Test - Game Theory

Problem Set 1:
Strategic and Extensive Form Games

Lecturer: Amrish Patel
Teaching Assistant: Conny Wollbrant
Class date: Friday 12th November
Guidance: You should each be prepared to present solutions on the whiteboard

in class (with help from Conny), so see us before the date of the class if you
haven’t a clue how to start to answer a particular question.
1. Consider a three-player strategic form game. Player 1 chooses be-

tween pure strategies fA; Bg, player 2 between fX; Y g and player 3 between
fJ; K; L; M g. Assume mixed strategies are permitted. Player 3’s payo¤s are
given in the following matricies:
X Y X Y X Y X Y
A 8 0 A 4 0 A 0 0 A 3 3
B 0 0 B 0 4 B 0 8 B 3 3
J K L M
(a) Is strategy K a never-best response? (Hint: Consider whether it is a best-

response to any mixed stategy of players 1 & 2)
(b) Is strategy K strictly dominated?
(c) Given your answers, comment on the relationship between the set of ratio-
nalisable strategies and the set of strategies surviving iterated dominance for
three-player games.
2. Identify all the pure strategy Nash equilibria in the following two games
(assume utility = payo¤s):
(a) Two students work together to solve a game theory problem set. Dr Patel
& Dr Wollbrant each interview one of the students simultaneously in separate
rooms. Each student is asked what percentage of the problem set they believed
they answered themselves. If the sum of the percentages is greater than 100,
then both students get a mark of zero for the game theory course. If the sum
of percentages is less than or equal 100, then they each get the number they
stated as their mark for this course.
(b) The students claimed this was an unfair way to assess their game theory
knowledge. So the teachers suggested an alternative game. All students in the
class were asked for a number between 1 and 100. The student that was closest
to 2=3 of the mean of all other students’ answers would receive a high-pass.
[Hint: Use iterated dominance]
1
3. Find the mixed strategy Nash equilibrium of the following game and draw
the best-response correspondences to illustrate the equilibrium (Hint: Think
about dominance/rationalisability)
W X Y Z
A 2, 5 4, 2 2, 3 1, 4
B 1, 5 3, 3 4, 4 1, 6
C 3, 2 2, 3 1, 1 2, 1
4. Consider an industry with n …rms. The n …rms could lobby parliament for
2
a subsidy. Firm i’s e¤ort cost of lobbying for hi hours is ci (hi ) = wi (hi ) where
wi is some positive constant. For some set of e¤ort levels of …rm (h1 ; :::; hn ) the
value of the subsidy will be
n n
!
X Y
hi + hi ;
i=1 i=1
for some positive constants and . Assuming each …rm decides simultaneously
and independently, show that each has a strictly dominant strategy i¤ = 0.
How many hours does each …rm lobby when = 0?
5. F farmers can freely graze their cows on the village common. The
amount of milk a cow produces depends on the number of cows grazing, N .
The revenue by farmer i’s ni cows is ni v (N ) for N < N and v (N ) 0 for
N N . Where v (0) > 0, v 0 < 0 and v 00 0. Each cow costs c, assume cows
are perfectly divisible and v (0) > c. Farmers simultaneously decide how many
cows to purchase, all cows will graze.
(a) Write down farmer i’s strategy and payo¤ function
(b) Find the symmetric Nash equilibrium. [Hint: You cannot solve for the
strategy explicitly]
(c) Find the symmetric socially optimal level of grazing.
(d) Show there is too much grazing in the NE relative to the socially optimal
amount. [Hint: Think about the rate of change of the social welfare function at
Nash grazing]
6. Consider the following scenario. Anna …rst chooses whether she wants to
buy Mac or Windows. Bjorn observes Anna’s choice and makes his own choice
between the two. In addition, if (and only if) Anna chose Windows, then since
she is familiar with the software, she creates a letter in Word and posts it to
Caroline who then also has the chance to choose between Windows and Mac.
Neither Bjorn nor Caroline can observe one another’s choice when they make
2
their own choice. Each person gets a payo¤ of 2 for each other person that made
the same choice as them.
(a) Depict the game in extensive form (i.e. draw the game tree)
(b) Write down the game in strategic form.
(c) Identify all the pure strategy Nash equilibria
(d) How many subgames are there in this game?
(e) Identify the pure strategy Subgame Perfect Nash equilibria
(f ) Pick one of the Nash equilibria that is not subgame perfect and explain in
words why this NE is not credible
7. Consider a game with 2 players. Each player i has a …nite action set
Ai with mi elements. Player i’s payo¤ is given by ui (ai ; a i ) where ai is i’s
choice of action and a i is his opponent’s choice. Player 1 moves …rst, player 2
observes his move, then moves himself.
(a) How many pure strategies does each player have?
(b) Show that it can only be the case that this game has multiple SPNE if
there exists two pairs of moves (a1 ; a1 ) and (a01 ; a02 ) (where either a1 6= a01 or
a2 6= a02 ) such that either u1 (a1 ; a2 ) = u1 (a01 ; a02 ) or u2 (a1 ; a2 ) = u2 (a01 ; a02 ).
[Hint: Prove by contradiction]
8. Consider the manufacturing of electicity from fossil fuels. Given fossil

