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2. a. Which of the following games can be solved by dominance or iterated dominance? b. Find the pure strategy Nash equilibria for the games. L R U 3,3 2,0 D 4,1 8,-1 L U 5,9 M 3,2 D 2,8 W U 3,6 M 2,6 D 1,5 M 1,1 0,9 0,1 X 4,10 3,3 2,9 R 4,3 1,1 8,4 Y 5,0 4,10 3,0 Z 0,8 1,1 4,6
c. Consider a two stage game in which the rst game with two strategies for each player is played twice, and in which the payos to the players are the sum of the payos from each stage without discounting. Can the game be solved by dominance or iterated dominance? 1
3. Suppose that two people can invest in a project that would be valuable to both of them if it is completed. The project requires 2 units of investment and will give a value of 25 to each person if undertaken. Person 1 can only invest in odd period while person 2 can only invest in even periods. There are four periods, with the cost of investment in period t equal to 2t per unit of investment. That is, an investment of 1 costs 2 in period 1, 4 in period 2, 6 in period 3 and 8 in period 4. If there are at least 2 units of investment at the end of period 4 each person receives a payo of 25 minus the cost of the investments that player has made. If there are 0 or 1 units of investment at the end of period 4 each person just loses the cost of her investment, if any. Suppose that in each period that a player can make an investment, either 0 or 1 can be invested. a. Write down the extensive form for the game. b. Describe precisely the strategy sets for the two players. c. What is the subgame perfect equilibrium for the game? (Be sure to describe precisely the strategies in the equilibrium.) d. Is there a Nash equilibrium of the game that is not subgame perfect? Explain. e. Suppose now that in each period that a player can make an investment, each player can invest 0, 1, or 2. What is the subgame perfect equilibrium? (Be sure to describe precisely the strategies in the equilibrium.) f. Suppose now that as before, in each period that a player can make an investment, that player can invest 0 or 1, but that there are six periods instead of four periods. Also as before, the cost of making an investment of 1 is 2t, where t is the period the investment is made. Thus, the cost of investing 1 in period 5 is 10 and the cost in period 6 is 12. What is the subgame perfect equilibrium outcome in this case? (You do not need to specify fully the equilibrium strategies in this case, but you should explain the logic briey. You also should not write out the extensive form tree for the game.)