HUL 212A: Microeconomics
IIT Delhi
Problem Set 6
March 31, 2026
1. Suppose a consumer satisfies the von Neumann-Morgenstern axioms and is (strictly) risk averse.
She initially has monetary wealth w. There is some probability p that she will lose an amount
L. The consumer can purchase insurance that will pay her q dollars in the event that she incurs
this loss. The amount she has to pay for this insurance is πq; here π is the premium per dollar of
coverage.
(a) How much insurance will the consumer purchase? That is, what is the choice of q (as a
function of the parameters w, p, L and π) that maximizes her expected utility? (Note: It’s
fine to just give an equation that implicitly defines q.)
(b) In the special case where the insurance is actuarially fair (that is, π = p), how much insurance
will the consumer purchase? What about if π > p? Discuss.
2. Suppose you face the following lottery. You can earn 1 of 3 possible grades in this class: an “A”,
a “C”, or an “F”, with the following probabilities:
2 6 2
πA = , πC = , πF =
10 10 10
Your current wealth (w) is $400. If you receive an “A”, you gain (e.g. I pay you) $500. However,
if you get an “F”, you lose (e.g. you pay me) $300. If you receive a “C”, you DO
pNOT GAIN OR
LOSE anything. Assume your utility function, defined over wealth, is U (w) = (w).
(a) What is your expected utility (EU)? [Hint: be sure to calculate your total wealth in each
“state”.]
(b) What is the certainty equivalent level of wealth (w∗ ), that is, the guaranteed payoff at which
a person is “indifferent” between accepting the guaranteed payoff and their expected utility
from (a)?
3. Eliminating strictly dominated strategies:
(a)
A Game
(b)
A Game
4. (Iterated Elimination of Strictly Dominated Strategies) Consider the iterated elimination of strictly
dominated strategies in the strategic form game (I, (Si )i∈I , (ui )i∈I ). For all i ∈ I, denote the set
of strategies of player i at the kth step of the elimination by Sik . Suppose that each ui (si , s−i ) is
continuous in si and s−i , and each Si is compact. Prove that Si∞ (for each i) is nonempty.
5. (Iterated Elimination of Strictly Dominated Strategies in Cournot Competition) Consider a market
in which the price charged for quantity Q of some good is given by P (Q) = α − βQ for some
α, β > 0. Assume that the cost of producing a unit of this good is c.
(a) Assume that there are two firms in the market. Using the iterated elimination of the strictly
dominated strategies construct the sets of strategies S1k , S2k for any fixed k, and conclude that
S1∞ is a singleton. (Use the definition of Sik given in question 1.)
(b) Assume that there are three firms. Show that S1∞ is not a singleton.
6. Consider the following game, “Guess Two-Thirds the Average”, in which each player submits a
real number from 0 to 100, and the player whose submission is closest to two-thirds of the average
submission wins. Formally, |P | = n, and for each player i ∈ P , Ai = [0, 100]. Given a collection of
actions a ∈ A, let
n
2 X
w(a) = ai ,
3n i=1
and let
win(a) = arg min |ai − w(a)|
i∈P
be the set of players whose submissions are closest to 2/3 of the average. The utility function for
each player is such that (
1
if i ∈ win(a),
ui (a) = |win(a)|
0 otherwise.
Find the unique Nash equilibrium of this game via iterated elimination of dominated strategies.
7. Find the Nash equilibrium (equilibria) of the following games in pure strategies.
(a) Hawk-Dove Game
Dove Hawk
Dove (3,3) (1,4)
Hawk (4,1) (0,0)
Table 1: Hawk-Dove Game
(b) Battle of the sexes
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L R
U (4,2) (0,0)
D (0,0) (2,4)
Table 2: Battle of the sexes
H T
H (1,-1) (-1,1)
T (-1,1) (1,-1)
Table 3: Matching Pennies
(c) Matching Pennies
(d) A general 2 × 3 Game (Is this game familiar?)
L M R
U (1,2) (-2,1) (0,0)
M (-2,1) (1,2) (0,0)
D (0,0) (0,0) (1,1)
Table 4: A 2 × 3 Game
8. Consider the following two payoff matrices (6(a) and 6(b)). Find the Nash equilibrium for both
the games in pure strategies. Is there anything interesting going on?
L R
T (0,1) (1,2)
B (1,-1) (0,0)
Table 5: 6(a)
L R
T (0,3) (1,2)
B (1,1) (0,0)
Table 6: 6(b)
9. Consider the following 2 × 2 coordination game. For what values of x, this game admits a unique
Nash equilibrium in pure strategies? And for what values of x, this game admits multiple equilibria
in pure strategies?
α2 β2
α1 x, x x, 0
β1 0, x 4, 4
Table 7: A 2 × 2 coordination Game
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