Economics 440/640 Problem Set 1 Answers

All questions are equally weighted.

Gibbons Questions
1.2. B is dominated by T. After eliminating B, C is dominated by R. Therefore 4 strategy pairs are rationalizable: (T, L), (M, L), (T, R), and (M, R). The pure strategy Nash equilibria are (T, R) and (M, L).

1.6.

Prot for rm 1 is
2 1 = q1 P (Q) c1 q1 = q1 (a c1 q2 ) q1 .

The rms prot is maximized at d1 = 0 = a c1 q2 2q1 dq1

q1 (q2 ) = just reverses the indexes: Firm 2s q2 q2 (q1 ) =

a c1 q 2 2 a c2 q 1 . 2

This gives us two equations and two unknowns (the quantity choices of each rm). Solving q1 = q1 3q1 4 q1 a c1 1 a c2 q 1 2 2 2 a c1 a c2 q 1 = + 2 4 4 a 2c1 + c2 = 4 a 2c1 + c2 = 3

Again, the solution for rm 2 just reverses the indexes. As long as q1 0 and q2 0 our solution is satisfactory. If however a + c1 < 2c2 the solution for q2 will be negative. Firms cant produce negative output! Thus in these cases the other rm operates as a monopolist: q1 = (a c1 )/2. 1

1.10. In the Prisoners Dilemma, iterated elimination of dominated strategies leaves only (F ink, F ink ), so no mixed strategy is possible. In 1.1.1, iterated elimination of dominated strategies leaves only (U p, M iddle), so again no mixed strategy is possible. Game 1.1.4 is more complex. Iterated elimination does not eliminate any strategies. A variety of arguments could work here. For example, you could calculate probabilities and show that you get more than 1 or less than 0 for one of the probabilities. This is a little tricky since you have to think about each player mixing with two strategies as well as with three. Lets try a more indirect argument though. Player 1 will always play B as long as Pr(L) < 3/4 and Pr(C ) < 3/4. If Pr(L) < 3/4, player 1 will play M, but that means player 2 will get a maximum payoff of 1 (if player 2 plays C the rest of the time). Player 2 could do better by playing R. Likewise, player 2 could do better playing R than playing C more than 3/4s of the time. Hence player 2 will play R. If player 2 plays R, player 1 plays B. The only equilibrium is (B,R) and there are no mixed-strategy equilibria.

Additional questions
Question 1. A Blotto Game (From Binmore, Fun and Games). Colonel Blotto and Count Baloney are opposing generals in a military campaign. Colonel Blotto has four companies that he can distribute among two locations in three different ways: (3, 1), (2, 2), and (1, 3) (where (x, y ) x companies in location 1 and y companies in location 2). His opponent Count Baloney has three companies that he can distribute in two different ways: (2, 1) and (1, 2). Suppose that Blotto sends m1 companies to location 1 and Baloney sends n1 companies to location 1. If m1 = n1 , the result is a stand-off and each commander gets a payoff of zero for location 1. If m1 = n1 , the larger force overwhelms the smaller force without loss to itself. If m1 > n1 , Blotto gets a payoff of n1 and Baloney gets a payoff of n1 . If m1 < n1 , Blotto gets a payoff of m1 and Baloney gets a payoff of m1 . Each players total payoff is the sum of his payoffs at both locations. A) Describe in words Colonel Blotto and Count Baloneys aims. B) Find the normal-form of this game. C) Determine a mixed-strategy Nash equilibrium of the game. A. The two commanders each want to destroy as much of the oppositions forces as possible. B. 2

(3, 1) (2, 2) (1, 3)

(2, 1) 2, 2 1, 1 0, 0

(1, 2) 0, 0 1, 1 2, 2

C. Let q be the probability Baloney chooses to allocate his companies (2, 1). In a mixed strategy equilibrium, Blotto must be indifferent between any of his possible actions: 2q + 0(1 q ) = 1 = 0q + 2(1 q ). Hence q = 1/2. Now let p be the probability Blotto chooses (3, 1) and r be the probability that Blotto chooses (2, 2) (so 1 p r is the probability that Blotto chooses (1, 3)). Baloney must be indifferent: 2p r + 0(1 p r) = 0p r 2(1 p r) This is one equation and two unknowns, so it has several (techically, innite) solutions. Any combination of p and r that satises 2p + r = 1 is OK. For example, p = 1/2 and r = 0 or p = 1/4 and r = 1/2. This makes intuitive sense because Blotto has to make Baloneys (2, 1) or (1, 2) allocation equally attractive in order to for Blotto to maximize his utility. Blotto can do this by playing (3, 1) and (1, 3) equally often or by playing (2, 2).

Question 2. Geometry of Best Response Functions. person games with two strategies for each player: S1 = {Up, Down} and

For this question, consider two-

S2 = {Left, Right}

We can represent a mixed-strategy combination as a point in the unit square where x = probability 2 plays Right and y = probability that 1 plays Up. For example, the point (3/4, 1/3) represents player 1 playing Up 1/3 of the time and Down 2/3 of the time, and player 2 playing Left 1/4 of the time and Right 3/4s of the time.

