Assignment Questions for Game Theory

1. Consider the following Game Player 2 Left Right Player 1 Up 1,4 -100,3 Down 0,3 0,2 a. What is the NE of the Game? b. If you were Player 1, how would you play the game? 2. Lucy and Ricky are making plan for Saturday night. They can go to either go to a ballet or to a boxing match. Each will make the choice independently but there are some benefits if they can coordinate and end up doing the same thing. (These types of games are known as co-ordination game and the game battle of sexes is one such example.) The payoff matrix of Lucy and Ricky is Player 2 Ballet Ballet 100,30 Boxing -90,-90

Player 1

Boxing -90,-90 30,100

What are the NE (both pure strategy and mixed strategy NE) of the game? 3. Two firms are competing in an oligopolistic industry. Firm 1, the larger of the two firms is contemplating its capacity strategy which can be either Aggressive or Passive. The aggressive strategy involves a large increase in capacity aimed at increasing the firms market share, while a passive strategy involves no change in firms capacity. Firm 2 which is a smaller firm is also contemplating in capacity expansion strategy which is also choosing between an active and an passive strategy. The following table shows the profit associated with each pair of choices Firm 2 Active Passive Firm 1 Active 25,9 33,10 Passive 30,13 36,12 a. If both firms decide their strategies simultaneously, what is the NE? b. If firm 1 could move first and credible commit to its capacity expansion strategy, what is its optimal strategy? What will Firm 2 do? 4. ABC and XYZ are the two cereals manufacturing firm contemplating entry into South Asian market. Each will be able to build one plant which will either be able to make a high fiber low in calorie variant of cereal or a less healthy sweet cereal. Once a plant commit in producing a variant of the cereal it will be prohibitively difficult to switch production to the other type. The following table shows the annual profit that each firm would earn given the production choices of the two firms. 1

ABC

Sweet High Fiber

XYZ Sweet 50, 60 20, 30

High Fiber 30,40 40,60

a. If the two firms choose the type of the plant simultaneously, is there a unique pure NE? What are the mixed strategy equilibrium probability (Draw the Best response correspondence for answering the question)? b. Would ABC have a first-mover advantage if capacities were chosen sequentially? If, so briefly explain how it might credible implement this strategy? c. Would XYZ have a first-mover advantage if capacities were chosen sequentially? If, so briefly explain how it might credible implement this strategy? 5. Boeing and Airbus are competing to fill an order of jets for Singapore Airlines. Each firm can offer either a $10 million per jet or $5 million per jet. If both the firm offers the same price then both the firm will split the offer into halves. If any of the firms offers a lower price than the other then the firm with lower price receives the entire order. The profit for both the firm from the price offer is given in the table below. Boeing $5mill $10mill Airbus $5mill 30, 30 270,0 $10mill 0, 270 50,50 a. What is the NE of the simultaneous move game? b. What will the mixed strategy NE, (Draw the Best Response Strategy) of each player? 6. What is the mixed strategy NE of the matching the coin game (Draw the Best Response Correspondence of each player to determine the mixed strategy equilibrium)? 7. Suppose the market demand function is P=130-Q a. If two firms compete in the market with marginal cost c=10, find the Cournot equilibrium output and profit per firm? b. Find the monopoly output and profit if there is only one firm with marginal cost c=10. c. Using the information give in parts (a) and (b), construct a 22 payoff matrix where the strategies available to the both the firms is to either produce both the Cournot output or half the monopoly output? d. What is the NE of the game? 8. Suppose the market demand function is P=200-2Q. There are two firms in the market that competes strategically on quantity, such that the output is determined simultaneously. Firm 1s marginal cost and Firm 2s marginal cost . a. Determine the reaction function of Firm 1 and Firm 2. b. Determine the Cournot equilibrium output. 9. Suppose ( be the equilibrium Cournot outcome of quantity. What happens to the equilibrium quantity if the marginal cost of Firm 1 decreases? 2