Economics S4415

Columbia University
Summer 2001
Professor Dutta
Solutions to Problem Set 3
Chapter 9
9.2 Consider the payo matrix of any 2 2 game, i.e., any game with
two players and two pure strategies:
P layer 1nP layer 2 t c
t
a; a d; e
c
e; d b; b
i) Write down parameter restrictions so that (t; t) is a symmetric
Nash equilibrium.
ii) Under what restrictions, can (c; c) be a symmetric Nash equilibrium? Are the restrictions in parts i) and ii) compatible with each
other, i.e., can such a game have multiple pure strategy symmetric Nash
equilibria?
Answer: i) a e ii) b d. Yes.
9.5 Consider the denition of a two-player symmetric game. Using
the denition, prove the following statement in a semi-rigorous fashion:
if the two players play identical actions, they get exactly the same payo.
Answer: Suppose the action is a pure strategy choice. By denition
of a symmetric game, if each player chooses thew same pure strategy then
their two payos must be equal. Suppose instead that the two players
choose identical mixed strategies, say each player chooses strategies s1 ,
s2 , ::: sM with probabilities p1 , p2 , ::: pM . With probability p2k each player
chooses the same pure strategy sk (k = 1, ::: M ) and in that case their
two payos are identical. Consider two dierent pure strategies instead say s1 and s2 . With probability p1 p2 , player 1 picks s1 and 2 picks s2 .
In this case their payos need not be the same - say they are (s1 ; s2 )
and r(s1 ; s2 ) respectively. However there is an identical probability p1 p2 - that these choices will be reversed, i.e., that player 1 picks s2
and 2 picks s1 . And if that happens the two payos will be reversed as
well, i.e., player 1 will get r(s1 ; s2 ) and 2 will get (s1 ; s2 ). Hence the
expected payos arising out of this pair of pure strategies is exactly the
same for each player, i.e., is p1 p2 [(s1 ; s2 ) + r(s1 ; s2 )].
The same argument applies to any two strategies sk and sk0 - hence
the expected payos are identical for the two players.
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9.8 i) Redo parts i) and ii) of the previous question if the costs of
staying increase from 5 dollars to 10 dollars so that the payo matrix
becomes:
F irm 1 n F irm 2 date 0 date 1 date 2
date 0
0; 0
0; 15
0; 30
date 1
15; 0 10; 10 10; 5
date 2
30; 0 5; 10 20; 20

ii) How does this increase aect the expected prots in the symmetric
equilibrium? Explain.
Answer: i) Note that a mixed strategy - 0.5 on 0 and 0.5 on 2 dominates the pure strategy date 1. Hence we can concentrate on nding
a mixed strategy equilibrium in which only dates 0 and 2 are played
(why?). Suppose the probability of the former is p. The expected payo
to playing 2 is therefore 30p 20(1 p). This equals the expected payo
to playing 0 - 0 - if p = 52 .
Expected payo must be 0 (why?).
ii) The expected prots are the same as in 2.1 - the probabilities are
dierent and there is a greater likelihood of early exit by each rm.
9.16 Consider the following bankruptcy model (with collection costs
of two dollars):
# of other creditors grabbing 0 1 2
grab
822
ref rain
514
i) Compute the symmetric mixed strategy equilibrium.
ii) Compare the probability that each creditor ref rains with the
probability that was derived in the text. Explain your answer.
iii) How successful is voidable preference law as a deterrent in this
case?
Answer: Suppose that the probability of grab is p. Then the expected
payo from grabbing is
8(1 p)2 + 4p(1 p) + 2p2
while the expected payo from refraining is
5(1 p)2 + p(1 p) + 4p2

The two payos are equal if 3(1 p) = 2p2 ; i.e., p = 3+4 33 , i.e.,
approximately 0:7
ii) There is a greater probability of ref rain in this case because
collection costs are higher.
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3 3
iii) Everybody refraining has probability ( 10
) , i.e., 2.7% - not very
high even in this case!
9.17 i) Redo the previous question when collection costs are four
dollars.
ii) How high would the costs need to be for all three creditors to
ref rain from stripping the insolvent companys assets?
Chapter 11
11.2 Redo the theatre game of F igure 11.1 to allow for the possibility that a cab can get caught in a trac jam (and in that case is
slower than the subway although it is faster than the bus). Suppose
that road conditions are known to both players before they make their
transportation choices. Be sure to carefully explain the payos that you
assign.
Answer:
Exercise 11.2

b
Player 2

c
s

1(,b), 2(N,b)
1(,b), 2(T,c)
1(,b), 2(T,s)

b
b
Player 1

Player 2

c
s

s
Player 2

b
c
s

1(,c), 2(N,b)
1(,c), 2(N,c)
0.751(,c)+0.251(N,c),
0.752(N,s)+0.252(T,s)
1(,s), 2(N,b)
0.751(,)+0.251(T,s),
0.752(T,c)+0.252(N,c)
1(,s), 2(N,s)

