Answers Hand in PS 1 Microeconomics
Answers Hand in PS 1 Microeconomics
Answers Hand in PS 1 Microeconomics
1
(b
2
) =
8
<
:
b
1
< b
2
if b
2
> x
1
b
1
[0; ) if b
2
= x
1
b
1
_ b
2
if b
2
< x
1
2
(b
1
) =
8
<
:
b
2
_ b
1
if b
1
> x
2
b
2
[0; ) if b
1
= x
2
b
2
> b
1
if b
1
< x
2
(b) Characterize all the Nash equilibria for a given prole (x
1
; x
2
).
Answer: All Nash Equilibria of the game satisfy one of the following:
b
2
_ x
1
and b
1
_ x
2
b
1
_ x
2
and b
2
_ minx
1
; b
1
To nd the PNE simply intersect the two best response correspondences in a plot. You may verify
that for each of the proposed strategies both players are best responding to their competitor.
(c) Is bidding above the value weakly dominated? and bidding below the value?
Answer: Yes both bidding above and below the value are weakly dominated, by bidding ones
value.
Bidding below your value is dominated by bidding your value. Consider player 1 bidding b
1
< x
1
and notice that:
u
1
(x
1
; b
2
) = (x
1
b
2
) = u
1
(b
1
; b
2
) if b
2
_ b
1
u
1
(x
1
; b
2
) = (x
1
b
2
) > 0 = u
1
(b
1
; b
2
) if b
1
< b
2
< x
1
u
1
(x
1
; b
2
) = 0 = u
1
(b
1
; b
2
) if b
2
_ x
1
3
Microeconomic Principles II F. Nava
Bidding above your value is dominated by bidding your value. Consider player 1 bidding b
1
> v
1
and notice that:
u
1
(x
1
; b
2
) = (x
1
b
2
) = u
1
(b
1
; b
2
) if b
2
_ x
1
u
1
(x
1
; b
2
) = 0 > (x
1
b
2
) = u
1
(b
1
; b
2
) if x
1
< b
2
_ b
1
u
1
(x
1
; b
2
) = 0 = u
1
(b
1
; b
2
) if b
2
> b
1
A similar argument works for player 2. Note that for player 2 inequalities need to be adjusted to
account for the tie-braking rule.
(d) Are there any dominant strategy equilibria
Answer: Yes, b
i
= x
i
for any i 1; 2.
This is an immediate consequence of part (c) since it has been shown that bidding the valuation
is a dominant strategy for both players.
(e) If so, what are the sellers revenues in such equilibrium?
Answer: The revenues are x
2
.
If both bid their value the highest value player wins the object and he pays the second highest
value, namely x
2
.
4. Consider two rms competing on prices to supply a market. Each rm can sell goods to the market
at one of three prices 2; 4; 6. Suppose that rm 1s marginal cost of production is zero. While the
cost of production of rm 2 is only known by rm 2 and is either 2 or 4 with equal probability. If
the lowest price charged is p, then assume that market demand for goods is 7 p. The rm oering
the lowest price captures the entire market. To keep payos simple establish the following convention
when rms choose the same price: if the rms marginal costs are less than or equal to the common
price, then the market is split evenly amongst them. Otherwise rm 1 captures the entire market at
the common price. Therefore payos in the game satisfy:
12L p
L
= 6 p
L
= 4 p
L
= 2 12H p
H
= 6 p
H
= 4 p
H
= 2
p
1
= 6 3; 2 0; 6 0; 0 p
1
= 6 3; 1 0; 0 0; 10
p
1
= 4 12; 0 6; 3 0; 0 p
1
= 4 12; 0 6; 0 0; 10
p
1
= 2 10; 0 10; 0 5; 0 p
1
= 2 10; 0 10; 0 10; 0
For this game of incomplete information:
(a) Characterize the set of possible pure strategies for each player.
Answer: S
1
= 2; 4; 6 & S
2
= p
2
: L; H 2; 4; 6
Equivalently S
2
can be dene as a list of pairs of actions:
S
2
= (2; 2); (2; 4); (2; 6); (4; 2); (4; 4); (4; 6); (6; 2); (6; 4); (6; 6)
(b) Find the dominated strategies of each player.
