Econ 487
Problem Set 3 (Chapter 4)
1. S1
2. S2
3. S3
4. S4
5. S5
6. S7
7. S8
8. S9
9. S10
10. S11
11. Two men share access to a common grazing area. Each man can choose to own
either no cows, one cow, or two cows. Each cow's daily yield of milk, in quarts,
depends on how many cows in total are grazing, as follows:
Total cows grazing: 1 2 3 4
Each cow's daily yield: 8 5 3 2
(a) Write down the payoff matrix of this game.
(b) How many cows do you predict each man will own? Explain your prediction.
12. Suppose that Pat and Sam intended to communicate with each other about what to
do tonight but the message never got through. Now each has to simultaneously
and independently decide where to show up (communication is no longer
possible). There are just two possibilities – a ball game or a concert. Other things
equal, Pat likes ball games better, and Sam likes concerts better. Both Pat and
Sam agree that either event would be more fun if the other person were also there.
However, Pat and Sam differ in their attitudes about how important it is that they
be there together. Since Pat is choosing between the game and the concert and
Sam is facing the same two choices, there are four possible outcomes. The table
below shows how Sam and Pat rank these four outcomes.
Outcome Pat’s Ranking Sam’s Ranking
Best Pat at game, Sam at game Sam at concert, Pat at concert
Second Best Pat at game, Sam at concert Sam at game, Pat at game
Third Best Pat at concert, Sam at concert Sam at concert, Pat at game
Worst Pat at concert, Sam at game Sam at game, Pat at concert
(a) Write down the payoff matrix of this game. Choose payoffs that are consistent
with the rankings given in the table above.
(b) Does either player have a dominant strategy? Explain.
(c) Find all pure strategy Nash equilibria for this game. Intuitively, why these
strategy combinations are Nash equilibrium?
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13. A public good is one for which those who do not pay for the good enjoy the same
benefits as those who do pay for it. Think of publicly supported television or
radio; paid members cannot exclude non-member “free-riders” from watching or
listening. With this in mind, consider the following three-person game involving
contributions to a public good: Call the three players: Larry, Curly and Moe. Each
player has two action choices: contribute or not contribute one unit to the public
good. Each player who chooses to contribute pays a cost of 1.5 units. If a player
contributes, his payoff is the total number of units contributed by all players,
himself included (so a maximum of 3 units), less the cost of making his own
contribution, 1.5 units. If a player does not contribute, his payoff is the total
number of units contributed by all other players.
a) Describe the game using payoff matrix.
b) Find the Nash equilibrium of this game. Is this equilibrium the most efficient
outcome? Explain why or why not. Why the efficient situation couldn’t be the
Nash equilibrium?
14. Two sellers (seller A and B) operate in a market in which the demand is given by
Q = 200 – p. Each seller has the same constant MC or AC, which is $100.
Suppose that the consumers don’t differentiate between the two sellers, and each
seller chooses Q to maximize its profit. For each seller, there are only two options
to choose from for its output: 40 units or 50 units. Assuming that collusion
(cartel) is illegal, which Q will each seller choose? Show your work. What if
cartel is legal?
Solutions:
1. (a) For Rowena, Up strictly dominates Down, so Down may be eliminated. For
Colin, Right strictly dominates Left, so Left may be eliminated. These actions leave the
pure-strategy Nash equilibrium (Up, Right).
(b) Down is dominant for Rowena and Left is dominant for Colin. Equilibrium:
(Down, Left) with payoffs of (6, 5).
(c) There are no dominated strategies for Rowena. For Colin, Left dominates Middle
and Right. Thus these two strategies may be eliminated, leaving only Left. With only Left
remaining, for Rowena, Straight dominates both Up and Down, so they are eliminated,
making the pure-strategy Nash equilibrium (Straight, Left).
(d) Beginning with Rowena, Straight dominates Down, so Down is eliminated. Then
for Colin, Middle dominates both Right and Left, so both are eliminated, leaving only
Middle. Because Straight and Up both give a payoff of 1, neither may be eliminated for
Rowena, so there are two, pure-strategy Nash equilibria: (Up, Middle) and (Straight,
Middle).
2. (a) Zero-sum or constant-sum game (payoffs in all cells sum to 4)
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(b) Non-zero-sum
(c) Zero-sum or constant-sum (payoffs in all cells sum to 6)
(d) Zero-sum or constant-sum (payoffs in all cells sum to 7)
3. (a) (i) The minima for Rowena’s strategies are 3 for Up and 1 for Down. The minima
for Colin’s strategies are 0 for Left and 1 for Right. (ii) Rowena wants to receive the
maximum of the minima, so she chooses Up. Colin wants to receive the maximum of the
minima, so he chooses Right. Again, the pure-strategy (minimax) Nash equilibrium is
(Up, Right).
