Econ 487
Problem Set 2 (Chapter 3)
1. S1
2. S2
3. S3
4. S4
5. S5
6. S6
7. S10 (ignore parts e and f).
Solutions:
1. (a) There is one initial node (I) for Hansel making the first move; three decision
nodes (D) including the initial node, which represent the points where either Hansel or
Gretel make a decision; and six terminal nodes (T).
(b) There is one initial node (I) for Hansel making the first move; four
decision nodes (D) including the initial node, which represent the nodes where Hansel or
Gretel make a decision; and nine terminal nodes (T).
(c) There is one initial node (I) for Hansel making the first move; five
decision nodes (D) including the initial node, which represent the nodes where Hansel or
Gretel make a decision; and eight terminal nodes (T).
1
2. (a) Scarecrow has two strategies: N and S. Tinman has two strategies: t and b.
(b) Scarecrow has two actions at three different nodes, so Scarecrow has eight
strategies, 2•2•2=8. To describe the strategies accurately, we must specify a player’s
action at each decision node. Scarecrow decides at nodes 1, 3, and 5, so we will label a
strategy by listing the action and the node number. For example, to describe Scarecrow
choosing N at each node, we write (N1N3N5). Accordingly, the eight strategies for
Scarecrow are: (N1N3N5), (N1N3S5), (N1S3N5), (S1N3N5), (N1S3S5), (S1N3S5), (S1S3N5),
and (S1S3S5).
Tinman has two actions at three different nodes, so Tinman also has eight
strategies, 2•2•2=8. Tinman’s strategies are: (n2n4n6), (n2n4s6), (n2s4n6), (s2n4n6), (n2s4s6),
(s2n4s6), (s2s4n6), and (s2s4s6).
(Notice that some of these strategies are unrealistic. For example, (N1 N3 N5) in which the
Scarecrow chooses N in the first node; as a result the game ends and she never gets to
move again. But this is completely fine because strategies are descriptions of plan of
action; not what someone has actually chosen.)
(c) Scarecrow has two actions at three decision nodes, so Scarecrow has eight
strategies: 2•2•2=8. Scarecrow’s strategies are: (N1N4N5), (N1N4S5), (N1S4N5), (S1N4N5),
(N1S4S5), (S1N4S5), (S1S4N5), and (S1S4S5). Tinman has two strategies: t and b. Lion has
two strategies: u and d.
3. (a) The arrows in the graph below indicates which
action Scarecrow and Tinman choose at each node. Thus, the
rollback equilibrium:
Scarecrow’s strategy = S; Tinman’s strategy = t.
Scarecrow’s payoff =1; Tinman’s payoff =0.
(b) The arrows in the graph below indicates which
action Scarecrow and Tinman choose at each node. The rollback equilibrium is:
Scarecrow’s strategy = S1S3N5 ; Tinman’s strategy = n2n4s6.
Scarecrow’s payoff =4; Tinman’s payoff =5.
2
(c) The arrows in the graph below
indicates which action Scarecrow, Tinman, and
Lion choose at each node. The rollback equilibrium
is:
Scarecrow’s strategy = N1N4N5 ; Tinman’s strategy
= b; Lion’s strategy = d.
Scarecrow’s payoff =2; Tinman’s payoff =3; Lion’s
payoff = 2.
4. The game tree is shown below.
Boeing prefers $300 million to losing $100 million, so Boeing will peacefully
accommodate Airbus’s entry into the market. Airbus expects Boeing to accommodate its
entry peacefully, so it can make $300 million by entering, or nothing by not entering, so
Airbus will enter the market. Thus, the rollback equilibrium is: Airbus’s strategy = in;
Boeing’s strategy = peace. The payoffs at the equilibrium are: Airbus’s payoff = $300;
Boeing’s payoff = $300.
5. (a) For Barney to win the game, he must remove the last matchstick, which
means that if he leaves Fred 1 to 4 matches, Fred can remove all of them and Barney
would lose, so Barney must leave more than 4 matchsticks. Because there are 6
matchsticks and Barney must take at least 1, Barney should remove only 1 matchstick,
which will leave Fred with 5 matchsticks. No matter what Fred does, Barney, on his next
turn, will be able to remove all the remaining matchsticks to win the game. More
precisely, Barney should take 1 matchstick on his first turn. If Fred takes f matchsticks,
Barney should take (5–f) matchsticks.