fuels are running out the market is shrinking. Suppose two …rms A & B can
compete in periods t = 0; 1; 2; 3:::: (i.e. inde…nitely). At the start of each period
each …rm simultaneously chooses whether to "exit" or "stay". Once the …rm
exists, they leave the market forever and get zero for every period thereafter.
If both …rms are present in period t, …rm A earns 105 10t and …rm B earns
10:5 t. If there is only A is present in period t then it earns 510 25t if only
B is present it earns 51 2t. Firms maximise their undiscounted sum of pro…ts.
What is the SPNE outcome? [Hint: Think about when the …rms will de…nitely
leave and apply backwards induction arguments]
9. Consider a household consisting of a parent and a teenager together. The

teenager chooses how much to work, x. The function v (x) denotes the income he
gets from working. Further, the teenager working has an e¤ect on the parent’s
income u (x) (e.g. less time wasted dealing with the teenager). Assume both
u (:) and v (:) are increasing, concave functions. In addition to earnt income,
the teenager will also receive a transfer t from the parent, thus their utilities
from money are U = u (x) t and V = v (x) + t. The parent’s objective is to
3
maximise familial welfare as represented by W (U; V ), increasing and concave
in both arguments.
(a) Assume the teenager listens to the parent so can be told exactly how much
to work. Characterise the parent’s optimal choice of x and t.
(b) Assume instead the teenager is sel…sh, so chooses x to maximise only his
utility. After the teenager has chosen x the parent observes his choice and gives
him a transfer t. Show that despite being sel…sh, the teenager chooses the level
of x that maximises familial welfare. [Hint: Use backwards induction]
10. A daughter has current income z > 0 and her father has current income
y > 0. The daughter can choose some s 2 [0; z] to save for her education
next period, receives an interest rate of r on s. In addition, she will receive
a transfer t from her father in the second period. Thus her utility function is
V (s; t) = v1 (z s) + v2 (s (1 + r) + t) where > 0 is the discount factor. The
father’s utility function is U (s; t) = u (y t) + v (s; t) for > 0. Assume all
utility functions and increasing and concave.
(a) Suppose …rst the daughter chooses s, the father observes s and then pays
transfer t. Derive a condition characterising the equilibrium choices of s and t.
[Hint: Solve backwards]
(b) Let s and t be the equilibrium choices of the game in part (a). Suppose
the father is able to precommit to t i.e. the transfer is …xed regardless of her
choice of s. Argue that the daughter will actually now save more than s . [Hint:
Think about dt=ds]

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Problem Set 1:

Strategic and Extensive Form Games

Class date: Friday 12th November

Guidance: You should each be prepared to present solutions on the whiteboard

1. Consider a three-player strategic form game. Player 1 chooses be-

(a) Is strategy K a never-best response? (Hint: Consider whether it is a best-

(b) Is strategy K strictly dominated?

(a) Write down farmer i’s strategy and payo¤ function

(c) Find the symmetric socially optimal level of grazing.

(b) Write down the game in strategic form.

(c) Identify all the pure strategy Nash equilibria

(d) How many subgames are there in this game?

(e) Identify the pure strategy Subgame Perfect Nash equilibria

(a) How many pure strategies does each player have?

8. Consider the manufacturing of electicity from fossil fuels. Given fossil

9. Consider a household consisting of a parent and a teenager together. The

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