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46 views5 pages

Ex1 Sol

fjdsigdsigdsgidsjgi

Uploaded by

truonghachi36
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© © All Rights Reserved
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EX1:

eBay’s recommendation: It is hard to imagine that anyone is not familiar


with eBay°c , the most popular auction website by far. The way a typical
eBay auction works is that a good is placed for sale, and each bidder places
a “proxy bid”, which eBay keeps in memory. If you enter a proxy bid that
is lower than the current highest bid, then your bid is ignored. If, however,
it is higher, then the current bid increases up to one increment (say, 1 cent)
above the second highest proxy bid. For example, imagine that three people
placed bids on a used laptop of $55, $98 and $112. The current price will be
at $98.01, and if the auction ended the player who bid $112 would win at a
price of $98.01. If you were to place a bid of $103.45 then the who bid $112
would still win, but at a price of $103.46, while if your bid was $123.12 then
you would win at a price of $112.01.
Now consider eBay’s historical recommendation that you think hard about
your value of the good, and that you enter your true value as your bid, no
more, no less. Assume that the value of the good for each potential bidder is
independent of how much other bidders value it.
(a) Argue that bidding more than your valuation is weakly dominated by
actually bidding your valuation.
Answer: If you put in a bid  = 0   where  is your valuation, then
only the three following cases can happen: () All other bids are below 
In this case bidding  =  will yield the exact same outcome: you’ll win
at the same price. () Some bid is above 0 . In this case bidding  = 
will yield the exact same outcome: you’ll lose to a higher bid. () No
bids are above 0 and some bid ∗  is in between  and 0 . In this case
bidding 0  will cause you to win in and pay ∗    which means that
your payoff is negative, while if you would have bid  =  then you
would lose and get nothing. Hence, in cases () and () bidding  would
do as well as bidding 0 , and in case () it would do strictly better,
implying that bidding more than your valuation is weakly dominated
by actually bidding your valuation. ¥
(b) Argue that bidding less than your valuation is weakly dominated by
actually bidding your valuation.
Answer: If you put in a bid  = 0    where  is your valuation, then
only the three following cases can happen: () Some other bid are above
In this case bidding  =  will yield the exact same outcome: you’ll
lose to a higher bid. () All other bids are below 0 . In this case bidding
 =  will yield the exact same outcome: you’ll win at the same price.
() No bids are above  and some bid ∗  is in between 0  and . In
this case bidding 0  will cause you to lose and get nothing, while if you
would have bid  =  then you would win and get a positive payoff of
-∗ . Hence, in cases () and () bidding  would do as well as bidding
0
, and in case () it would do strictly better, implying that bidding
less than your valuation is weakly dominated by actually bidding your
valuation. ¥
(c) Use your analysis above to make sense of eBay’s recommendation.
Would
you follow it?
Answer: The recommendation is indeed supported by an analysis of
rational behavior.

Roommates: Two roommates need to each choose to clean their apartment,


and each can choose an amount of time  ≥ 0 to clean. If their choices are 
and , then player ’s payoff is given by (10-) -2  . (This payoff function
implies that the more one roommate cleans, the less valuable is cleaning for
the other roommate.)
(a) What is the best response correspondence of each player ?
Answer: Player  maximizes (10-) -2  given a belief about , and
the first-order optimality condition is 10 -  - 2 = 0 implying that
the best response is  = 10-2   ¥
(b) Which choices survive one round of IESDS?

 = 0. Hence, any   5 is dominated by  = 5.2 Hence,  ∈ [0 5] are


Answer: The most player  would choose is  = 5, which is a BR to

the choices that survive one round of IESDS.


