ECONOMICS 373
Problem Set 8
Problems for Lectures 13, 14, and 15
Dr. L. Vojtassak
Solutions to some of the problems are in square brackets at the end of the question.
1. Another Language Game.
Five people are choosing a language, either ENG or SPAN. Naturally, they
want to communicate with each other. In addition, players 1 and 2 have
a mild preference for ENG, and players 3, 4 and 5 have a mild prefer-
ence for SPAN. Let M be the number of people other than a representative
player who choose ENG. The payoff function for a representative player
who prefers ENG, whom we will call Rep ENG, is
Payoff Function for Rep ENG
ENG M+1
SPAN 4-M
Similarly, Rep SPAN’s payoff function is
Payoff Function for Rep SPAN
ENG M
SPAN 5-M
(a) Find the Nash equilibria of the simultaneous move game. [ALL ENG,
ALL SPAN]
(b) Now consider some games in which choices are made sequentially.
In each case find the language chosen by each player in the subgame
prefect equilibrium (or equilibria if there is more than one subgame
perfect equilibrium).
i. First choice sequence: 1 moves first, then 2, then 3, then 4 and
finally 5.
Econ 373 Problem Set 8 Page 2
ii. Second choice sequence: 5 moves first, then 4, then 3, then 2 and
finally 1.
iii. Third choice sequence: 1 moves first, then 5, then 2, then 3 and
finally 4.
2. Nim
The parlour game Nim involves two players, One and Two, and two piles of
matches, Pile A and Pile B. Play is sequential, and One moves first. At each
of her turns, a player must take one or more matches from one of the two
piles, and the player who takes the last match is the winner. Players prefer
winning to losing.
(a) Suppose that the number of matches in the two piles is not identical
- in this case, player One can always win the game. Describe One’s
winning strategy. What can you say about TWO’s best strategy? Hint:
First analyze the case in which there are 2 matches in pile A and 1 in
pile B. Then, analyze the case in which there are 3 matches in pile A
and 1 in pile B. Then analyze the case in which there are 3 matches in
pile A and 2 in pile B. Then, ask yourself what the general message
is. [When A=2 and B=1, One’s winning strategy is to choose 1 match
from A. When A=3 and B=1, One’s winning strategy is to choose 2
matches from A]
(b) Now suppose that the number of matches in the two piles is identical
- in this case, player Two can always win the game. Describe Two’s
winning strategy.
3. The Ultimatum Game (from Problem Set 1).
There are two players, PROPOSER and RESPONDER. There is $100 to be
split between the two players. PROPOSER proposes a split, and RESPON-
DER accepts or rejects the proposal. PROPOSER has 3 options: she can
propose a 25/75 split ($25 for PROPOSER and $75 for RESPONDER), a
50/50 split ($50 for PROPOSER and $50 for RESPONDER), or a 75/25
split ($75 for PROPOSER and $25 for RESPONDER). RESPONDER has
2 options: he can accept (A) the proposed split (in which case the money is
actually split between the two players in the proposed manner), or he can
reject (R) it (in which case neither player gets any money).
Econ 373 Problem Set 8 Page 3
(a) Assume that play is sequential: PROPOSER makes the first choice;
then knowing PROPOSER?s choice, RESPONDER makes her choice.
Construct an extensive form for the game. Find the SPE. [(75/25, (A,
A, A))]
(b) Assume that choices are made simultaneously. Construct a strategic
form for the game, and find all the Nash equilibria.
4. Mutual Assured Destruction (MAD).
During the cold war, we saw an equilibrium in which the United States and
Russia held huge stockpiles of nuclear weapons, so as to maintain what was
called a second-strike capability. The idea was that if country A had a suf-
ficient quantity of nuclear weapons, country B could not destroy them all
in a first strike, and in particular, if the stockpile was large enough, country
A would still have, after a first strike by B, enough weapons to obliterate
country B. Hence, it was believed, neither country would ever launch a first
strike. This is the essence of MAD. Construct an extensive form for this
game, and use it to discuss the credibility problems at the heart of MAD.
5. Burning Bridges.
An island that lies between countries A and B is in dispute. The island
is connected to Country B’s mainland by a bridge. The island is currently
occupied by B’s Army. A’s army is deciding to mount an amphibious attack
on the island or not. In the event of an attack, Army B may fight or retreat
over the bridge to its mainland, allowing Army A to occupy the island. Both
armies prefer to occupy the island rather than not to occupy it, and a fight is
the worst outcome for both armies.
(a) Find the subgame perfect equilibrium strategies, and the associated
outcome of the game. [Country A will attack and Country B will
retreat.]
(b) If it could be done at no cost, Army B could increase its subgame per-
fect equilibrium payoff by burning the bridge. Use an extensive form
game to show this result. Hint: timing is everything. [If B burns the
bridge, ”attack” branch of the three does not happen, B’s payoff will
be higher.]
Econ 373 Problem Set 8 Page 4
6. Missed Opportunities.
This game involves two players, ONE and TWO. They alternate moves, and
ONE moves first. At the first 9 decision nodes there is a pile of money, and
the player whose turn it is to move can either take two thirds of the money
in the pile, and if she does the other player gets the remaining third, or not;
if she chooses not, the amount of money in the pile triples. When ONE
makes the first decision to take or not, there is $3 in the pile. At the 10th
decision node, TWO can again choose to take two thirds of the money in
the pile leaving one third for ONE, or not; but if she chooses not at the 10th
decision node the money in the pile is split evenly between the two players
and the game ends. Find the subgame perfect equilibrium strategies in this
game, the equilibrium path, and the equilibrium payoffs for the players.
7. In 1519, Hernando Cortez, a Spanish soldier based in Cuba, sailed with 600
men and 30 horses to the Yucatan coast in Mexico, where he launched a
military campaign that ultimately destroyed the Aztec Empire. Perhaps the
most famous part of this story of conquest is that, after landing on the main-
land of Mexico, Cortez scuttled his ships thus preventing an easy escape
back to Cuba. With the aid of an extensive form game, provide an interpre-
tation of what Cortez was trying to achieve with this action. [Please read
Ch 6 of Thinking Strategically.]
8. In the game of Shared Responsibility, let X = 400. Find all of the subgame
perfect Nash equilibria (there is more than one). For each of them, write
down the SPE strategy combination, the equilibrium path, and the equilib-
rium payoffs of the players.