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Problem Set 2

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33 views2 pages

Problem Set 2

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Asteroid Destroyer
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© © All Rights Reserved
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Problem Set 2

Exercise 1 — Iterated Deletion of Strictly Dominated Strategies


Consider the strategic game below

Player 2
Player 1 x y z
a 1, 2 1, 2 0, 3
b 4, 0 1, 3 0, 2
c 3, 1 2, 1 1, 2
d 0, 2 0, 1 2, 4

Find which strategies survive the iterative deletion of strictly dominated strategies.

Exercise 2 — Nash equilibrium with two players


b1 b2 b3 b4
a1 0, 7 2, 5 7, 0 0, 1
a2 5, 2 3, 3 5, 2 0, 1
a3 7, 0 2, 5 0, 7 0, 1
a4 0, 0 0, -2 0, 0 10, -1

Find all the pure strategy Nash equilibria of the game.

Exercise 3 — Nash equilibrium with three players


Consider the game below played by three players. Player 1 chooses one of the rows (T vs B). Player 2 chooses
one of the columns (L vs R). Player 3 chooses one of the three tables (A vs B vs C). Each payoffs cell gives
payoffs to players 1, 2 and 3 respectively.
A B C
L R L R L R
T 0, 0, 3 0, 0, 0 T 2, 2, 2 0, 0, 0 T 0, 0, 0 0, 0, 0
B 1, 0, 0 0, 0, 0 B 0, 0, 0 2, 2, 2 B 0, 1, 0 0, 0, 3

1
Exercise 4 — Political Competition (Median Voter)
Consider two candidates competing for office: Democrat (D) and Republican (R). While they
can compete along several dimensions (such as their past policies, their endorsements from labor unions,
their advertising, and even their looks!), we assume for simplicity that voters compare the two candidates
according to only one dimension (e.g., the budget share that each candidate promises to spend on education).
Voters’ ideal policies are uniformly distributed along the interval [0, 1], and each votes for the candidate with
a policy promise closest to the voter’s ideal. Candidates simultaneously and independently announce their
policy positions. A candidate’s payoff from winning is 1, and from losing is -1. If both candidates receive
the same number of votes, then a coin toss determines the winner of the election. Show that there exists a
unique pure strategy Nash equilibrium, and that in involves both candidates proposals to promise a policy
closest to the median voter.

Exercise 5 — Cournot Game of Quantity Competition


Consider an industry with two firms competing in quantities, i.e., Cournot competition. For simplicity,
assume that firms are symmetric in costs, c > 0, with no fixed costs and that they face a linear inverse
demand p(Q) = a − bQ, where a > c, b > 0, and Q denotes aggregate output. Note that the assumption
a > c implies that the highest willingness to pay for the first unit is larger than the marginal cost that firms
must incur in order to produce the first unit, thus indicating that a positive production level is profitable in
this industry. If firms simultaneously and independently select their output level, q1 and q2 , find the Nash
Equilibrium (NE) of the Cournot game of quantity competition.

Exercise 6 — Cournot Mergers with Efficiency Gains


Consider an industry with three identical firms each selling a homogeneous good and producing at a constant
cost per unit c with 1 > c > 0. Industry demand is given by p(Q) = 1−Q, where Q = q1 +q2 +q3 . Competition
in the marketplace is in quantities.
Part (a) Find the equilibrium quantities, price, and profits.
Part (b) Consider now a merger between two of the three firms, resulting in a duopolistic structure of
the market (since only two firms are left: the merged firm and the remaining firm). The merger might give
rise to efficiency gains, in the sense that the firm resulting from the merger produces at a cost e · c, with
e ≤ 1 (whereas the remaining firm still has a cost c). find the best respons functions :
Part (c) Find the post-merger equilibrium quantities, price, and profits. Under which conditions does
the merger reduce prices? Under which conditions is the merger beneficial to the merging firms?

Exercise 7 — The n-Firm Cournot Model


Suppose there are n firms in the Cournot oligopoly model. Let qi denote the quantity produced by firm i,
and let
Q = q1 + . . . + qn
denote the aggregate production. Let P (Q) denote the market clearing price (when demand equals Q) and
assume that the inverse demand function is given by P (Q) = a − Q, where Q ≤ a. Assume that firms have
no fixed cost and that the cost of producing quantity qi is cqi (all firms have the same marginal cost), and
assume that c < a.
a. What is the Nash (Cournot) equilibrium of the game in which firms choose their quantities simulta-
neously?
b. What happens to the equilibrium prices if the number of firms increases? Is this result familiar?

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