3
(b) From part (a), we know that whomever is left with 5 matchsticks will lose
the game, so Barney should remove enough matchsticks to leave Fred only 5. If Barney
leaves Fred 6 to 9 matches, then Fred will leave Barney with 5, and Barney will lose, so
Barney must leave Fred with more than 9 matches. Also, if Barney leaves 11 matches,
Fred can ensure he is left with 6 to 9 matches by choosing only 1 match, leaving Barney
with 10 matches and no way to keep Fred from having 6 to 9 matches. Thus, Barney must
take 2 matches, leaving Fred with 10, and must choose (5–f) matches on each subsequent
turn.
Another way to view this problem is that a player will lose if his turn begins with
5 matches. Thus, each player always wants to remove matchsticks to leave his opponent
with 5. Since we know what happens when 5 matchsticks remain, we can divide the
number of remaining matchsticks into units of 5. For example, 12 matchsticks can be
divided into two units of 5 with 2 extra. Barney wants to force Fred to have some
multiple of 5, so Barney removes 2 matches at first, and then (5–f) matches in each of his
subsequent turns.
(c) The full game has 21 matchsticks, and Fred begins. As described in (b),
Fred wants to leave Barney with some multiple of 5, and 21 is 4 units of 5 with 1 extra.
So Fred should remove 1 matchstick on his first turn, and then (5–b) matchsticks on his
subsequent turns, where b is the number of sticks that Barney has just removed. With
optimal play, Fred will win every time.
(d) Each player wants to leave the other player a multiple of 5 matchsticks. So
on each turn, the player should divide the remaining matchsticks by 5 and remove the
remainder. If the remainder is 0 and more than 4 matchsticks remain, then the player is
stuck with a multiple of 5. So that player should randomly choose 1 to 4 matchsticks,
hoping that the opponent will make a mistake on a subsequent turn. If 4 or fewer
matchsticks remain, then the player should remove all of them to win the game.
6. (a) The game tree is:
4
(b) The graph in part (a) indicates the four rollback equilibria, which can be
described as Fred’s taking 1 to 4 matchsticks, and then Barney’s removing all remaining
matchsticks. Letting the first number represent the number of matchsticks removed by
Fred and the second by Barney, the four rollback equilibria may be described as: (1, 4),
(2, 3), (3, 2), and (4, 1).
(c) With 5 matchsticks at the beginning of the game, there is a second-mover
advantage, because no matter what quantity the first mover removes, the second mover
can remove all remaining matchsticks to win the game.
(d) There is more than one rollback equilibrium, because so long as Barney
plays optimally, any of Fred’s four actions at the initial node leads to the same payoff.
Thus in equilibrium, he is indifferent among those four actions at that node.
7. (a) The game tree is shown below.
5
(b) The Proposer has one node with 11 actions; thus the Proposer has 11
complete strategies. We can list these as the split proposed, with the first number
indicating the portion for the Proposer and the second for the Responder. The 11
complete strategies are: 0/10, 1/9, 2/8, 3/7, 4/6, 5/5, 6/4, 7/3, 8/2, 9/1, and 10/0.
The Responder has 11 nodes with actions Accept or Reject at each node; thus the
Responder has 211, or 2,048 complete strategies. Some examples of possible strategies
include accepting only 5/5, accepting only 10, accepting only odd numbers, and rejecting
all offers.
(c) Assuming that the players care only about their cash payoffs means that
the Responder will definitely accept any positive offer and will be indifferent between
Accepting and Rejecting when offered nothing. If the Proposer assumes that the
Responder will accept an offer of $0 when indifferent, then the rollback equilibrium is to
offer $0 and for it to be accepted. However, although the Proposer may be unsure of the
Responder’s action in the face of indifference, he can expect the Responder to accept an
offer of $1. If there is uncertainty about the Responder’s action when she’s indifferent,
the rollback equilibrium occurs where the Proposer offers $1 and that offer is accepted.
(d) Because Pete knows Rachel will accept any offer of $3 or more, Pete can
maximize his payoff by offering only $3.