Answer: Strategies p
2
(L) 2; 6 are weakly dominated for player 2L; strategies p
2
(H) 2; 4
are weakly dominated for player 2H; strategy p
1
= 6 is strictly dominated for player 1. To check
these notice that:
u
2
(4; p
1
[L) _ u
2
(6; p
1
[L) _ u
2
(2; p
1
[L) for any p
1
(somewhere strict)
u
2
(6; p
1
[H) _ u
2
(4; p
1
[H) _ u
2
(2; p
1
[H) for any p
1
(somewhere strict)
u
1
(2; p
2
[x
2
) > u
1
(6; p
2
[x
2
) for any p
2
2; 4; 6 & x
2
T; L
4
Microeconomic Principles II F. Nava
(c) Find a pure strategy Bayes Nash equilibrium of this game.
Answer: A BNE satises p
2
(L) = 4, p
2
(H) = 6, p
1
= 2. The other pure strategy BN equilibria
satisfy p
1
= 2, for any (p
2
(L); p
2
(H)) ,= (6; 6). This is extra, but mixed strategy BNE satisfy
1
(2) = 1 and:
10(1 (1=2)
2L
(2)) + 5(1=2)
2L
(2) _ 12(1=2)(
2H
(6) +
2L
(6)) + 6(1=2)(
2H
(4) +
2L
(4))
Lets check that no player benets from a deviation in the rst BNE. Notice that the strategy used
by player two of either type is dominant and that therefore he cannot benet from a deviation.
All we have to check is the optimality of the strategy of player 1 which holds since:
U
1
(2; p
2
) = 10 > (1=2)6 + (1=2)12 = U
1
(4; p
2
) > U
1
(2; p
2
)
Similarly for the other pure strategy BN equilibria just notice that player 1 always prefers to
play p
1
= 2 so long as p
2
,= (6; 6) and that player 2s strategy is always optimal as he is always
indierent:
U
1
(2; p
2
) > U
1
(4; p
2
) > U
1
(2; p
2
)
u
2
(4; p
1
[L) = u
2
(6; p
1
[L) = u
2
(2; p
1
[L)
u
2
(4; p
1
[H) = u
2
(6; p
1
[H) = u
2
(2; p
1
[H)
where the rst inequality holds since:
10 > (1=2)6 + (1=2)12
(1=2)5 + (1=2)10 > (1=2)12
Finally to test for the mixed BNE notice that if the above condition holds, player 1 does not
benet from a deviation since:
U
1
(2;
2
) _ U
1
(4;
2
) _ U
1
(2;
2
)
(d) Is it a dominant strategy equilibrium?
Answer: No, p
1
= 2 is not weakly dominant, since:
u
1
(4; 6[L) = 12 > 10 = u
1
(2; 6[L)
5. Consider the following extensive form game:
5
Microeconomic Principles II F. Nava
(a) Find the unique Subgame Perfect equilibrium of this game
Answer:
1:1
(b) = 1,
2:1
(A) = 1,
2:2
(C) = 1 &
1:2
(e) = 1.
The proposed strategies constitute a SPE since:
u
1:2
(e) = 2 > u
1:2
(d) = 0
u
2:2
(C) = 1 > u
2:2
(D) = 0
u
2:1
(A;
1:2
) = 4 > u
2:1
(B;
1:2
) = 2
u
1:1
(b;
1:1
) = 5 > u
1:1
(c;
1:1
) = 3 > u
1:1
(a;
1:1
) = 2
(b) Find a pure strategy Nash equilibrium with payos (3; 5)
Answer:
1:1
(c) = 1,
2:1
(A) = 1,
2:2
(D) = 1 &
1:2
(e) = 1.
The proposed strategies constitute a NE since:
u
1
(c; e;
2
) = 3 = u
1
(c; d;
2
) > u
1
(a; e;
2
) = 2 >
> u
1
(a; d;
2
) = u
1
(b; e;
2
) = u
1
(b; d;
2
) = 0
u
2
(A; D;
1
) = 5 = u
2
(A; C;
1
) = u
2
(B; C;
1
) = u
2
(B; D;
1
)
(c) Find a pure strategy Nash equilibrium with payos (4; 2)
Answer:
1:1
(a) = 1,
2:1
(B) = 1,
2:2
(D) = 1 &
1:2
(d) = 1.
The proposed strategies constitute a NE since:
u
1
(a; d;
2
) = 4 = u
1
(a; e;
2
) > u
1
(c; d;
2
) = u
1
(c; e;
2
) = 3 >
> u
1
(b; d;
2
) = u
1
(b; e;
2
) = 0
u
2
(B; D;
1
) = 2 = u
2
(B; C;
1
) > u
2
(A; C;
1
) = u
2
(A; D;
1
) = 0
6