firm 2 were to produce quantity s2 , the prevailing price in the good market would be 1−s1 −s2 ,
the utility of Firm 1 would be their profit, u1 (s1 , s2 ) = (1 − s1 − s2 − c)s1 , and the utility of Firm 2
would be their profit, u2 (s1 , s2 ) = (1−s1 −s2 −c)s2 , where 0 ≤ c < 1 is the marginal cost of production
for both firms.
(a) Find the pure-strategy Nash equilibria of this game.
(b) Are there other Nash equilibria in this game.

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 Consider now a Bertrand competition environment with one good and two firms, Firm 1 and Firm 2.
The (pure) strategy space of Firm 1 is S1 = [0, 5], and the strategy s1 of Firm 1 corresponds to the
price they charge for the good. Similarly, the (pure) strategy space of Firm 2 is S2 = [0, 5], and the
strategy s2 of Firm 2 corresponds to the price they charge for the good. If Firm 1 were to choose price
s1 and Firm 2 were to choose price s2 , then the demand Firm 1 would face is given by

1 if s1 < s2 ,

D1 (s1 , s2 ) = 21 if s1 = s2 ,

0 if s1 > s2 ,


the demand Firm 2 would face is given by


1
 if s2 < s1 ,
1
D2 (s1 , s2 ) = if s2 = s1 ,
2
0 if s2 > s1 ,


the utility of Firm 1 would be their profit, u1 (s1 , s2 ) = (s1 − 1)D1 (s1 , s2 ), and the utility of Firm 2
would be their profit, u2 (s1 , s2 ) = (s2 − 1)D2 (s1 , s2 ). (The marginal cost of production for both firms
is 1.)
(c) Find the pure-strategy Nash equilibria of this game.
Consider now an altered version of the Bertrand competition environment above in which the (pure)
strategy space of Firm 1 is S1 = {0, 1, 2, 3, 4, 5}, the (pure) strategy space of Firm 2 is S2 = {0, 1, 2, 3, 4, 5},
and otherwise the game is the same as the Bertrand competition environment above.
(d) Find the pure-strategy Nash equilibria of this game.
3. Consider an exchange environment with two consumers, Consumer 1 and Consumer 2, and two goods,
a and b. Consumer 1 is initially endowed with e1,a = 0 of good a and e1,b = 10 of good b, while
Consumer 2 is initially endowed with e2,a = 10 of good a and e2,b = 0 of good b. The utility of
Consumer 1 from consuming x1,a ∈ R+ of good a and x1,b ∈ R is
√
u1 (x1,a , x1,b ) = x1,a + x1,b ,
while the utility of Consumer 2 from consuming x2,a ∈ R+ of good a and x2,b ∈ R is
√
u2 (x2,a , x2,b ) = x2,a + x2,b .
(a) Consider general equilibrium in the context of this environment in which the price of good b
is normalized to 1. Compute the equilibrium price p∗a of good a and find the corresponding
equilibrium quantities consumed by the various consumers.
(b) Consider the game in which, simultaneously, Consumer 1 submits a “demand curve” and Consumer
2 submits a “supply curve” to a market mediator. In particular, the strategy space of Consumer
1 is [0, 10], and the strategy d of Consumer 1 corresponds to the demand curve D1 in which
D1 (pa ) = d − pa is the amount of good a being demanded at price pa of good a. Similarly, the
strategy space of Consumer 2 is [0, 10], and the strategy s of Consumer 2 corresponds to the
supply curve S2 in which S2 (pa ) = −s + pa is the amount of good a being supplied at price pa
of good a. If Consumer 1 chooses a strategy d and Consumer 2 chooses a strategy s such that
d ≤ s, then no trade occurs and each consumer consumes their initial endowments. If Consumer
1 chooses strategy d and Consumer 2 chooses a strategy s such that d > s, then trade occurs, the
market mediator chooses the price p∗a at which D1 (p∗a ) = d − p∗a = −s + p∗a = S2 (p∗a ), Consumer 1
consumes D1 (p∗a ) of good a and 10 − p∗a D1 (p∗a ) of good b, and Consumer 2 consumes 10 − S2 (p∗a )
of good a and p∗a S2 (p∗a ) of good b. Find a pure-strategy Nash equilibrium of this game in which
trade occurs, and give the resulting equilibrium price p∗a of good a as well as the corresponding
quantities of the goods consumed by the consumers.

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4. Consider the two-player game with the following matrix form representation

A B
A θ, θ 0, 0
B 0, 0 0, 0

where player 1 is the “row player,” player 2 is the “column player,” and, for every cell, the left-most
number is the utility that player 1 obtains from the corresponding (pure) strategy profile and the
right-most number is the utility that player 2 obtains from the corresponding (pure) strategy profile.
At the time they choose their strategies, the players are uncertain about θ and put probability 21 on
θ = 6 and probability 12 on θ = −8.
(a) Find the Nash equilibria of this game.
Now suppose that player 1 can acquire information about the value of θ before choosing between A and
B. In particular, player 1 can purchase an information structure at cost 1 that, conditional on θ = 6,
results in signal h with probability 43 and signal l with probability 14 , and, conditional on θ = −8,
results in signal h with probability 14 and signal l with probability 34 . Take the (pure) strategy set of
player 1 to be {(n, A), (n, B), (i, A, A), (i, A, B), (i, B, A), (i, B, B)}, where, for all γ ∈ {A, B}, (n, γ)
denotes player 1 not purchasing the information structure but choosing γ, and, for all γh , γl ∈ {A, B},
(i, γh , γl ) denotes player 1 purchasing the information structure and choosing γh should signal h occur
and γl should signal l occur. The utilities of player 2 are as in the game above. If player 1 does not
purchase an information structure, the player 1 utilities are as in the game above. If player 1 does
purchase an information structure, the player 1 utilities equal their values in the game above minus 1.

(b) Find the Nash equilibria of this game.