THE UWI, MONA WJC

THE DEPARTMENT OF ECONOMICS

ECON2001 PROBLEM SET 4
2016-2017

1 Read the Varian and write short notes on the followings:

a Pure and mixed strategy equilibrium
b Nash equilibrium
c Sequential game
d Game tree
e zero-sum game
f Components of a game
g Dominant strategy and pure Nash equilibrium

2 Suppose Boeing and Airbus are both considering expanding their plant capacity as a strategic move
but cant observe their opponents move until their own move has been determined. The following
are time-discounted values of all future profit streams in billions of dollars.

Is there any Nash equilibrium strategy of the game? If your answer is yes, identify the Nash
equilibrium strategy.

3 Consider a hunter-gatherer economy where Adam and Eve are the only people around. Each of
them can either decide to go hunt dinosaurs or gather apples. If Adam goes hunting and Eve
goes gathering, then they can together provide the that will give them 200 calories each. If
they reverse the roles (Adam goes gathering and Eve goes hunting), then they get 100
calories each. If both goes hunting or both goes gathering, then they keep distracting each
other and end up with zero calorie each. Assume that both Adam and Eve are trying to
maximize the calories they can get and they do not have the option of talking to each other
before making their respective decisions.

a Write down the strategic interaction between Adam and Eve in the form of a
game. You can use a payoff matrix for this purpose.
b Is there any pure strategy Nash equilibrium of the game? If your answer is yes,
identify the pure strategy Nash equilibria.
4 There can be a mixed strategy Nash equilibrium even if there are pure strategy Nash equilibria. Find
the pure strategy and the mixed strategy Nash equilibrium for the following game.

Player 2
L R
Player 1
U 3,1 0,0
D 0,0 1,3

5 Consider the following game. Solve for the mixed strategy Nash Equilibrium.

6 An embezzler wants to hide some stolen money. An inspector is looking for the stolen money. There
are two places that the embezzler can put the money. One place is difficult to access and one is easy
to access. The inspector only has time to look in one of the two places. It is more costly to hide the
money in the difficult place than in the easy place and also more costly for the inspector to look in
the difficult place than in the easy case. The payoffs are as follows.

If the embezzler hides the money in the difficult place and the inspector looks in the difficult
place, the payoff is 0 for the embezzler and 2 for the inspector.
If the embezzler hides the money in the difficult place and the inspector looks in the easy place,
the payoff is 2 for the embezzler and 1 for the inspector.
If the embezzler hides the money in the easy place and the inspector looks in the difficult place,
the payoff is 3 for the embezzler and 0 for the inspector.
If the embezzler hides the money in the easy place and the inspector looks in the easy place, the
payoff is 1 for the embezzler and 3 for the inspector.

a. If the embezzler has the first mover advantage, use a sequential game tree to illustrate this
scenario.
b. If both the embezzler and the inspector carry out their strategies simultaneously, illustrate the
most appropriate method to depict this
c. Find a Nash equilibrium in mixed strategies for this game.
d. In Nash equilibrium: What is the expected payoff for the embezzler?
e. What is the expected payoff for the inspector?