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Problem Set 3 (2022)

This document contains a problem set for an advanced microeconomics course. It includes 3 problems involving dynamic games: 1) A two-player game where one player proposes how to split an endowment and the other can accept or reject. The problem asks for the extensive form, normal form, Nash equilibria, and subgame-perfect Nash equilibria. 2) A three-period bargaining game between two players with different discount factors, to be solved using backward induction. 3) A dynamic oligopoly game where 3 firms choose quantities sequentially, and the questions involve identifying subgames, information structure, the unique subgame-perfect Nash equilibrium, and a Nash equilibrium that is not subgame

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74 views1 page

Problem Set 3 (2022)

This document contains a problem set for an advanced microeconomics course. It includes 3 problems involving dynamic games: 1) A two-player game where one player proposes how to split an endowment and the other can accept or reject. The problem asks for the extensive form, normal form, Nash equilibria, and subgame-perfect Nash equilibria. 2) A three-period bargaining game between two players with different discount factors, to be solved using backward induction. 3) A dynamic oligopoly game where 3 firms choose quantities sequentially, and the questions involve identifying subgames, information structure, the unique subgame-perfect Nash equilibrium, and a Nash equilibrium that is not subgame

Uploaded by

Anne
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Advanced Microeconomics I

Problem Set 3 (Lecture 4)


Fall Term 2022

1. Consider a dynamic two-player game where Player 1 is the proposer and Player 2 is the
responder. The proposer is endowed with 10. Her task is to propose a division of this endowment
with the responder, (𝜋! , 𝜋" ), and she can choose one of two proposals: (8, 2) or (5, 5). Once the
proposer makes a decision, she communicates it to the responder, and the responder can choose
to accept it, or to reject it. If the responder accepts, the money is split according to the proposal;
if the responder rejects, then both players will receive 0.
a. What are both the extensive form and normal form representations of this game?
b. Find all the Nash equilibria of this game.
c. Find the subgame-perfect Nash equilibria of this game.

2. Consider an example of the three-period version of Rubinstein’s sequential bargaining model


where the two players have different discount factors: 𝛿! = 0.8 for Player 1 and 𝛿" = 0.6 for
Player 2. Suppose the third-period settlement, if no agreement is reached in period 2, is (0.5,
0.5).
Solve this game using backward induction.

3. Three oligopolists operate in a market with inverse demand given by 𝑃(𝑄) = 𝑎 − 𝑄, where
𝑄 = 𝑞! + 𝑞" + 𝑞# , and 𝑞$ is the quantity produced by firm 𝑖. Each firm has a constant marginal
cost of production, 𝑐, and no fixed cost. The firms choose their quantities dynamically as follows:
Firm 1, which is the industry leader, chooses 𝑞! ≥ 0. Firms 2 and 3 observe 𝑞! and then
simultaneously choose 𝑞" ≥ 0 and 𝑞# ≥ 0, respectively.
a. How many proper subgames does this dynamic game have? Explain briefly.
b. Is it a game of perfect or imperfect information? Explain briefly.
c. What is the subgame-perfect Nash equilibrium of this game? Show that it is unique.
d. Find a Nash equilibrium to this game that is not a subgame-perfect Nash equilibrium.

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