Q1.

Player 2
Left Middle Right
Player 1
Top 3,1 2,3 10,2
High 4,5 3,0 6,4
Low 2,2 5,4 12,3
Bottom 5,6 4,5 9,7
Solution:
The best response of a player for each strategy of the other player is as follows
BR2 (Top) = Middle
BR2 (High) = Left
BR2 (Low) = Middle
BR2 (Bottom) = Right
BR1 (Left) = Bottom
BR1 (Middle) = Low
BR1 (Right) = Low
We see that Nash Equilibrium is reached when player 1 chooses Low and Player 2 chooses Middle and
their payoffs are 5 and 4 respectively.
Q2.

Player 2
Rock Paper Scissors
Player 1
Rock 0,0 -1, 1 1, -1
Paper 1, -1 0,0 -1, 1
Scissors -1, 1 1, -1 0,0
Solution:
The best responses of a player for each strategy of the other player is as follows
BR1 (Rock) = Paper
BR1 (Paper) = Scissors
BR1 (Scissors) = Rock
BR2 (Rock) = Paper
BR2 (Paper) = Scissors
BR2 (Scissors) = Rock
We see that there is no pure Nash equilibrium.
Solving for Mixed Strategy
Let, a = P (Player 1 plays rock), b = P (Player 1 plays paper), 1-a-b = P (Player 1 plays scissors)
m = P (Player 2 plays rock), m = P (Player 2 plays paper), 1-m-n = P (Player 2 plays scissors)
For Player 1:
a*0 + b*1 + (1-a-b)*(-1) = a*(-1) + b*0 + (1-a-b)*1
b-1+a+b = -a+1-a-b
a+b = 2/3 .. (i)
a*(-1) + b*0 + (1-a-b)*1 = a*1+b*(-1)+(1-a-b)*0
-a+1-a-b = a-b
3a = 1
a = 1/3 (ii)
put (ii) in (i) we get b = 1/3
Similarly
For Player 2 : m = 1/3 , n = 1/3
Thus, the mixed strategy is to choose each rock, paper, scissors one third of the total number of trails.
Q3.

Auditor
Audit No Audit
Tax Payer
Pay tax 0,2 0,4
Do not pay tax -10, 4 4,0

Solution:
BR1 (Audit) = Pay tax
BR1 (No audit) = Do not pay tax
BR2 (Pay tax) = No audit
BR2 (Do not pay tax) = Audit

We see that there is no pure Nash equilibrium.
Solving for mixed strategy
Let, p= Probability (Auditor audits), q = Probability (Tax payer pays tax)
Therefore 1-p= Probability (Auditor does not audits), 1-q = Probability (Tax payer does not pay tax)
For the tax payer
0*q+(1-q)*(-10) = 0*q+4*(1-q)
14(1-q) = 0
q = 1
For Auditor
2*q +4*(1-q) = 4*q + 0*(1-q)
6q = 4
q = 2/3
Thus, the tax payer will have a payoff of [0*2/3] +[ -10*(1- 2/3)] = -10/3 = -3.33
The auditor will have a payoff of [2* 2/7] + [4*(1- 2/7)] = 24/7 = 3.42
Q 3 c)

Auditor
Audit No Audit
Tax Payer
Pay tax 0,2 0,4
Do not pay tax -20, 4 4,0
Again there is no Nash Equilibrium.
For the tax payer
0*p + 0*(1-p) = (-20)*p + 4*(1-p)
p = 1/6
For Auditor
2*q +4*(1-q) = 4*q + 0*(1-q)
q = 2/3
Thus, the tax payer will have a payoff of [0*2/3] +[ -20*(1- 2/3)] = -20/3 = -6.67
The auditor will have a payoff of [2* 1/6] + [4*(1- 1/6)] = 11/3 = 3.67