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Assignment 3 Solutions

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Prathibha Vikram
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45 views3 pages

Assignment 3 Solutions

Uploaded by

Prathibha Vikram
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ASSIGNMENT – 3 (SOLUTIONS)

1) Rationality basically means that in a given situation, a player can decide


what is best for him. In order for rationality to hold, all bundles must be
comparable to each other which means there must be completeness as
well as there must be transitivity for the preferences to be consistent.
Hence, correct option is (c).
Ans – (c)
2) The relation at least as tall as is both complete and transitive since we can
compare each and every person with respect to their heights. Secondly,
the relation is transitive because if D is at least as tall as E and E is at least
as tall as F then it must be the case that D is at least as tall as F.
Ans – (c)
3) The information that the coach will be late is mutual knowledge and not
common knowledge. This is because all the students know that the coach
will be late but they don’t know that the other student knows that the
coach will be late and the reasoning further continues in the similar way.
Ans – (b)
4) As per the assumptions of game theory, rationality of players is common
knowledge since all players are assumed to be rational and each player
knows that the other player is rational.
Ans – (b)
5) Here no strategy is dominant for player 1 because there is no such
strategy which dominates i.e., has higher payoff as compared to every
other strategy of player 1.
Ans – (d)
6) In this case, strategy Y weakly dominates strategy X of player 2 hence the
dominant strategy of player 2 is Y.
Ans – (a)
7) Let us start with player 1. Upon referring to the payoff matrix, we can see
that strategy C strictly dominates strategy D of player 1 so we will remove
strategy D of player 1 as he will never choose D in the presence of C. In
case of player 2, R strictly dominates Q so we remove Q from the matrix.
Now, strategy B weakly dominates A hence we remove A. T strictly
dominates S hence we remove S from the reduced payoff matrix. Now B
strictly dominates C so we remove C from the matrix. Again, T dominates
R so upon removing R, we will get strategy profile (B, T) as the Nash
equilibrium of the game.
Ans – (a)
8) Here we are considering a second price sealed bid auction which means
that the player with the highest bid wins but he pays amount equal to the
bid of the second highest bidder. Now, Rahul’s valuation is $10 and
Rohan’s valuation is $15. If, Rahul bids $10 and Rohan bids $15 then
Rohan wins the auction and pays $10 so that his payoff is ($15 - $10 =) $5
and Rahul loses the auction and get $0.
Ans – (a)
9) I propose that the action profile in which two people take the route via X
and two via Y will be the Nash equilibrium of the given problem. To see
that this is the NE, we need to show that there is no scope of unilateral
deviation for any player. If two people take the route via X then each car
will take 45.9 minutes to reach B. Again, if two people take the route via
Y then each one takes 46 minutes to reach B. Now let us suppose that a
person moves from Y to X so that now there are three persons choosing
X and two persons choosing Y. In this case, each person takes 49.8
minutes to reach B which is greater than 46 minutes taken earlier. Hence,
it is not beneficial to deviate from Y to X. In the same way, we can show
that no other unilateral deviation will be beneficial.
Ans – (a)
10) In order to show that a given solution is not NE, we need to find
only a single instance in which a unilateral deviation to any of the players
provides him with greater payoff then the existing setup. In the given
problem when each firm is located at 0.5 then there is always the
possibility of unilateral deviation. For e.g., if one firm deviates to the point
1/4 then he can capture 31.25% of the market share which is greater than
the earlier share of 25%.
Ans – (b)
11) The situation can be represented with the following game tree: -
Entrant
Enter Not to enter
Incumbent
(0, 5)
Fight
Accommodates

(-2, 2)
(2, 4)
In case of above game, we can use the normal form representation of the
extensive form game to find out all the NE(s).
Incumbent
Entrant Fight Accommodate
Enter (-2, 2) (2,4)
Not to Enter (0, 5) (0, 5)
As we can see, there are two NEs. One is (Not to enter, fight) and another
is (enter, accommodate).
Ans – (c)
12) Refer to the game tree in previous solution. Using the method of
backward induction, we start with the incumbent first. At node 2,
incumbent will choose to accommodate. Now, at node 1 given that the
entrant knows that the incumbent will accommodate, he will choose to
enter the market. Hence, the equilibrium will be (Enter, accommodate).
Ans – (b)

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