Problem Set 3 - SOLUTIONS

1. The following is what is known in game theory as the Chicken Game. Two cars are moving towards
each other. Each of the drivers has to decide whether to swerve or keep driving straight (and risking
a collision). If no one swerves, then they risk a life threatening injury and a low utility of −5. If only
one driver swerves, then he is the chicken, but he lives; his utility is −1 and the other driver’s utility
is 1. If both swerve, then their utility is 0.

(a) Describe this game in its normal form.

Answer: The game can be described by the following payoff matrix, with driver I as the row
player and driver II as the column player:

II
swerve straight
I swerve 0, 0 −1, 1
straight 1, −1 −5, −5

(b) Find all (pure and mixed) Nash equilibria of this game.

Answer: There are two pure strategy Nash equilibria: (swerve, straight) and (straight, swerve).
To find the mixed strategy equilibrium, let p denote the probability that player I chooses swerve.
By the Indifference Principle, in any equilibrium player II has to be indifferent between choosing
either of the two actions:
4
p × 0 + (1 − p) × (−1) = p × 1 + (1 − p) × (−5) ⇒ p =
5
Similarly, let q denote the probability that player II chooses swerve. Then:
4
q × 0 + (1 − q) × (−1) = q × 1 + (1 − q) × (−5) ⇒ q =
5
Hence, the mixed strategy Nash equilibrium is: (swerve, 54 ; straight, 15 ), (swerve, 45 ; straight, 15 )


2. Find a Nash equilibrium of the Centipede game that is not Sub Game Perfect.

Answer: Consider the following version of the Centipede game:

1 P ass 2 P ass 1 P ass 2 P ass

3, 3

End End End End

1, 1 0, 3 2, 2 1, 4

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 Solving by backwards induction, we can see that the only Sub Game Perfect Nash Equilibrium is
for player 1 to play (End, End ) and for player 2 to also play (End, End ). To find the other Nash
Equilibrium, let’s write this game in its normal form:

2
P ass, P ass P ass, End End, P ass End, End
P ass, P ass 3, 3 1, 4 0, 3 0, 3
1 P ass, End 2, 2 2, 2 0, 3 0, 3
End, P ass 1, 1 1, 1 1, 1* 1, 1*
End, End 1, 1 1, 1 1, 1* 1, 1*

Note that all combinations of strategies marked with an * are a Nash Equilibrium for this game.
However, three of these are not Sub Game Perfect. For example, {(End, Pass), (End, End )} is a Nash
Equilibrium, but it’s not Sub Game Perfect. To see this, note that for player 1, choosing Pass in the
second node is not a best response to player 2 choosing End in the second node.

3. There are 2 players. Player 1 has 10 dollars. She can choose to give (10 dollars to player 2 and 0 to
player 1), share (5 dollars to each player), or keep (10 dollars to player 1 and 0 to player 2). After she
makes her decision, which player 2 observes, player 2 can accept or reject. After accepting payoffs are
as specified (let’s assume utilities are in dollar amounts), and after rejecting everyone gets 0.

(a) Describe this game in its extensive form.

Answer: Let A, R mean Accept and Reject, respectively. The game, in extensive form, is:

Player 1

Give Share Keep

Player 2

A R A R A R

(0, 10) (0, 0) (5, 5) (0, 0) (10, 0) (0, 0)

(b) Find all (pure) Sub Game Perfect equilibria of this game.

Answer: Using backwards induction, we know that player 2 will play A if player 1 plays ei-
ther Give or Share, and be indifferent between R and A if player 1 plays Keep. Hence, there are
two Sub Game Perfect equilibria, namely (Share, Accept) and (Keep, Accept).

(c) Find a Nash equilibrium that is not Sub Game Perfect.

Answer: Again, we can construct the normal form game to find all the (pure strategy) Nash
Equilibria (see below). All entries with an * represent a Nash Equilibrium of this game, many of
which are not Sub Game Perfect. For instance, {(S ), (RG, AS, RK )} is a Nash Equilibrium, but
cannot be a Sub Game Perfect equilibrium because player 2 will never Reject if player 1 chooses
Give, that is, this is not a credible commitment.