11.5 Use backward induction to solve the game from a conguration

of (1; 0)? What about (2; 0) and (3; 0)?
Answer: Use the convention that the rst player to move is player
1. >From (1; 0) clearly player 2 wins. From (2; 0) player 1 can force a
win by moving to (1; 0) but loses otherwise. From (3; 0) again player 1
can force a win by moving to (1; 0).
11.11 Consider Example 2 now. Show that there are no (fully) mixed
strategy Nash equilibria in that game of entry, i.e., the only Nash equilibria are the pure strategy Nash equilibria that I discussed in the text.
(Hint: Show that if Pepsi mixes between T and A, then Coke will never
play any of the strategies ET T; EAT; and EAA - since these are all
dominated by ET A. Can you show that if Coke plays a mixed strategy
in which she puts positive probability on ET A, Pepsi will never want to
mix between T and A?)
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Answer: Consider the strategic form given on p. 16. ET A dominates ET T; EAT; and EA 6 A and hence if Pepsi mixes between T and
A, then Coke will never play any of the strategies ET T; EAT; and EAA.
On the other hand if Coke plays ET A then Pepsi has a strict best response, i.e., A. Indeed if if Coke plays any mixed strategy with positive
probability on ET A and the four strategies involving O, then Pepsi has
a strict best response - to play A. So there is no mixed strategy Nash
equilibrium in which Pepsi plays T and A with positive probabilities.
11.17 Show that if we attach a backwards induction solution to the
n 1 step problem to the best choices at the nal decision nodes, we get
a backwards induction solution to the n step problem.
Answer: This is true virtually by denition. Suppose we are at a
penultimate decision node of the original game - this corresponds to a
nal decision node of the n1 step problem. At this node the backwards
induction solution of the n1 step problem involves the best choice after
incorporating the continuation best choices of the last decision nodes.
But that of course is what we would do if we folded the tree two steps....
Chapter 12
12.4 Suppose that the patent is worth $25. Everything else is unchanged. Solve the R&D game by backwards induction.
Answer:
Exercise 12.4

End R
Satety Zone I
for R

Trigger Zone I

(3,3)

Safety Zone II
for R

Trigger Zone II

(6,6)
Trigger
Zone III

Safety
Zone II
sor S

(8,8)

Safety
Zone I
for S

End S

Trigger
Zone IV
(10,10)
(11,11)
(12,12)

12.9 Show then that Safety Zone I, for A, is made up of all locations
in which Firm A is within 3 steps - and Firm B is more than 2 steps
from nishing, i.e., is made up of all locations (a; b) such that a
3
and b > 2. Similarly, show that Safety Zone I, for B, is made up of all
4

locations in which Firm B is within 2 steps - and Firm A is more than

3 steps from nishing, i.e., is made up of all locations (a; b) such that
a > 3 and b 2.
Answer: Consider (3; 3). Then Firm B nds it unprotable to move
3 steps and 2 steps or less is wasted money (given the Trigger Zone).
Similarly for (2; 3) and (1; 3). But that means from (3; 4) Firm B nds
it unprotable to move 1 , 2 or 3 periods, etc. ..
A symmetric argument establishes the safety zone of Firm B.
12.13 Find the backwards induction solution to this game.
Answer:
Exercise 12.13
End B
Trigger Zone I
Safety Zone I for B
(3,2)
Trigger
Zone II
(5,4)

Safety Zone I
for A

(7,5)
(8,6)

12.17 Redo the analysis of the book when public policy subsidizes
Firm As R&D by 50%, i.e., it costs Firm A, 1, 3.5 and 7.5 dollars to
make. respectively, 1, 2 and 3 steps of progress.

End A

Answer:
Exercise 12.17
End B
Trigger
Zone I

Safety Zone I for B

(3,3)
Trigger
Zone II
(6,5)
(9,7)
(12,8)
(15,9)
(17,10)

Safety
Zone I
for A

End A