Introduction to Game Theory Lyyla Khalid ASSIGNMENT 1 Due Date: Tuesday 4th February 2pm in the Economics Department

QS1) Two drivers, A and B are simultaneously approaching an intersection from different directions. They may choose to Stop (S) or Continue (C) at the intersection. If they both stop they prevent a crash and each receives a payoff of 1. If they both continue they crash and each receives a payoff of 0. If only player 2 stops, then player 1 gets a payoff of 2, whereas player 2 gets a payoff of 1-c, where c represents the dislike of the player being the only one to stop. Conversely, if only player 1 stops, then she gets 1-c and the player 2 gets 2. (A) Formulate as a strategic game. (B) Solve for the NASH equilibrium using IEDS if c=0.5. (C) How does the equilibrium/ia change depending on the value of c?[you may use any method to solve for the Nash equilibrium) (D) Now suppose that the drivers are educated so that they feel guilty about choosing to continue, i.e. about being aggressive. In particular, suppose that the payoff of a player from choosing C decreases by g, where 0<g<1, irrespective of what the other player does. Assume, that c is fixed at 0.5. What are the new equilibrium/ia? (E) Ignoring part [D] above, represent this information in extensive form, when c=0.5. (F) Make a payoff matrix to represent the situation where the game is played sequentially, with player B, moving before player A. Continue to assume that c=0.5. Do NOT include g in your analysis for this part. QS2) Consider the following simple auction scenario. Two individuals, Player 1 and Player 2, are competing in an auction to obtain a valuable object. Each player bids in a sealed envelope, without knowing the bid of the other player. The bids must be in multiples of $100 and the maximum they can bid is $500 (lowest 0). The object is worth $400 to player 1 and $300 to player 2. The highest bidder wins the object. In case of a tie player 1 gets the object. The winner pays a price p to be specified below. So, if the value of the object for player i is x and player i wins the object her payoff is x-p; If she does not win her payoff is zero. (First price auction) In this case, the winner of the object pays the price he bids. Answer the following questions for the first price auction: (a) Write down the strategic form of this game (b) Identify any strictly dominating and weakly dominating strategies for both players. (c) What is the Nash equilibrium using IEDS? QS3) Suppose the Battle of Sexes game is played sequentially. The wife moves first and chooses between football and opera. The husband then decides whether

to choose the football match or opera. Payoffs remain the same as the original matrix which is represented below: H/W F O F 3,1 0,0 O 0,0 1,3

Represent the information in the extensive form List clearly the strategies of the husband and the wife. Also make another matrix showing the strategies of both players and the associated payoffs.

QS4) Briefly explain the relationship between Best Response Nash equilibria and IEDS equilibria. [2points]