(c) Which choices survive IESDS?
Answer: The analysis follows the same ideas that were used for the
Cournot duopoly in section 4.2.2. In the second round of elimination,
because 2 ≤ 5 the best response  = 10-2  implies that firm 1 will
choose 1 ≥ 25, and a symmetric argument applies to firm 2. Hence,

are  ∈ [25 5] for  ∈ {1 2}. If this process were to converge to an


the second round of elimination implies that the surviving strategy sets

interval, and not to a single point, then by the symmetry between both
players, the resulting interval for each firm would be [min max] that
simultaneously satisfy two equations with two unknowns: min = 10-2max
and max = 10-2min. However, the only solution to these two equations imin =
max = 10 3  Hence, the unique pair of choices that survive IESDS
for this game are 1 = 2 = 10 3 .

Ex3
Popsicle stands: There are five lifeguard towers lined along a beach, where
the left-most tower is number 1 and the right most tower is number 5. Two
vendors, players 1 and 2, each have a popsicle stand that can be located
next
to one of five towers. There are 25 people located next to each tower, and
each person will purchase a popsicle from the stand that is closest to him or
her. That is, if player 1 locates his stand at tower 2 and player 2 at tower
3, then 50 people (at towers 1 and 2) will purchase from player 1, while 75
(from towers 3,4 and 5) will purchase from vendor 2. Each purchase yields a
profit of $1.
(a) Specify the strategy set of each player. Are there any strictly dominated
strategies?
Answer: The strategy sets for each player are  = {1 2  5} where
each choice represents a tower. To see whether there are any strictly
dominated strategies it is useful to construct the matrix representation
of this game. Assume that if a group of people are indifferent between
the two places (equidistant) then they will split between the two vendors
(e.g., if the vendors are at the same tower then their payoffs will be 62.5
each, while if they are located at towers 1 and 3 then they split the
people from tower 2 and their payoffs are 37.5 and 87.5 respectively.)
Otherwise they get the people closest to them, so payoffs are:
Player 1
Player 2
12345
1
625 375 625
25 100 50 75
625 875 625
625 625
100 25 50 75 75 50
625 625
875 625 875
75 50 75 50
375 625 375
625 625
75 50 50 75 100 25
625 625
625 375 625
50 75 25 100
625 875 625
2 3 4 5 Notice that the choices of 1 and 5 are strictly dominated by any other
choice for both players 1 and 2.
(b) Find the set of strategies that survive Rationalizability.
Answer: Because the strategies 1 and 5 are strictly dominated then
they cannot be a best response to any belief (Proposition 4.3). In the
reduced game in which these strategies are removed, both strategies 2
and 4 are dominated by 3, and therefore cannot be a best response in
this second stage. Hence, only the choice {3} is rationalizable.

Ex4:
Splitting Pizza: You and a friend are in an Italian restaurant, and the owner
offers both of you an 8-slice pizza for free under the following condition. Each

is, each player  ∈ {1 2} names his desired amount of pizza, 0 ≤  ≤ 8 If 1


of you must simultaneously announce how many slices you would like; that

+ 2 ≤ 8 then the players get their demands (and the owner eats any
leftover slices). If 1 + 2  8, then the players get nothing. Assume that you
each care only about how much pizza you individually consume, and the
more the better.
(a) Write out or graph each player’s best-response correspondence
(b) What outcomes can be supported as pure-strategy Nash equilibria?

Solution

(b) What outcomes can be supported as pure-strategy Nash equilibria?


Answer: It is easy to see from the best response correspondence that
any pair of demands that add up to 8 will be a Nash equilibrium, i.e.,
(0 8) (1 7)  (8 0). However, there is another Nash equilibrium: (8,8)
in which both players get nothing. It is a Nash equilibrium because given that
each player is asking for 8 slices, the other player gets nothing regardless of
his request, hence he is indifferent between all of his
requests including 8.

Note: The pair  = 8 and  =  where  ∈ {1 2  7} is not a Nash


equilibrium because even though player  is playing a best response to
, player  is not playing a best response to  because by demanding
8 player  received nothing, but if he instead demanded 8 -   0 then
he would get those amount of slices and get something.

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