Problem Set 7 - Graduate Microeconomics II
Prof. Leandro Arozamena
TA: Matías Cersosimo
2017
Exercise 1 (M.W.G. 8.B.4)C
Show that the order of deletion does not matter for the set of strategies surviving a process of iterated
deletion of strictly dominated strategies.
Exercise 2 (M.W.G. 8.B.5)C
Consider the Cournot duopoly model (discussed extensively in Chapter 12) in which two rms, 1 and 2,
simultaneously choose the quantities they will sell on the market, q1 and q2 . The price each receives for each
unit given these quantities is P (q1 , q2 ) = a − b (q1 + q2 ). Their costs are c per unit sold.
(a) Argue that successive elimination of strictly dominated strategies yields a unique prediction in this
game.
Exercise 3 (M.W.G. 8.C.4)B
Consider a game ΓN with players 1, 2 and 3 in which S1 = {L, M, R}, S2 = {U, D} and S3 = {`, r}. Player
1's payos from each of his three strategies conditional on the strategy choices of players 2 and 3 are depicted
as (uL , uM , uR ) in each of the four boxes shown below, where (π, , η) >> 0. Assume that η < 4.
Player 3's Strategy
` r
U π + 4, π − η, π − 4 π − 4, π + 0.5η, π + 4
Player 2's Strategy
D π + 4, π + 0.5η, π − 4 π + 4, π − η, π − 4
(a) Argue that (pure) strategy M is never a best response for player 1 to any independent randomizations
by players 2 and 3.
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(b) Show that (pure) strategy M is not strictly dominated.
(c) Show that (pure) strategy M can be a best response if player 2's and player 3's randomizations are
allowed to be correlated.
Exercise 4 (M.W.G. 8.D.2)B
Show that if there is a unique pro le of strategies that survives iterated removal of strictly dominated
strategies, this pro le is a Nash equilibrium.
Exercise 5 (F.T. 1.5)* (Final-oer arbitration - Farber (1980))
There are three players: a management (i = 1), a union (i = 2), and an arbitrator (i = 3). The arbitrator
must choose a settlement t ∈ R from the two oers, s1 ∈ R and s2 ∈ R, made by the management and the
union respectively. The arbitrator has exogenously given preferences ν0 = − (t − s0 )2 . That is, he would
like to be as close to his "bliss point", s0 , as possible. The management and the union don't know the
arbitrator's bliss point: they know only that it is drawn from the distribution P with continuous, positive
density p on [s0 , s0 ]. The management and the union choose their oers simultaneously. Their objective
functions are u1 = −t and u2 = t, respectively.
Derive and interpret the rst-order conditions for a Nash equilibrium. Show that the two oers are equally
likely to be chosen by the arbitrator.
Exercise 6 (F.T. 1.6)**
Show that the two-player game
Player 2
L M R
U (1, −2) (−2, 1) (0, 0)
Player 1 M (−2, 1) (1, −2) (0, 0)
D (0, 0) (0, 0) (1, 1)
has a unique equilibrium. (Hint: Show that it has a unique pure-strategy equilibrium; then show that player
1, say, cannot put positive weight on both U and M , then show that player 1, say, cannot put positive weight
on both U and D, but not on M , for instance.)
Exercise 7 (F.T. 1.12)*
Consider a simultaneous-move auction in which two-player simultaneously choose bids, which must be in
nonnegative integer mutiples of once cent. The higher bidder wins a dollar bill. If the bids are equal, neither
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player receives the dollar. Each player must pay his own bid, whether or not he wins the dollar. (The loser
pays too.) Each player's utility is simply his net winnings; that is, the player are risk neutral. Construct a
symmetric mixed-strategy equilibrium in which every bid less than 1.00 has a positive probability.