Economics 440/640 Problem Set 1

Due 1/28/2013

You are allowed to work in groups of up to four people, but not to share answers with non-group members. If you do form a group, the group must turn in one shared solution set. All questions are equally weighted. If you have any questions please email me or stop by my ofce.

Question 1. Geometry of Best Response Functions.

(This question is about material that will be covered on 1/23 or 1/25). For this question, consider two-person games with two strategies for each player: S1 = {Up, Down} and S2 = {Left, Right}

We can represent a mixed-strategy combination as a point in the unit square where x is the probability 2 plays Right and y is the probability that 1 plays Up. For example, the point (3/4, 1/3) represents player 1 playing Up 1/3 of the time and Down 2/3 of the time, and player 2 playing Left 1/4 of the time and Right 3/4s of the time. A) Draw both players best response curves for the following game. L U D 2, 2 1, 0 R 0, 3 1, 1

B) Find payoffs that would produce the following best response diagram. (The solid line is player 1s best response and the dashed line is player 2s). Hint: you may want to work out numbers that will give you the approximate shapes rst and only then focus on the point where the curves intersect.
Pr. Up

(1/2, 1/3)

(0, 0)

Pr. Right

C) Find payoffs that would produce the following best response diagram. 1

Pr. Up (2/5, 4/5)

(0, 0)

Pr. Right

Question 2. A Patent Race.

Firm 1 and rm 2 each decide on a research investment of ri that is either $0, $1 million, or $2 million. If ri > rj , rm i has a breakthrough worth $5 million while rm j is too late and gets no benet from its research expenditure. If ri = rj , neither rm gets the $5 million gross prot from the breakthrough because it is eaten up by patent disputes. For example, if r1 = r2 = $1 million, then both rms have a payoff of $1 million. A) Find the matrix form of this game. B) Find the Nash equilibrum of this game. C) Now assume ri can be $ x million, where x is any non-negative integer. Find the the resulting Nash equilibrium.

Question 3. Group HW version 3.5

Consider three classmates working a group homework assignment, who simultaneously choose si = S = {S, W }. Assume their nal grade is # of Ws Grade 0 1 0 30 2 3 70 100

and ui = g if si = W or ui = g + 35 if si = S . A) Write this game in matrix form. 2

B) Solve for all pure-strategy Nash equilibria of the game. C) If your solution differs from the group homework example in class on 1/14 (Group HW Version 3), explain intuitively why the outcome in this problem is different. D) Solve for a symmetric mixed strategy Nash equilibrium of the game. I.e., if p1 is the probability that Player 1 Works, and so on, is there a NE in which p = p1 = p2 = p3 ? What is the expected grade in this equilibrium? (More difcult. Note that the probability of n players working is binomially distributed.)

Question 4. Volunteers Dilemma.

The Parliament of the Republic of Nash is made up of two elected ofcials. Being a parliamentarian is a full-time job (there are only two of them!). Both feel like they are overworked relative to their pay. Their current wage gives each of them utility L. If one of them would introduce a bill to increase the salary of members of parliament, they could achieve a higher wage giving each of them utility V . However, the parliamentarian who introduces the bill is going to get angry calls from his constituents, which cost him C utility. A) What is the matrix form of this game? B) Find the pure strategies of the game. Do they depend on how large L or V is relative to C ? C) Find the mixed strategies of the game. If you need to assume something about L, V , and C for a mixed strategy to exist, please do so. A symmetric Nash equilibrium is a Nash equilibrium in which 1 = 2 = = n (all players use the same strategy). D) What if Parliament had more than two members? Find the unique symmetric equilibrium of the game as a function of the number of members, N , for all combinations of parameters.