ECON3036 Problem Set UNMC Fall 2018-19

Solutions

January 9, 2019

This problem set covers the first section of the exam, which contains of two
compulsory questions on calculating equilibria in Bayesian incomplete informa-
tion games. The second part of the exam are essay-style questions, which can
be learned for easily using the handouts. All questions and subquestions have
equal weight.
1. Consider Bayessian Nash Equilibria in pure strategies in the following
signalling game.

(a) Show that the game is cheap talk.

This is easily done by showing that both types of player 1 are indiffer-
ent between L and R if player two plays U always (that is, U (L)U (R))
or D always (D (L) D (R)).
(b) A cheap talk game always has a pooling equilibrium. Argue using
the structure of this game.
All types of player one can choose any message, that is, LL or RR.
In any case, player two chooses an optimal action on the chosen
side (with the prior probabilities), and plays the same strategy off-
equilibrium. Then, by the criterion formulated in (a), also all types of
player 1 are indifferent to the signal, and therefore have no incentive
to deviate.

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 (c) Find all pooling equilibria in pure strategy.Let us first investigate
the decisions of the receiver as function of their beliefs.

E2 (U |L) = p · 1 + (1 − p) · 1 = 1
E2 (D|L) = p · 0 + (1 − p) · 1 = 1 − p
E2 (U |R) = q · 1 + (1 − q) · 1 = 1
E2 (D|R) = q · 0 + (1 − q) · 2 = 2 · (1 − q)

In the above game, upon player 1 choosing LL, we find p = 1/2, and
player 2 will choose U (L). Since player 2’s payoff does not depend on
her off-equilibrium choice, we set U (R) and any q ∈ [0, 1] to complete
an BNE (which might not be perfect, although).
If player 1 choosed RR instead, we obtain q = 1/2, which makes
player two indifferent between U (R) and D (R). Thus there are two
BNEs RR, U (R) U (L) ; p ∈ [0, 1] , q = 1/2, and RR, D (R) D (L) ; p ∈
[0, 1] , q = 1/2.
(d) Are there any separating equilibria in pure strategies? Find them.
(1) Sender playing LR would imply p = 1, q = 0. Thus the receiver
plays U (L) , D (R). Type A prefers L, and type B prefers R. We
found an equilibrium.
(2) Sender playing RL would imply p = 0, q = 1. This makes the
receiver indifferent between U (L) and D (L) and prefering U (R).
U (L) makes both types of player 1 indifferent between L and R.
This constitutes the second equilibrium. D (R) makes type A prefer
R, and type B prefer L, in accordance with the assumption. This
makes the third equilibrium.
2. Consider the following signalling game, for any values of x.

(a) Is this a cheap talk game? Argue carefully.

No. If player 2 plays down, both types of player 1 are not indifference
between L and R.

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 (b) Are there any strictly dominant strategies? Check for all values of x.
Yes, for player 2. U (R) is strictly preferred over D (R). For x <
2, D (L) is strictly preferred over U (L). For type A, R is weakly
dominant and for type B, L is weakly dominant.
(c) Find the pooling equilibria in pure strategy for all values of x.Let
us first investigate the decisions of the receiver as function of their
beliefs.

E2 (U |L) = p · x + (1 − p) · 0 = p · x
E2 (D|L) = p · 2 + (1 − p) · 2 = 2
E2 (U |R) = q · 2 + (1 − q) · 2 = 2
E2 (D|R) = q · 0 + (1 − q) · 1 = 1 − q

Thus U (L) is at least as good as D (L) if and only if p · x ≥ 2. For

p = 0 this is never true. For p > 0 this is equivalent to
2
x≥ .
p

U (R) is strictly dominant.

