Lect1 2 Exercises Solutions

Introduction to Game Theory
Exercises
Let’s do some exercise…
Two players: The employee and the employer. The employee has to choose whether to
pursue training that costs 1000£ to herself or not. The employer has to decide whether to
pay a fixed wage of 10000£ to the employee or share the revenues of the enterprise 50:50
with the employee. The output is positively affected by both training and revenue sharing.
Indeed, with no training and a fixed wage, the total output is 20000£, whereas if either
training or profit sharing is implemented, the output rises to 22000£. If both training and
revenue sharing are implemented the output is 25000£.
• Construct the payoff matrix
• Are there strictly dominated strategies?
• Can you find the solution of the game with the Iterated Elimination of Dominated
Strategies?
• Is there any NE?
Employer Revenue sharing Fixed wage
Let’s do some exercise… Employee

Training 11500, 12500 9000, 12000
No training 11000, 11000 10000, 10000
Two players (The employee and the employer)
Semployee = {training, no training} (training is costly)
Semployer = {revenue sharing, fixed wage}
The employer has a strictly dominated strategy (Fixed wage leads to strictly lower payoffs than
choosing ‘Revenue sharing’.
The employee has no strictly dominated strategy. The employee prefers to train only if the
employer gives revenue sharing, while prefers not to train with a fixed wage.
Assuming that players are rational and that this information is common knowledge, the
employee knows that the employer will never choose a fixed wage. Then the employee will
choose to train because No training is a dominated strategy after the elimination of the
employer’s dominated strategy.
NE: (Training, Revenue sharing)
Consider the following normal form game.
Construct the reaction functions and find the NE
A P2 L R
Reaction function of P1:
P1
Best response of P1: Given that P2 plays:
U 9,20 90,0
D L
U R
M 12,14 40,13
D 14,0 17,-2
L U NE: (D,L)
L M
L D
game B P2 L C R
Construct the reaction functions and find the NE P1
Reaction function of P1: U 2,8 0,9 4,3
Best response of P1: Given that P2 plays: D 3,7 -2,10 2,15
D L
U C
U R

Best response of P2: Given that P1 plays: NE: (U,C)
C U
R D
Construct the reaction functions and find the NE C P2 L R
Reaction function of P1: P1
Best response of P1: Given that P2 plays: U 9,86 7,5
D L M 6,5 10,6
M R
D 15,75 4,90
L U NE: (M,R)
R M
R D
Consider the following normal form games
Player 2 l m r
Player 1
T 7,17 21,21 14,11
M 10,5 14,4 4,3
B 4,4 7,3 10,25
Find the NE in pure strategies.

2 NE: (T,m) and (M,l)
What if we have three players?
All the methods discussed so far can be used to find the pure-strategy
NE of any simultaneous-play game among any number of players.
Let’s consider the following situation: Emily, Nina and Talia have to
choose wheter to contribute toward the creation of a flower garden for
their small street.
• Emily, Nina and Talia make their choices simultaneously

• The size and the splendor of the garden will now differ according to
the exact number of contributors
Three contributors will produce the largest and best garden
Two contributors will produce a medium garden
One contributor will produce a small garden
Suppose Emily is contemplating the possible outcomes of the street-garden game. There
are six possible choices for her to consider:
• Contributing when both Nina and Talia contribute
• Not contributing when both Nina and Talia contribute
• Contributing when just one contributes, Nina or Talia
• Not contributing when just one contributes, Nina or Talia
• Contributing when no one contributes
• Not contributing when no one contributes
Let’s rank them from the highest to the lowest payoff:
• Not contributing when both Nina and Talia contribute (payoff = 6)

• Contributing when both Nina and Talia contribute (payoff = 5)
• Not contributing when just one contributes, Nina or Talia (payoff = 4)
• Contributing when just one contributes, Nina or Talia (payoff = 3)
• Not contributing when no one contributes (payoff = 2)
• Contributing when no one contributes (payoff = 1)
Nina and Talia have the same views as Emily on the costs and benefits of
contributions and garden size, each of them order the different outcomes in the
same way.
We are dealing with a three-person simulatneous-move game.
To find the NE, we need game table.
The easiest way to add a third dimension to a two-dimensional game

table is the following:
Two rows for Emily, two colums for Nina and two ‘tables’ for Talia
Talia chooses:
Contribute Don’t
Nina Nina
Contribute Don’t Contribute Don’t
Emily Emily
Contribute Contribute
5,5,5 3,6,3 3,3,6 1,4,4
Don’t 6,3,3 4,4,1 Don’t 4,1,4 2,2,2

Best-Response analysis
Talia chooses:
Contribute Don’t
Nina Nina
Contribute Don’t Contribute Don’t
Emily Emily
Contribute Contribute
5,5,5 3,6,3 3,3,6 1,4,4
Don’t 6,3,3 4,4,1 Don’t 4,1,4 2,2,2
NE = (Don’t, Don’t, Don’t)

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Introduction to Game Theory

Let’s do some exercise… Employee

Reaction function of P2:

Find the NE in pure strategies.

• Emily, Nina and Talia make their choices simultaneously

• Not contributing when both Nina and Talia contribute (payoff = 6)

To find the NE, we need game table.

The easiest way to add a third dimension to a two-dimensional game

Don’t 6,3,3 4,4,1 Don’t 4,1,4 2,2,2

Don’t 6,3,3 4,4,1 Don’t 4,1,4 2,2,2

NE = (Don’t, Don’t, Don’t)

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