Problem Set 10 – BIE Game Theory

Due on May 12, 3:00 pm

Submission instructions:

• Submit your answers in a single PDF file.

• The title of the file should be of the form: “BIEMadrid_LastName_FirstName_Pset10.pdf”.

• Upload your PDF file directly on Blackboard.

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1. (Three hunter stag hunt) Three hunters play a stag hunt game. There are two possible
strategies, Stag and Hare. Anyone who plays Hare will get a payoff of 1, no matter what
the others do. If at least two hunters play the strategy Stag, then each player who played
Stag will get a payoff of S/n where n is the number of hunters who played Stag. If one
hunter plays Stag and the other two play Hare, then the hunter who played Stag gets 0.

(a) (5 points) If S > 3, find all of the pure-strategy Nash equilibria for this game. If
2 < S < 3, find all of the pure-strategy Nash equilibria for this game.
(b) (5 points) Suppose that there is a symmetric mixed strategy equilibrium where
each hunter plays Stag with probability p such that 0 < p < 1. Find a quadratic
equation in p that must be satisfied at such an equilibrium.
(c) (5 points) Looking at the solution to (c) find the range of values of S for which
there is a symmetric mixed strategy equilibrium with 0 < p < 1.
(To solvepfor the roots of a quadratic, ax 2 + b x + c = 0, the quadratic formula is
−b± b2 −4ac
x= 2a .)
(d) (5 points) If S = 3, find a symmetric mixed strategy equilibrium that is not a
pure-strategy equilibrium.

2. (Not Survivor) (20 points) Six Game Theory students Ayesha, Bharat, Chandrika, Dev,
Ehsan, and Fatima are the contestants in a new reality TV show. They are placed on an
island. The rules of the game are as follows. Ayesha goes first. She is given a bag that
everyone knows contains six gold coins. Ayesha makes a proposal of how to allocate
the six coins among the six contestants including herself. The contestants (including
Ayesha) then vote ‘yes’ or ‘no’ on the proposal. If the proposal gets more than half the
votes then the coins are allocated according to the proposal and everyone leaves the
island. If the proposal gets half or fewer than half the votes then Ayesha has to leave the
island empty-handed and she is out of the game. In this case, the bag of six gold coins
passes to Bharat. He gets to make a proposal of how to allocate the coins among the
remaining contestants (i.e., including Bharat but excluding Ayesha) and the remaining
contestants (i.e., including Bharat but excluding Ayesha) then vote. As before, if the
proposal gets more than half the votes then the coins are allocated according to the
proposal and everyone leaves the island. If the proposal gets half or fewer than half
the votes then Bharat has to leave the island empty-handed and is out of the game.
In this case, the bag of six gold coins passes to Chandrika. And so on, with the same
voting rules, with each failed proposal leading to expulsion of the proposer, and with
the role of proposer being passed on alphabetically. The following assumptions matter.

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 The coins are indivisible, there is no other money on the island, and side contracts to
make payments on the island are not allowed. There are no abstentions; each surviving
voter must vote yes or no: whenever a voter is indifferent, she or he votes no. The
players only care about the gold (and this is common knowledge). For example, leaving
empty handed because your proposal fails is the same as leaving empty-handed because
a successful proposal gives you no coins. Finally: it is common knowledge that all the
contestants were well trained in Game Theory. What proposal should Ayesha make and
why? (Hint: use backward induction)

3. (Congestion and Toll Booths) Sometimes very long queues build up at toll booths. You
find yourself, say, waiting 5 minutes to pay 50c. An often heard catch is that such tolls
are the cause of long commutes and should be eliminated. This question asks you to
apply some game theory to this problem. In effect, you are going to design tolls that
minimize traffic problems! The whole question is quite hard, but each part is not too
bad so do not panic: just take it a step at a time. Suppose that a very large (say, infinite)
number of commuters must travel, one per car, from A to B. There are two possible
routes, 1 and 2. Let x be the proportion of cars that use route 1. There is a public
debate over whether to put a toll on route 1. The time it takes each car to get from A to
B, depends on the proportion of other cars on that route. The time, in hours, each car
takes on Route 1 is given by

3.8x if there is no toll
T1 (x) = .
4x if there is a toll

The time each car takes on route 2 is given by.

T2 (x) = 1 + 2(1 − x)

The utility of a commuter who chooses route 2 is −T2 (x). Her utility if she chooses route
1 is −T1 (x) if there is no toll, and −T1 (x) − p if there is a toll of p. In principle, p could
be negative.

(a) (5 points) Consider the game among the commuters simultaneously choosing
which route to take. Find the Nash-equilibrium proportion x that choose route
1 when there is no toll. How long does the commute take each car on route 1,
and on route 2? [Hint: in equilibrium, what must be true of the utilities of a com-
muter who chooses route 1 and one who chooses route 2? You might want to use

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 a calculator.]
(b) (5 points) Find the Nash equilibrium x when there is a toll as a function of the toll
charge p.
(c) (5 points) Consider a social planner who can set x and who aims to minimize
the average commuting time T (x) := x T1 (x) + (1 − x)T2 (x). (We assume that
the social planner does not care about the money that changes hands at the toll
booth.) Find the social planner’s optimum x when there is a toll. What are the
corresponding commutes on each route, and the average commuting time T ?
(d) (15 points) Suppose that the social planner can not direct the traffic x, but she can
set the toll charge p. She could also choose no toll. Consider the following game.
First, the social planner sets the toll (or chooses no toll). Then, after observing the
toll charge (or no toll), the commuters simultaneously choose their routes (much
as in parts (a) and (b)). Consider the subgame perfect equilibrium outcome of
this game. Does the social planner set a toll and, if so, what toll does she choose?
[Hint: from part (b), you already know the relation between p and x if there is
a toll. From part (c), if there is to be a toll, you already know the x the social
planner would like to choose, and the T that this induces. And, from part (a), you
can figure out the T without a toll.]
(e) (5 points) Assuming that the time spent at the toll booth is 0.2x, in the subgame-
perfect equilibrium outcome from part (d), how long will each car on route 1 spend
at the booth?

4. Consider an interaction between a peasant and a dictator. The peasant can either decide
to grow enough food to sustain his family (eat) or to produce additional crops to sell on
the market (grow). The dictator decides on how much to expropriate from the peasant,
either low or high. The payoffs are given as follows. If the peasant decides to only
produce enough food for his family, then the dictator’s expropriation has no effect since
the peasant is not selling anything publicly, as a result the dictator makes 0 and the
worker gets a payoff of 1. If the peasant decides to produce more crops and sell them
on the market and the dictator’s expropriation policy is low then the peasant’s payoff is
2 and the dictator’s payoff is 1. On the other hand, if the peasant decides to grow more
crops for the market but the dictator’s expropriation policy is high, then the peasant gets
a payoff of 0 and the dictator’s payoff is 3.

(a) (5 points) Write down the payoff matrix of this interaction and find the Nash equi-
libria.

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 (b) (10 points) Suppose that this interaction is repeated with probability δ. What is
the lowest δ for which we can support the outcome (low,grow) in an SPE?

5. (Card game) (10 points) Consider the following extensive form game:

Show that there is no perfect Bayesian equilibrium where type High player 1 raises, type
Low player 1 sees, player 2 concludes that player 1 is of type High when there is a raise
and passes. (2’s beliefs are consistent with 1’s strategies, so you should show that some
type of some player wants to deviate)