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Labsnov 29

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408 views16 pages

Labsnov 29

Uploaded by

api-235832666
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© Attribution Non-Commercial (BY-NC)
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Question 1: Page 443-444 in Old Text and Page 481-482 in New Text, Problems 8 & 9. 8.

Firm 1 and firm 2 are automobile producers. Each has the option of producing either a big car or a small car. The payoffs to each of the four possible combinations of choices are as given in the following payoff matrix. Each firm must make its choice without knowing what the other has chosen.

a. Does either firm have a dominant strategy? a) Neither firm has a dominant strategy. If one firm chooses to make a big car, the other has an incentive to produce a small car, and vice versa. b. There are two Nash equilibria for this game. Identify them. b) Either combination of one firm producing a big car and the other producing a small car is a Nash equilibrium.

9. Suppose we have the same payoff matrix as in Problem 8 except now firm 1 gets to move first and knows that firm 2 will see the results of this choice before deciding which type of car to build. a. Draw the game tree for this sequential game.

b. What is the Nash equilibrium for this game? b) If firm 1 chooses the big car, firm 2 will choose the small car (point E). If firm 1 chooses the small car, firm 2 will choose the big car (point F). Since profits for firm 1 are higher at E than at F, firm 1 will choose big car to begin with. Hence, the Nash equilibrium for this game occurs at point E. It is better to move first rather than second in this game.

Question 2: What is the definition of A Nash equilibrium in an n player game? The Nash equilibrium of an n-player game is the combination of strategies in a game such that no player has an incentive to change strategies given the strategies adopted by each of the other n-1 players. The equilibrium is when all players are simultaneously playing a best response to the choices of other players (L,L). This is called Nash Equilibrium.

Question 3: Below is the extensive-form representation of the game between Dr. Gray and Dr. Green, who are in the running for the UVic presidency. Gray moves first and decides whether or not to place costly advertisements to her support. Green decides next whether to continue to run (c) or withdraw (w). The top entry of the payoff vector represents Grays payoff, the bottom entry Greens payoff.

In (a)-(c) below, assume that p=0 (a) Give the strategic form representation of the game above. Explain your notation for the strategies of Gray and Green with an example.

For instance, cw means: Play c if

Green plays Ads; and w if Green plays No ads.

(b) Find the Nash equilibria

This is a bit of a tricky question if one does not know p. The above strategic form representation tries to make it clear. I have added question marks there where

the best response maps become unclear. The matrix reveals that (Ads, wc) is a NE for sure. But, in case p=0 there is another NE, namely (No Ads, cc).

(c) Find the subgame perfect Nash equilibria. Use backward induction to find that there is no value of p that makes {Ads,cc} [or {Ads,cw}] the SGPN as Green will always choose to play w when Gray chooses to play Ads. [Note: It is very attractive to argue that for large enough p Grey would persuade Green (through

compensation, bribes) to play c instead of w after Grey plays Ads. However, this story would translate as a change in the game tree.

(d) Now the game changes. Assume that p=1/2 and also that Gray and Green choose simultaneously. Find the Nash equilibria of the new game.

The next three questions relate to the game represented below. (Greys Payoffs, Greens Payoffs)
Gray

Ads Green c w c

No ads Green w

2 0

1 1

0 2

2 0

1. What is true about this game if players choose simultaneously? a) It has no dominant strategies in normal form b) It is in normal form c) It is no subgame perfect Nash equilibrium d) It is a prisoners dilemma 2. What is the Nash equilibrium of this game if it is played simultaneously? a. Ads, c b. Ads, w c. No ads, c d. Ads, wc

3. The Subgame Perfect Nash equilibrium of this game is a. Ads, c b. Ads, w c. No ads, c d. There is none

============================ A firm invents a vaccine for HIV and receives a patent. Its total cost function is given by . Assume for the moment that the firm is only allowed to sell in North America. The inverse demand function in North America is . What is the profit maximizing price and quantity of this firm? P=13, Q=7 Eventually the firms patent expires. Assume that firms can now freely produce the drug. What is the new long run price and quantity of the drug? P=6, Q=14

Now assume that the monopolist could have serviced Africa. The demand function for Africa is . What is the new price and quantity of the monopolist in Africa? What about the competitive firm? What if consumers could engage in arbitrage? Monopolist: P=8, Q=2 Competitive: P=6, Q=14 If consumers could engage in arbitrage it would mean the monopolist could not price discriminate between the two markets and would set its price by aggregating demand.

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