(d) Describe this game in its normal form.

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 Answer: In the normal form representation, we have to describe all the complete strategies avail-
able to each of the players. For player 2, let AG mean that player 2 plays A if player 1 Gives,
RG mean that player 2 plays R if player 1 Gives, and so on. In this case, we have a 3 × 8 matrix:

II
AG, AS, AK AG, AS, RK AG, RS, AK AG, RS, RK RG, AS, AK RG, AS, RK RG, RS, AK RG, RS, RK
G 0, 10 0, 10 0, 10 0, 10* 0, 0 0, 0 0, 0 0, 0
I S 5, 5 5, 5* 0, 0 0, 0 5, 5 5, 5* 0, 0 0, 0
K 10, 0* 0, 0 10, 0* 0, 0* 10, 0* 0, 0 10, 0* 0, 0*

4. Consider the following extensive form game:

P1

T B

P2

L1 R1 L2 R2

(1, 1) (−5, 5) (5, −5) (0, 0)

(a) How many sub-games are there in this game? What is the Subgame Perfect Equilibrium?

Answer: We have three subgames, namely (i) the game itself, (ii) the game tree starting at
the leftmost node of player 2, and (iii) the game tree starting at the rightmost node of player 2.
The unique Sub Game Perfect equilibrium is {(B), (R1 , R2 )}, which results in the payoff of (0,0).

(b) Represent this game as a Normal form game and find all Nash Eq.

As before, we have to write down all the possible complete strategies for all players:

2
L1 , L2 L1 , R2 R1 , L2 R1 , R2
1 T 1, 1 1, 1 −5, 5 −5, 5
B 5, −5 0, 0 5, −5 0, 0*

The unique pure strategy Nash Equilibrium is {(B),(R1 , R2 )}, as indicated with an * sign.

(c) Now assume that P2 cannot observe P1’s action before he makes his move. As such, he cannot
condition on player 1’s action. Draw this as an extensive form game. How many sub games are
there now?

Answer: In this case, player 2’s nodes have to be in the same information set. For this rea-
son, the available actions have to be the same in both nodes, or otherwise player 2 would be able

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 to infer player 1’s move. Let’s call the actions simply L and R. Note also that the new game has
only one sub game.

P1

T B

P2

L R L R

(1, 1) (−5, 5) (5, −5) (0, 0)

(d) Represent this game as a Normal form game and find all Nash Eq.

Answer: The normal form of this game is represented by the usual 2 × 2 matrix, since it is a
situation similar to simultaneous moves:

II
L R
I T 1, 1 −5, 5
B 5, −5 0, 0

Note that R strictly dominates L for player 2. The unique Nash Equilibrium for this game is
(B, R).

5. Consider a variation of the Entrant Game with an uncertain economy as discussed in class, in which
the Incumbent knows the state of the economy. Find all sub game perfect Nash eq. as a function of
p ∈ [0, 1], (where p stands for the probability of the economy being in a good state and 1 − p is the
probability the economy will be in a bad state).

Answer: The game is depicted below. Since the incumbent knows the state of the economy, we
can use backwards induction on the incumbent’s choice. If the state is good and the competitor decides
to enter (in), the incumbent will choose to fight (F), generating a payoff of (1, 12); since 1 is better
than 0, the competitor would always prefer to play in when the state is good. Now, if the state of
the economy is bad, the incumbent would choose to accomodate (A) whenever the competitor enters,
generating a payoff of (5, 5). Since 5 is greater than 0, the competitor always prefers to enter when the
state of the economy is bad. Therefore, since in is the best response for the competitor in both states
of the economy, the Sub Game Perfect equilibrium of this game is (In, F ), when the state is good, and
(In, A) when the state is bad.

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 N

Good(p) Bad(1 − p)

Competitor

Out In In Out

Incumbent
(0, 15) (0, 10)

F A F A

(1, 12) (10, 10) (−4, 2) (5, 5)