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Micro Problem Set 1 - Week 2

The document presents a problem set for a microeconomics course, consisting of four distinct problems involving game theory concepts such as Nash equilibria, dominated strategies, and auction dynamics. It includes scenarios with two-person games, auction bidding strategies, worker effort decisions, and firm location choices, each requiring analysis of strategic forms and equilibrium outcomes. The problems aim to deepen understanding of microeconomic principles through practical applications.

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3 views2 pages

Micro Problem Set 1 - Week 2

The document presents a problem set for a microeconomics course, consisting of four distinct problems involving game theory concepts such as Nash equilibria, dominated strategies, and auction dynamics. It includes scenarios with two-person games, auction bidding strategies, worker effort decisions, and firm location choices, each requiring analysis of strategic forms and equilibrium outcomes. The problems aim to deepen understanding of microeconomic principles through practical applications.

Uploaded by

snigdha.g121
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

ECON0013 Microeconomics 1

Problem Set 1

1. Consider the following two person game.

L R P MP
U (3, 2) (0, 0) (1.2, 1) (0, 0)
D (0, 0) (2, 3) (0, 0) (1.4, 1.5)
P (1, 1.2) (0, 0) (0, 0) (0, 0)
MP (0, 0) (1.5, 1.4) (0, 0) (0, 0)

(a) Find all the pure-strategy Nash equilibria of this game.


(b) Show that the actions P and M P are strictly dominated for both
players.
(c) Delete the strictly dominated actions and find the mixed strategy
Nash equilibrium of the game that remains.

2. Two buyers (Ann and Bob) are in an auction to acquire an item. They
have five possible bids they can submit b = £0, £1, £2, £3, £4. Ann
values the item at £2 and Bob values the item at £3. If they win the
item they receive utility equal to their value for the object less the price
they paid. If they lose the item they have utility of zero less any money
they have paid. The rules of the auction are: First, the buyers submit
their bids in sealed envelopes. Second, the envelopes are opened and
the highest bidder gets allocated the item. The highest bidder must
pay the price that was written losing (second highest) bid. Third, if
there is a tie in the bids, then a coin is tossed to determine who wins.

(a) What are the players’ pure strategies in this game?


(b) Write down the strategic form of this game.
(c) Can you find any weakly or strictly dominated strategies?

3. Two workers (A and B) are on a production line. They can each chose
to exert effort E or to shirk S. It costs each worker 1 > £c > 0 to exert
effort, but shirking costs them nothing. The workers together produce
one unit of output. If the unit passes a quality-control test, then it can
be sold for £2 (shared equally between the workers). If it fails the test
it cannot be sold. The probability of passing the quality-control test is
denoted by p. This depends on how much effort is supplied: p = 0 if
ECON0013 Microeconomics 2

1
neither worker exerts effort, p = 2
if one worker exerts effort and p = 1
if two workers exert effort.

(a) Write down the strategic form of this game.


(b) For what values of c can you find dominated actions?
(c) Find a Nash Equilibrium of this game when you cannot eliminate
dominated actions?

4. Firm 1 chooses a location −∞ < x < ∞ and Firm 2 chooses a location


−∞ < y < ∞. Firm 1 prefers to be as close as possible to the location
of its suppliers (at a) but dislikes having a lower location than its
competitor (at y). It has the profits

π1 = 50 − α(a − x)2 + (1 − α)(x − y).

Firm 2 prefers to be as close as possible to the location of its suppliers


(at b) and likes being close to its competitor (at x). It has the profits

π2 = 10 − (b − y)2 − (x − y)2 .

(a) For what values of α is Firm 1’s profit a strictly concave function
of x? When does firm 1 have a best response function (why won’t
weak concavity work)?
(b) Find the Nash equilibrium in this game when α = 12 . Calculate
the firms’ Nash-equilibrium profits.
(c) Determine when firm 1 ends up at a lower location than its com-
petitor.

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