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 HS 123: Game Theory and Economics
B Tech, 4th Semester, Mid Semester Test
Total Marks: 40
Date: 6th March, 2022

[Explain the answers in words. Without proper elaboration of answers, marks would be
deducted.]

1. In the following zero-sum game only the payoffs of player A are displayed. Using
iterated elimination of strictly dominated actions try to solve it. Is/are the solution/s a
Nash equilibrium/equilibria? [4+2]
B
L M R
U 5 1 3
A S 6 1 2
D 1 0 0

2. Suppose there are two aircraft manufacturers A and B, together they produce all aircrafts
in the world. The price of new aircrafts is determined by the function, P = 180 – Q,
where Q = qA + qB. Cost of building an aircraft is $30 million for both companies. Or,
cA = cB = 30, where the cost per aircraft is measured in millions of dollars.
(a) Write the profit function of each company in terms of qA and qB as well as cA and
cB. Find each company’s best response function. [2+2 = 4]
(b) From (a) above find the Nash equilibrium quantity of aircrafts a year produced by
the two companies. What is the price of an aircraft? How much profit is made by
each company. [2+2+2 = 6]
(c) Suppose A has developed an improved technology to manufacture aircrafts due to
which its cost is lower. The cost of B has however gone up. The cost per aircraft of
two companies are now, cA = 20, cB = 40. What is the market share of each
company? What are the profits of each company? [2+2 = 4]

3. 50 students in a class play the following game. Each chooses an integer from 0 to 100.
Let X = the mean of the 50 chosen numbers. The student who has chosen a number
which is closest to the two-thirds of X wins a prize of 100 rupees. If multiple students
tie, they split the prize equally.
(a) Show that choosing the number 80 is a weakly dominated action. [2]
(b) Suppose all else have chosen 40, then for an individual player i, what is the set of
best responses? [6]
(c) Find a symmetric Nash equilibrium of the game (that is, a Nash equilibrium where
everyone chooses the same number). [4]

4. In contrast to the Cournot model, suppose prices are decided by firms. Two stores are
there, A (which sells bread) and B (which sells butter). The cost of producing a loaf of
bread is 1 rupee and the cost of producing a packet (200 g) of butter is 2 rupees. If the
price of A’s bread is P1 per loaf, and price of B’s butter is P2 per packet, then their

1
respective monthly sales (Q1 thousand loaves of bread and Q2 thousand packets of
butter) are given by,
Q1 = 14 – P1 – 0.5 P2 and
Q2 = 19 – 0.5P1 – P2

(a) For each store, write the profit as a function of P1 and P2. [2]
(b) Using (a), derive their best response functions. [3]
(c) Using (b), derive Nash equilibrium prices. [3]

2
 HS 123: Game Theory and Economics
BTech 4th Semester, Quiz 2
Total Marks 10, Time 55 minutes
Date: 9th April, 2022
[Answers should be accompanied by proper elaboration]

1. In a Bertrand duopoly market, firm 1 maximises its market share subject to not making a
loss. Firm 2 maximises its profit. Their unit costs are same, c. The market demand function
is given by, D(p) = α – p, if α ≥ p; D(p) = 0, if α < p; α > c. Other standard assumptions as
discussed in the class hold here. Find the best response functions of the firms and the Nash
equilibrium/equilibria. [3+3]

2. Find all the Nash equilibria of a second-price sealed-bid auction with two bidders with the
same setting as mentioned in the class. [4]

(Hint: construct best response functions.)

 HS 123: Game Theory and Economics
BTech 4th Semester, End Semester Test
Total Marks 40, Date: 10th May, 2022
[Answers should be accompanied by proper elaboration]

1. Consider a Bertrand duopoly market as discussed in the class except that unit costs of firms are
different: ܿଵ = 2 < ܿଶ = 4. The market demand function is, D(p) = 10 – p, if 10 ≥ p; D(p) = 0, if 10
< p.
(a) Suppose that the rule of splitting up consumers when ‫݌‬ଵ = ‫݌‬ଶ = 4 assigns all consumers to firm
1; when ‫݌‬ଵ = ‫݌‬ଶ ≠ 4 each firm gets half of consumers. Show that ሺ‫݌‬ଵ , ‫݌‬ଶ ሻ = ሺ4, 4ሻ is the unique
Nash equilibrium of this game. What are the equilibrium profits? [4+2]
(b) Suppose the rule of splitting up consumers when ‫݌‬ଵ = ‫݌‬ଶ assigns half of consumers to each firm.
Show that no Nash equilibrium exists in this case. [3]

2. [Electoral competition with discrete positions] Consider the Hotelling model as discussed in the class
with the modification that there are only 101 voters with their favourite positions at -50, -49,…, 49,
50. Two candidates (players) are competing.
(a) Write down the best response functions of the players. [3]
(b) What is/are the Nash equilibrium/equilibria? [2]

3. Consider the following game with von Neumann Morgenstern preferences.

(a) Is there any strict domination in pure strategies? [1]
(b) Is there any strict domination in mixed strategies? If yes, identify the dominated actions, and after
eliminating them find mixed strategy Nash equilibria of the game. [3+3]

Player 2
X Y Z
A 1, 3 2,3 1,4
Player 1 B 2, 2.5 4, 0 0, 6
C 1, 1.5 0, 4 4, 0

4. In a strategic game with von Neumann Morgenstern preferences where each player has the same set of
actions, a symmetric mixed strategy Nash equilibrium is defined as one which is a mixed strategy Nash
equilibrium and the mixed strategy is same for every player. In the following game, what is/are the
symmetric mixed strategy Nash equilibrium/equilibria? [4]

Player 2
A B
A 0,0 1,1
Player 1
B 1,1 0,0

5. [Stackelberg duopoly] The market demand function is D(p) = 10 – p, if 10 ≥ p; D(p) = 0, if 10 < p. The
unit cost of production of the two firms is 2. Now, consider a variation of the Cournot duopoly model.
Both firms decide how much to produce (‫ݍ‬௜ ), but they do it sequentially. First, firm 1 (the leader)
decides ‫ݍ‬ଵ , after which firm 2 (the follower) decides ‫ݍ‬ଶ . Each firm likes to maximise its profit.

1
 (a) Specify this extensive game with perfect information. [2]
(b) Apply backward induction to find the subgame perfect equilibrium/equilibria of the game. [4]
(c) What are the profits of the firms in the subgame perfect equilibrium/equilibria? [4]

6. Consider the Ultimatum Game as discussed in the class. Player 1 offers 100 − ߙ to player 2 and keeps
ߙ to herself. Find the values of ߙ for which there is a Nash equilibrium. [Note, while describing a Nash
equilibrium, the strategies of players need to be specified] [5]

‫ݐ݌݁ܿܿܣ‬ ܴ݆݁݁ܿ‫ݐ‬

ߙ, 100 − ߙ 0, 0