For LL we have p = 21 , thus U (L) is preferred if and only x ≥ 4.
LL, U (L) U (R) ; p = 1/2, q ∈ [0, 1] is an equilibrium for x ≥ 4. But in
LL, D (L) U (R), type A wants to swich to R, so no further equilibria
here.
For RR we obtain q = 12 , without any influence on player 2, since
U (R) is dominant. Off-equilibrium, U (L) makes both types indif-
ferent between L and R. Thus RR, U (L) , U (R) ; q = 1/2, p ∈ [0, 1] is
a BNE for all values of x. Under D (L), however, type B wants to
deviate to L. No further equilibrium in this case.
(d) Finally, find all separating equilibria in pure strategy for all values of
x.
In case LR we have p = 1, q = 0, thus U (L) is preferred if and only
x ≥ 2, while U (R) is strictly dominant. This makes both types of
player 1 indifferent between L and R. Thus LR, U (L) U (R) ; p =
1, q = 0 is a BNE for x ≥ 2. In the case x ≤ 2, player 2 can play
D (L), but then type A wants to deviate to R. No further equilibrium
here.
In the last case RL we obtain p = 0, q = 1. Here, D (L) is always
preferred and U (R) is the strictly dominant strategy. This makes
type B wanting to deliate to L. No equilibrium in this case.
3. Find all Bayesian Nash Equilibria of the following game (both types of
player 1 are equally probable for player 2; player 1 knows his type).

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 Player 1 \2 L R
Type A U 0,1 0,0
D 0,0 0,0
Type B U 0,0 0,0
D 0,0 2,0
Bayesian Nash Equilibria in pure strategies are: U U, L, U D, L, DU, L,
DD, L, DD, R. Type A can always mix, since he is indifferent between U
and D. Type B mixes only if player 2 plays L. Let pA and pB denote the
probability that player 1 type A and B, respectively, plays U . We find
1 1 1
E2 (L) = [pA · 1 + (1 − pA ) · 0] + [0] = pA ,
2 2 2
E2 (R) = 0.

Thus player 2 only mixes if pA = 0, or type A plays D.

We have to consider the following three cases: First, player 2 plays L.
Then both types of player 1 will mix. For player 2, L is better or equal
than R, if and only if pA ≥ 0, which is always the case. Thus
  
U D U D
,L
pA 1 − pA pB 1 − pB

for 0 ≤ pA , pB ≤ 1 is a class of equilibria.

For the second case, assume that player 2 is playing R . While player 1
type A is still mixing, type B will play D,
 
U D
D, R.
pA 1 − pA

However, for player 2, R is at least as good as L if and only 0 ≥ pA , or

pA = 0. This case reduces to the pure strategy equilibrium DD, R.
The last case is to assume that player 2 is mixing. Player 1 type A
is indifferent and can mix abitrarily. Assume further, without loss of
generality, that 0 ≤ q < 1, since the case q = 1 or DD, L is already
contained in the class of the first case. But for q < 1, player 1 type B has
to play D. Thus
   
U D L R
D,
pA 1 − pA q 1−q

is a class of Nash Equilibria for 0 ≤ q < 1. But for q = 0 this class includes
the second case equilibrium DD, R.
We arrive at two classes of Nash Equilibria,
  
U D U D
,L
pA 1 − pA pB 1 − pB

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 for 0 ≤ pA , pB ≤ 1, and
   
U D L R
D,
pA 1 − pA q 1−q

for 0 ≤ q < 1. Observe that all pure strategy Nash Equilibria are contained
in these two classes.
4. Consider the following two games, A and B. Both player have forgotten
which game they play. They assign an equal probability to both games.
Find all Bayesian Nash Equilibria.
A L R B L R
U 2,0 0,0 U 0,0 0,2
D 0,0 0,1 D 1,0 0,0
Player 1 plays row and player 2 plays column. Let p be the probability
that player 1 plays U , and q be the probability that player 2 plays L. We
find
1 1
E1 (U ) = [q · 2 + (1 − q) · 0] + [q · 0 + (1 − q) · 0] = q,
2 2
1 1 1
E1 (D) = [q · 0 + (1 − q) · 0] + [q · 1 + (1 − q) · 0] = · q,
2 2 2
1 1
E2 (L) = [p · 0 + (1 − p) · 0] + [p · 0 + (1 − p) · 0] = 0,
2 2
1 1
E2 (R) = [p · 0 + (1 − p) · 1] + [p · 2 + (1 − p) · 0] = 1 + p.
2 2
Thus player 1 only mixes for q = 0, and player 2 always plays R (q = 0).
Thus the only class of equilibria are
 
U D
,R
p 1−p

for any p ∈ [0, 1].