(b) Not a zero-sum game or constant-sum game, so minimax solution is not
possible.
(c) (i) The minima for Rowena’s three strategies are 1 for Up, 2 for Straight,
and 1 for Down. The minima for Colin’s strategies are 4 for Left, 2 for Straight, and 1
for Right. (ii) Rowena wants the strategy that gets her the maximum of her minima, or 2,
which she gets from playing Straight. Colin’s maximum of the minima is 4, so he plays
Left. This yields the pure-strategy (minimax) Nash equilibrium of (Straight, Left).
(d) (i) The minima for Rowena’s strategies are 1 for Up, 1 for Straight, and 0
for Down. The minima for Colin’s strategies are 1 for Left, 6 for Middle, and 4 for Right.
(ii) Rowena wants to receive the maximum of the minima, so she chooses Up or Straight.
Colin wants to receive the maximum of the minima, so he chooses Middle. Again, the
two pure-strategy (minimax) Nash equilibria are (Up, Middle) and (Straight, Middle).
4. (a) Rowena has no dominant strategy, but Right dominates Left for Colin.
After eliminating Left for Colin, Up dominates Down for Rowena, so Down is
eliminated, leaving the pure-strategy Nash equilibrium (Up, Right).
(b) Down and Right are weakly dominant for Rowena and Colin, respectively,
leading to a Nash equilibrium at (Down, Right). Best-response analysis also shows
another Nash equilibrium at (Up, Left).
(c) Down is dominant for Rowena; Colin will then play Middle. Equilibrium
is (Down, Middle).
(d) There are no dominant or dominated strategies. Use best-response analysis
to find the equilibrium at (North, East) with payoffs of (7, 4). (The equilibrium is not in
dominant strategies—another interesting point to convey to students.)
5. (a) Neither Row nor Column has a dominant strategy, because neither has one
action that is its best response, irrespective of its opponent’s action.
(b) For Column, East dominates South, so South may be eliminated. But then
for Row, Fire dominates Earth, so Earth may be eliminated. Doing so then allows East to
dominate North for Column, so North may be eliminated. Finally, for Row, Water
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dominates Wind, so Wind may be eliminated. Elimination of dominated strategies reduces
the strategic-form game to:
COLUMN
East West
Water 2, 3 1, 1
ROW
Fire 1, 1 2, 2
(c) The game is not dominance solvable, because a unique solution cannot be
attained through IEDS method. See the table in part (b) for the result of IEDS method.
(d) Using best-response analysis (as shown by the underlines in the matrix)
There are two pure-strategy Nash equilibria, which are (Water, East) and (Fire, West).
(There is also a mixed-strategy Nash equilibrium, but that will be addressed in Chapter
7.)
6. The payoff matrix is below. Best-response analysis (as shown by the underlines in
the matrix) shows there are two pure-strategy Nash equilibria: (Help, Not Help) with
payoffs (2, 3) to (I, You) and (Not Help, Help) with payoffs (3, 2).
You
Help Not
Help 2, 2 2, 3
I
Not 3, 2 0, 0
7. (a) Best-response analysis shows that there are two pure-strategy Nash
equilibria: (Lab, Lab) and (Theater, Theater).
(b) The game is not Chicken, because the pure-strategy Nash equilibria occur
when the players choose the same strategy, whereas in Chicken, the pure-strategy Nash
equilibria occur when the players choose different strategies. Pure Coordination,
Assurance, and Battle of the Sexes have two pure-strategy Nash equilibria with the
players choosing the same strategy. But due to the payoffs, only one fits better. In Pure
Coordination, the payoffs to both parties are identical, which is different than in this
game. In Assurance, although the payoffs are different, both parties clearly desire one
pure-strategy Nash equilibrium over another. Therefore, the most similar multiple-
equilibria game is Battle of the Sexes, because the pure-strategy Nash equilibria occur
when the parties use the same strategy. But the parties desire different equilibria. For
example, in this question, the Science Faculty clearly wants the Lab more than the
Theater, but the Humanities Faculty wants the Theater more than the Lab, and both are
better off choosing the same thing rather than disagreeing.
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8. (a) The Nash equilibria are (1, 1), (2, 2), and (3, 3). You could argue that (1,
1) is a focal point, because it’s the only equilibrium giving payoffs of 10 to each, and it
might be hard to coordinate on one of the other two equilibria.
(b) Expected (average) payoff from flipping a (single) coin to decide whether
to play 2 or 3 is 0.25 × 25 + 0.25 × 25 + 0.5 × 0 = 12.5. The average payoff is then higher
than would be achieved if (1, 1) were focal and each player got 10. The risk that the
players might do different things is most important if you have only one opportunity to
play, because then you get zero 50% of the time. Such fears might make the (1, 1)
equilibrium look more attractive.
