Review

Lecture

EC 3101: Microeconomic Analysis II

1
 Homework 2.1
Consider the game “Rock, Paper, Scissors, Lizard, Spock”, a variant of
the classic “Rock, Paper, Scissors” game. Suppose when there is a tie,
each player’s payoff is 0. Suppose the winner gets a payoff of 1 and
the loser gets a payoff of -1.
(a) Write down the game’s payoff matrix.
(b) Is there a strictly dominated strategy for each player? Which one?
(c) Is there a pure strategy Nash equilibrium of this game?
(d) Now, consider the classic “Rock, Paper, Scissors” game. Find the
mixed-strategy Nash equilibrium in which each player plays “Rock”,
“Paper”, and “Scissors” with strictly positive probabilities.

2
 Homework 2.1
Consider the game “Rock, Paper, Scissors, Lizard, Spock”, a variant of
the classic “Rock, Paper, Scissors” game. Suppose when there is a tie,
each player’s payoff is 0. Suppose the winner gets a payoff of 1 and
the loser gets a payoff of -1.
(a) Write down the game’s payoff matrix.

3
 Homework 2.1
Consider the game “Rock, Paper, Scissors, Lizard, Spock”, a variant of
the classic “Rock, Paper, Scissors” game. Suppose when there is a tie,
each player’s payoff is 0. Suppose the winner gets a payoff of 1 and
the loser gets a payoff of -1.
(d) Consider the classic “Rock, Paper, Scissors” game. Is there a MSNE
in which each player plays “Rock” and “Paper” with strictly positive
probabilities and “Scissors” with 0 probability .

7
Homework 2.2

8
Homework 2.4

9
 Syllabus
Week 1 Course Overview; Intertemporal Choice, Ch.10
Week 2 Uncertainty, Ch. 12
Week 3 Monopoly, Ch.25
Week 4 Oligopoly, Ch.28
Week 5 Oligopoly, Ch.28
Week 6 Game Theory, Ch.29
–  Recess Week –
Week 7 Midterm
Week 8 Game Applications, Ch. 30
Week 9 Game Applications, Ch. 30
Week 10 Externalities, Ch. 35; Public Goods, Ch. 37
Week 11 Asymmetric Information, Ch. 38
Week 12 Asymmetric Information, Ch. 38; Welfare Ch.34
Week 13 Review
11
 Format of Final Exam

•  MCQ
•  Short Answer Questions

•  Answer MCQs on Answer Book (bubble form)

12
 1. Sum of infinite geometric sequence
with ratio d and first term a

Show that

2 3 a
a + ad + ad + ad + ... =
1− d

13
2. Actions, Strategies, Outcomes (Game Theory)

Joey
Confess Do Not Confess
Confess -5, -5 -1, -10
Chandler
Do Not Confess -10, -1 -2, -2

•  Each player has two possible actions

•  Each player has infinite number of strategies
•  There are four possible outcomes
•  You should describe the NE in terms of strategies instead of
outcomes (for future modules)

14
 Q1 (Game Theory)

A Nash equilibrium must result in

A.  both players being made better off.
B.  both players being made worse off.
C.  no way to make one player better off without making the
other player worse off.
D.  dominate strategies for both players.
E.  neither player wishing to change his or her strategy.

15
 Q2 (Game Theory)
There are two players, 1 and 2. Each player has $1 at the start of
the game. They take turns to choose between “stop” and
“continue”. At stage 1, it is player 1’s turn to choose; at stage 2,
it is player 2’s turn to choose; at stage 3, it is player 1’s turn to
choose; and so on. If a player chooses “continue”, the referee
takes 1 dollar from her and gives $2 to the other player. If a
player chooses “stop”, the game ends and each player keeps the
money that she currently has.
Suppose if no one chooses “stop”, the game ends when each
player has $3. Draw the extensive form of this game. Solve it by
backward induction.
(b) Suppose if no one chooses “stop”, the game ends when each
player has $100. Draw the last 3 stages of the extensive form of
the game. Solve the game by backward induction.

 Q3 (Externality)
Roy and Tan live on a slope overlooking Sentosa. Roy's home is higher
than Tan's, so to see Sentosa Roy must look past Tan's garden. Several
years ago, Tan planted a tree in his garden, and that tree has now grown
so tall than Roy can no longer clearly see Sentosa.
Suppose Roy enjoys a utility equivalent to $100 if the tree is there and a
utility equivalent to $500 if the tree is not there. Suppose Tan enjoys a
utility equivalent to $500 if the tree is there and a utility equivalent to
$300 if the tree is not there. The cost of cutting the tree is zero.

(a) What is the socially efficient outcome?

(b) If transaction cost is zero, do you think that the outcome will be
efficient? Explain.

18
 Consultation hours

•  Exam cumulative;

•  (Final: 2.30pm May 3, Friday);

•  May 2: from 6pm onward, only admin. questions will be

answered;

•  April 22, 23, 25, 26, 29, May 1, 2 (except April 24, 30,
weekends) 3–4pm (Walk-in);
•  Or by appointment.

19