Intermediate Microeconomics and Its Application 12th Edition Nicholson Solutions Manual 1
Intermediate Microeconomics and Its Application 12th Edition Nicholson Solutions Manual 1
Intermediate Microeconomics and Its Application 12th Edition Nicholson Solutions Manual 1
CHAPTER 5
Game Theory
A. Summary
This chapter provides an introduction to game theory, providing students with
tools to analyze simple games.
We have placed this chapter so early in the text for several reasons. Of
course it is useful to have this material covered before it is used in later
chapters, most importantly in studying the strategic interaction between
oligopoly firms in Chapter 12. But placing it up front in the text in Part 3 on
uncertainty and strategy drives home the point that game theory is not just for
oligopolies. We view game theory as the natural generalization of the
maximizing decision maker (the foundation of our analysis of consumer and
producer theory) to settings with two or more decision makers whose decisions
interact. Game theory applies to the interactions ranging from that between
individual people (say neighbors regarding how they maintain their yards) to
that between nations (say countries deciding whether or not to sign a new
climate treaty).
The chapter begins with a description of the components of a game:
players, strategies, and payoffs. Then it turns to the fundamental equilibrium
concept for simultaneous games, Nash equilibrium. Then it turns to sequential
games and the equilibrium concept for these, subgame-perfect equilibrium. It
ends with more advanced topics including repeated games, games with
continuous actions, and so forth. The focus throughout is on methods to solve
for equilibrium.
The chapter deals mostly with classic, abstract games such as the
Prisoners’ Dilemma and the Battle of the Sexes. As mentioned above,
applications of game theory to analyze imperfect competition have been
moved forward to Chapter 12.
1
2 Chapter 5: Game Theory
5.3 a.
A
Up Down
B B
Left Right Left Right
3, 3 5, 1 2, 2 4, 4
4 Chapter 5: Game Theory
b.
A
Up Down
B B
Left Right Left Right
3, 3 5, 1 2, 2 4, 4
c.
B
Up 3, 3 3, 3 5, 1 5, 1
A
Down
2, 2 4, 4 2, 2 4, 4
There are two Nash equilibria: first, A plays Up, and B plays “Left | Up, Left |
Down”; second, A plays Down, and B plays “Left | Up, Right | Down.” The
second is a subgame-perfect equilibrium.
5.4 a. One pure-strategy Nash equilibrium is for Sony to Invest Heavily and Toshiba
to Slacken. The other is the reverse (Sony Slackens and Toshiba Invests
Heavily).
b. Let a be the probability that Sony Invests Heavily and 1 - a that it Slackens.
Given Sony’s mixed strategy,
if Toshiba Invests Heavily, its expected payoff = (a)(0)+(1-a)(3) = 3 - 3a;
if Toshiba Slackens, its expected payoff = (a)(1)+(1-a)(2) = 2 - a.
Equating the two expected payoffs, 3 - 3a = 2 - a, implies a = ½. Letting b be
the probability that Toshiba Invests Heavily and 1 - b that it Slackens.
Calculations similar to the preceding show that b = ½ in the mixed-strategy
Nash equilibrium.
Chapter 5: Game Theory 5
c. Let I stand for Invest Heavily and S for Slacken. Toshiba’s contingent
strategies are in the column headings of the following normal form:
Toshiba
I
0, 0 0, 0 3, 1 3, 1
Sony
S
1, 3 2, 2 1, 3 2, 2
d. Refer to the underlining method in the normal form in part c. There are three
Nash equilibria indicated by the boxes with both payoffs underlined.
e. Proper subgames circled below.
6 Chapter 5: Game Theory
The subgame-perfect equilibrium is for Sony to play I and for Toshiba to play
“S | I, I | S.” In the other Nash equilibria, either Toshiba irrationally plays S
after Sony plays S or Toshiba irrationally plays I after Sony plays I.
5.5 a.
B
Shirk Work
Shirk 0, 0 4, -2
Work -2, 4 1, 1
b. Both shirk.
c. Shirking is a dominant strategy for both. Game resembles the Prisoners’
Dilemma
Husband
Ballet Boxing
Wife Ballet 4, 2 0, 0
Chapter 5: Game Theory 7
Boxing 0, 0 2, 4
Husband
Ballet Boxing
Ballet 4, 1 0, 0
Wife
Boxing 0, 0 1, 4
The mixed-strategy Nash equilibrium is for the wife to go to ballet and boxing
with probabilities 4/5 and 1/5, respectively, and for the husband to go to ballet
and boxing with probabilities 1/5 and 4/5, respectively.
h
1
Husband’s
best-response
function
Wife’s
best-response
function
1/5
w
4/5 1
Husband
Ballet Boxing
Wife Ballet
2, 1 1/2, 1/2
8 Chapter 5: Game Theory
Boxing 0, 0 1, 2
5.7 a. Using the underlining method shows that playing Rat is a dominant strategy for
both and that both Ratting is a Nash equilibrium.
b. Expected payoff in equilibrium is
5.8 The pure-strategy Nash equilibrium is for A to play Up and B to play Left.
5.9 a. There are four pure-strategy Nash equilibria, one in which none of the three
locate in the mall and three different ones in which two locate in the mall and
the third does not (so three different ones, one for each different left-out store
A, B, and C).
b. Playing cooperatively, they might reach one of the three outcomes in which
two of the stores locate in the mall and the third does not. The sum of the
payoffs is the highest in these outcomes, 4. The stores locating in the mall may
Chapter 5: Game Theory 9
pay the left-out one for not locating there, perhaps each paying 2/3 so that total
surplus is split evenly.
5.10 a. Following the logic of equation (6.6), the marginal benefit of an additional
sheep for A is
300-2sA-sB.
Setting the marginal benefit equal to the marginal cost 0 gives
sA = 150-sB/2.
Similarly,
sB = 150-sA/2.
Solving simultaneously shows that the Nash equilibrium is
s *A s *B 100.
b.
sB
150
100 B’s best-response
function
sA
100 150 300
s *A 120, s *B 90.
10 Chapter 5: Game Theory
sB
A’s best-response
function shifts out
sA
100
120