9. (a) In each cell, the payoffs are in the order: Arturo, Bernardo, Carlos.
CARLOS
Yes No
BERNARDO
BERNARDO
Yes No
Yes No
Yes 2, 2, 2 2, 5, 2
ARTURO Yes 2, 2, 5 2, 5, 5
ARTURO
No 5, 2, 2 5, 5, 2 No 5, 2, 5 0, 0, 0
(b) Best-response analysis (as shown by the underlines in the matrix) shows
that the three pure-strategy Nash equilibria occur when two children say No and
one child says Yes.
(c) A natural focal point is where Arturo and Bernardo write No and Carlos
writes Yes, because Arturo and Bernardo did not break the lamp. They reason that if they
both say no, then Carlos is forced to consider between saying Yes and receiving two
dollars or saying No and receiving no dollars. Thus, Carlos has an incentive to say Yes,
and Arturo and Bernardo will receive a payoff of five dollars.
10. There are three ticket buyers, and each ticket buyer can do three things: not
purchase a ticket (represented as $0), purchase a $15 ticket, and purchase a $30 ticket. To
represent this game, we need three 3-by-3 tables, where each table represents the
strategies of the first two players and one strategy of the third. (Since putting three tables
side by side was difficult, I’m being little bit innovative!) In each cell of the table, the
first number represents Larry’s payoff, the second number represents Curly’s payoff, and
the third number represents Moe’s payoff. Best responses are underlined.
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MOE $0:
CURLY
$0 $15 $30
$0 0, 0, 0 0, 15, 0 0, 0, 0
LARRY $15 15, 0, 0 0, 0, 0 –15, 0, 0
$30 0, 0, 0 0, –15, 0 –15, –15, 0
MOE $15:
CURLY
$0 $15 $30
$0 0, 0, 15 0, 0, 0 0, 0, –15
LARRY $15 0, 0, 0 –5, –5, –5 –15, 0, –15
$30 –15, 0, 0 0, –15, –15 –15, –15, –15
MOE $30:
CURLY
$0 $15 $30
$0 0, 0, 0 0, –15, 0 0, –15, –15
LARRY $15 –15, 0, 0 –15, –15, 0 –15, –15, –15
$30 –15, 0, –15 –15, –15, –15 –20, –20, –20
There are six pure-strategy Nash equilibria. Three occur when two purchasers
spend nothing, and the other spends $15. The other three have two players spending $15,
and the third spends nothing.
11. (a)
Player 2
0 1 2
0 0, 0 0, 8 0, 10
Player 1
1 8, 0 5, 5 3, 6
2 10, 0 6, 3 4, 4
(b) Each player will choose to own 2 cows since (2,2) is the NE of this game.
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12. (a) Assigning a payoff of 4 to best, 3 to second best, 2 to third best and 1 to worst, the
normal form of this game would be written as:
Sam
Ball Game Concert
Ball Game 4, 3 3, 2
Pat
Concert 1, 1 2, 4
(b) Pat’s DS is to choose Ball Game as this choice always gives her the higher payoff
than Concert, regardless of what Sam chooses.
Sam does not have a DS as he doesn’t have a strategy which is uniformly better than the
other one.
(c) Pat always chooses Ball Game as that’s her DS. Understanding Pat’s strong
preference for the game, Sam will now choose the Ball Game rather than the concert. So,
the NE: (Ball Game, Ball Game). (You’ll find the same NE using the best response
analysis.)
Recall, that a NE is a strategy combination in which given what others are doing, a
player’s strategy has to be optimal or a best response. Given that Sam chooses “Ball
Game”, “Ball Game” gives the highest payoff to Pat. Similarly, given that Pat chooses
“Ball Game”, “Ball Game” gives the highest payoff to Sam.
13. (a) Payoffs in the payoff matrix below are net of contribution costs, and are in the
order: Larry, Curly, Moe.
Moe
C DC
Curly Curly
C DC C DC
C 1.5, 1.5, 1.5 0.5, 2.0, 0.5 C 0.5, 0.5, 2.0 -0.5, 1.0, 1.0
Larry Larry
DC 2.0, 0.5, 0.5 1.0, 1.0, -0.5 DC 1.0, -0.5, 1.0 0.0, 0.0, 0.0
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(b) The underlines show the best response by each player. So, (DC, DC, DC) is the NE.
(In fact, DC is the DS for each player.) The NE, however, is not the efficient outcome as
there are other outcomes such as (C, C, C) (or any other in which any two players are
contributing) would have made each player better off compared to the NE.
The most efficient outcome (C, C, C), for example, couldn’t be the NE because given that
the other two players are choosing C, a player will not choose C; he will deviate and
choose DC to get a payoff of 2 instead of 1.5.
14.