A) Draw both players best response curves for the following game. L 2, 2 4, 0 R 0, 4 1, 1

U D

B) Find payoffs that would produce the following best response diagram. (The solid line is player 1s best response and the dashed line is player 2s). Hint: you may want to work out numbers that will give you the approximate shapes rst and only then focus on the point where the curves intersect.
Pr. Up

(1/2, 1/3)

(0, 0)

Pr. Right

C) Find payoffs that would produce the following best response diagram.
Pr. Up (2/5, 4/5)

(0, 0)

Pr. Right

A. Note that I switched the payoffs for (U, L) and (D, R) when I corrected this problem on January 26. You can answer either version. The older, boring version: (U, L) is the only NE because U and L are both dominant strategies.
Pr. Up

(0, 0)

Pr. Right

I intented the newer version to be more interesting, but failed in making it so. The new version is just the older version ipped, with a unique NE, (D, R): 4

Pr. Up

(0, 0)

Pr. Right

B. Let a through h denote the following payoffs: L a, b e, f R c, d g, h

U D

From the diagram (U, L) and (D, R) are NE, which requires For (U, L) : a > e b>d For (D, R) : g > c h>f

And nally we know there is a NE in mixed strategies where Player 1 is indifferent between U and D when Player 2 plays L and R each half the time. For that to be the case, U1 (U, (1/2, 1/2)) = U1 (D, (1/2, 1/2)) a/2 + c/2 = e/2 + g/2 a + c = e + g. Likewise, Player 2s mixed strategy implies U2 ((1/3, 2/3), L) = U2 ((1/3, 2/3), R) b/3 + 2f /3 = d/3 + 2h/3 b + 2f = d + 2h. Any payoffs that satisfy these four inequalities and two equalities are acceptable. For example: L 1, 2 0, 0 5 R 0, 0 1, 1

U D

C. Let a through h denote payoffs as above. When player 1 plays U, player 2 wants to play L, so b > d. However when player 1 plays D, player 2 wants to play R, so h > f . Likewise, e > a and c > g . For the mixed strategy, when player 1 plays U 4/5s of the time, player 2 is indifferent between L and R: U2 ((4/5, 1/5), L) = U2 ((4/5, 1/5), R) 4b + f = 4d + h. When player 2 plays R 2/5s of the time, player 1 is indifferent between U and D: U1 (U, (3/5, 2/5)) = U1 (D, (3/5, 2/5)) 3a + 2c = 3e + 2g. Any answer that satises these six conditions is correct. For instance, L 0, 10 20, 10 R 30, 0 0, 50

U D

Question 3. Zero-Sum Games. A zero-sum game is a game where where players payoffs can be represented by the form x, x for each strategy combination (where the xs vary). For example, the Blotto Game is a zero-sum game. A) Are the equilibria of a zero-sum game more likely to be mixed-strategy equilibria? B) Either provide an intuitive argument for your answer to the last question or prove your answer for 2 2 games. I would much rather get a good intuitive answer than a bad proof. A. Yes. B. The intuition is that for a pure-strategy equilibrium to exist, both players have to getting the highest payoff they can get when they know the others players strategy. But in a zerosum game, u2 = u1 . Either player 2 or player 1 will want to switch strategies. A simple proof: Theorem 1. Every generic zero-sum 2 2 game has one mixed-strategy and no purestrategy equilibria. 6

Proof. A zero-sum 2 2 game looks like L a, a c, c R b, b d, d

U D

with a = b = c = d. It will have an odd number of equilibria since it is generic. Assume towards contradiction that it has three NE, with (U,L) and (D,R) being equilibria. For (U,L) to be an equilibrium, a > c and a > b (or b > a), and for (D,R) to be an equilibrium, d > b and d > c (or c > d). Combining these inequalities, b > a > c > d > b, which is not possible, so the game must have a unique equilibrium.

Question 4. A Patent Race. Firm 1 and rm 2 each decide on a research investment of ri that is either $0, $1 million, or $2 million. If ri > rj , rm i has a breakthrough worth $5 million while rm j is too late and gets no benet from its research expenditure. If ri = rj , neither rm gets the $5 million gross prot from the breakthrough because it is eaten up by patent disputes.

A) Find the normal-form of this game. B) Find the the Nash equilibrum of this game.

A. 0 0, 0 4, 0 3, 0 1 0, 4 1, 1 3, 1 2 0, 3 1, 3 2, 2

0 1 2

B. There is a unique mixed strategy Nash equilibrium. Let p be the probability player 1 invests 0, q be the probability player 1 invests 1, etc. Then p, q , and 1 p q must make player 2 indifferent to any level of investment: 0 = 4p q 1 + p + q = 3p + 3q 2 + 2p + 2q so 4p q 1 + p + q = 0 5p 1 = 0 5p = 1 7

or p = 1/5, and 3p + 3q 2 + 2p + 2q 5p + 5q 5(1/5) + 5q 5q =0 =2 =2 =1

so q = 1/5 as well. Both players invest $2 million 3/5s of the time and $1 million and $0 each 1/5 of the time.