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Problem Set 10

This document contains practice problems involving game theory concepts like Nash equilibria and subgame perfect equilibria. It includes: 1) Three questions analyzing games in normal and extensive form, finding Nash equilibria. 2) Four exercises modeling strategic decision making between players, representing games in normal and extensive form and finding the equilibria. 3) The exercises analyze simultaneous and sequential move games between firms, producers, professors and students. Equilibria concepts like Nash equilibria and subgame perfect equilibria are identified.

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Federica Merlo
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87 views3 pages

Problem Set 10

This document contains practice problems involving game theory concepts like Nash equilibria and subgame perfect equilibria. It includes: 1) Three questions analyzing games in normal and extensive form, finding Nash equilibria. 2) Four exercises modeling strategic decision making between players, representing games in normal and extensive form and finding the equilibria. 3) The exercises analyze simultaneous and sequential move games between firms, producers, professors and students. Equilibria concepts like Nash equilibria and subgame perfect equilibria are identified.

Uploaded by

Federica Merlo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Problem Set 10

Question 1
In the following game, players must move simultaneously. How many Nash equilibria are there? If players
could collude would the outcome change?

Firm 2
A B
A 3, 1 7, 0
Firm 1
B 2, 4 5, 3

Question 2
Consider the following three-player simultaneous game. Here Player 1 chooses between the rows
U, M and D, Player 2 chooses between the columns L and R, and Player 3 chooses between the
matrices A and B. Find the (pure strategy) Nash Equilibria of this game.

Question 3
Consider the following game in matrix form with two players.

a)Does either player have a dominant strategy?


b)What are the pure strategy Nash Equilibria of this game?
c)Can you find a mixed strategy Nash Equilibrium of this game? Is it unique?

Exercise 1

The professor (P) of microeconomics has to decide whether to introduce game theory in the
program of the course (G) or not (NG). However, the course is optional and the student (S) can
decide to take (I) or not to take that course (NI).
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If game theory was in the program and the student chose to attend that course, the utility of the
professor would be 10 and the utility of the student would be 5. If game theory was excluded from
the program and the student decided to take the course, the professor’s utility would be 7 and the
student’s utility 10. If the student decided to take another course instead of microeconomics, his
utility would be 7 and the utility of professor would be either 1 (if game theory was included in the
program) or 0 (if it was excluded).

Assume that the professor and the student make their decisions simultaneously.

a) Represent the game in normal form. Do players have a dominant strategy?

b) Find the Nash equilibrium/a.

Assume now that the professor decides whether or not to include the game theory before the
student’s decision on whether taking the course.

c) Represent the game in normal and extensive form.

d) Find out the Nash equilibria and the subgame perfect Nash equilibria in the sequential game.

Exercise 2

Consider the following simultaneous game represented in the normal form:

Beta
UP MIDDLE DOWN
Alfa UP (16, 30) (18, 26) (26, 10)
DOWN (24,14) (20,22) (4,14)

a) Compute the Nash equilibria (or the Nash equilibrium) of the game.

Now, assume that Beta knows Alfa’s choice before making her choice.

b) Represent the new game in extensive form.

c) Compute the Subgame Perfect Equilibria of the new game.

Exercise 3

Consider two aircraft producers (Airbus and Boeing) facing a strategic decision: whether to enter (E)
or not (NE) in the market of 150-passenger jets. If only one company enters, this will generate profits

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of 50, while if both companies enter the market, the will both incur loss of 5. If company does not
enter, it will have no profits and no losses.

a) Suppose that none of the two companies can choose its strategy before the other. Find the Nash
equilibria for this game.

b) Suppose Boeing, before taking its choice, knows the Airbus’ decision (and Airbus knows that
Boeing knows). Draw the normal form of the game and determine if the Nash equilibria change.

c) Now, represent this game in the extensive form. Do the equilibria found at the previous points
satisfy the credibility requirement? If so, what kind of equilibria are they?

d) In the situation of point b), assume the government decides to give a subsidy of 10 to its national
company - Boeing - if it chooses to enter the market, no matter what Airbus (which, on the contrary,
does not receive the subsidy) decides to do. How does the equilibrium change?

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