Games and Information: 2011

Rubric: You have two hours. There are SIX questions. Full marks can be obtained by complete answers to any THREE of these. No credit will be given for answers to further questions.

Question 1
Alice and Bob are risk-neutral importers of performing elephants. Such elephants are rare, so neither player can import more than two elephants at a time. It costs Alice $ 2a to import a elephants. It costs Bob $ 3b to import b elephants. If a + b elephants are imported, the price $ p at which each elephant can be sold is given by p(a + b)2 = K , where K is a constant. If K > 27, it is never a good idea for either player to import no elephants, and so the possibility that a = 0 or b = 0 should be ignored. 1. Write down the strategic forms of the game played by Alice and Bob in the cases when K = 144 and K = 216 if they decide how many elephants to import in ignorance of the decision of the other player. What is this kind of competition called? 2. Show that the strategies a = 1 and b = 1 are strongly dominant when K < 144. What famous game has a similar structure in this case? 3. Show that the strategic form has two Nash equilibria in pure strategies when K > 216. If the players were to collude by agreeing on which of these equilibria to operate, which would they choose? 4. Show that the collusive outcome of (c) in the case K > 216 is also the subgame-perfect equilibrium of the game in which Alice decides rst and Bob decides only after observng Alices choice. What is this kind of competition called?

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Question 2
1. Pandoras Von Neumann and Morgenstern utility for $ x is u(x) = x2 . Show that Pandoras dollar equivalent of the lottery K below is $ 3.30. Check that $ 3.30 exceeds the dollar expectation of the lottery K. Is this conclusion consistent with Pandoras being risk averse over money? J= $0m $1m $10m 0 1 0 K= $0m $1m $10m .01 .89 .10

L=

$0m $1m $10m .89 .11 0

M=

$0m $1m $10m .9 0 .1

2. What feature of the shape of the graph of u(x) = x2 in part (1) tells us about Pandoras attitude to taking risks. What would Pandoras attitude to taking risks have been if u(x) = x1/2 ? 3. When Jimmie Savage visited Paris, Maurice Allais famously asked him to compare lotteries like J and K above, and then to compare L and M. How did Savage reply and what argument did Allais use to show that Savages replies were inconsistent with the Von Neumann and Morgenstern postulates? 4. Show that Savages replies would still have been inconsistent if the prizes $0m and $10m were reversed in all the lotteries.

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Question 3
1. What is a correlated equilibrium? Whose idea was it? 2. In the version of Chicken below, a referee chooses (dove , dove ) with probability 1 5 , (hawk , hawk ) with probability 0, and the remaining cells with probability 2 5 . The referee reports the row of the cell that results to player I and the column to player II. Check that it is a correlated equilibrium for both players to choose the strategy reported to them by the referee.
dove dove hawk hawk

3 3 0 4 1 0

4 1

3. A rational player cannot be harmed in a game by learning something, provided that the other players information remains unchanged. But it is not true that everybody will necessarily be better o if everybody learns some new piece of information. Use the correlated equilibrium calculated in part (2) to explain why both players will suer if it becomes common knowledge that they have both learned everything that the referee knows. 4. What will happen if player I learns what the referee knows, but not that player II has learned that player I has learned this information?

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Question 4
1. Adam is endowed with one barrel of sh and no wheat. Eve is endowed with two bushels of wheat and no sh. Draw an Edgeworth box and nd the contract curve when Adam and Eve both have the utility function u dened by u(f, w) = f 2 w . 2. Find the Walrasian equilibrium of the problem. 3. What trades will Eve enforce if she is a fully discriminating monopolist? 4. What trade will result if the players employ the symmetric Nash bargaining solution using the no-trade outcome as their status quo?

Question 5
Find a Bayes-Nash equilibrium of the following version of Russian Roulette with incomplete information played between Boris and Vladimir. A bullet is inserted at random into one of the three chambers of a revolver. Starting with Boris, the two players alternate in holding the gun to their heads and deciding whether or not to pull the trigger. Both players have three personal outcomes to consider: L (shooting yourself), D (chickening out), and W (the other player either chickens out or shoots himself). The players Von Neumann and Morgenstern utility functions are calibrated so that they both attach a utility of 0 to L, and 1 to W . Their levels of risk aversion are determined by the respective values of a and b they assign to D. Who is more risk averse when a < b? Each player knows his own level of risk aversion, but not that of his opponent. However, it is common knowledge that they both believe that a and b are determined as follows. First a is drawn from a uniform distribution on [ 0, 1]. One third of the time, b is then chosen equal to a. The other two thirds of the time, b is chosen independently from the same distribution.

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Question 6
1. Draw a strategic form for a version of the Battle of the Sexes. Show that the game has two Nash equilibria in pure strategies, and one in mixed strategies. 2. Draw the cooperative payo region for your version of the Battle of the Sexes. Locate the minimax point (allowing mixed strategies). Shade the set of payo pairs that can be supported as Nash equilibria in the innitely repeated Battle of the Sexes if the players are innitely patient. 3. Explain why the one-shot Battle of the Sexes poses an equilibrium selection problem if there is no way to break the symmetry. 4. Now consider a strategy prole for the innitely repeated Battle of the Sexes that tells the players always to play the mixed strategy of the oneshot game until both play box, or both play ball. In the former case, the strategy prole requires that the players continue by alternating between ball and box, starting with ball. In the latter case, the strategy prole requires that the players continue by alternating between box and ball, starting with box. Explain why the strategy prole is a Nash equilibrium. What payos will innitely patient players attribute to this equilibrium?

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