Intermediate

Microeconomics EC202
Lekima Nalaukai Semester II, 2020

Tutorial 12 Suggested Solutions
Chapter 14

Part A: Multiple Choices
1. A dominant strategy
A. is a strong strategy.
B. guarantees a Nash equilibrium.
C. is a strategy that is better for a player than any other the player might choose,
regardless of the other player’s strategy.
D. depends on the other player’s strategy.

**Reference: In the following games, all payoffs are listed with the row player’s payoffs first
and the column player’s payoffs second.
GAME 2
Player B
B1 B2
Player A A1 6, 6 4, 12
A2 12, 4 10, 10

2. *In Game 2 above,

A. player A has a dominant strategy.
B. player B has a dominant strategy.
C. both players have dominant strategies.
D. neither player has a dominant strategy.

3. Pure strategy
A. is a specific choice of a strategy from the player’s possible strategies in the game,
whereas a mixed strategy is a choice between quantity and price optimization.
B. is a specific choice of a strategy outside of the player’s possible strategies in the
game, whereas a mixed strategy is a choice among two or more pure strategies
according to pre-specified probabilities.
C. is a specific choice of a strategy outside of the player’s possible strategies in the
game, whereas a mixed strategy is a choice between quantity and price
optimization.
D. is a specific choice of a strategy from the player’s possible strategies in the
game, whereas a mixed strategy is a choice among two or more pure strategies
according to pre-specified probabilities.
Intermediate Microeconomics EC202
Lekima Nalaukai Semester II, 2020

Tutorial 12 Suggested Solutions
Chapter 14

4. In a simultaneous move game with two players,
A. if neither player has a dominant strategy, we successively eliminate each player’s
subordinate strategy.
B. a player chooses among two or more pure strategies according to pre-specified
probabilities.
C. if one player has a dominant strategy and the other doesn’t, you can’t reach a
Nash equilibrium.
D. if both players have a dominant strategy, these constitute their Nash
equilibrium strategies.

5. Backward induction refers to

A. a procedure for solving a sequential-move game by starting at the beginning of
the game tree and finding the optimal decision for the player at each decision
point.
B. a procedure for solving a sequential-move game by starting at the end of the game
tree and finding the best response function at each decision point.
C. a procedure for solving a sequential-move game by starting at the end of the game
tree and finding the player’s motives for making the decision at each decision
point.
D. a procedure for solving a sequential-move game by starting at the end of the
game tree and finding the optimal decision for the player at each decision point.

6. Player A and Player B are playing a prisoners’ dilemma game. Which of the following
statements is false?
A. If the players play the game repeatedly with each other, the players may play
cooperatively.
B. If the game is played only once, the players would not be expected to cooperate.
C. If players play the game repeatedly with each other, they are more likely to
cooperate if they are patient.
D. If the game is played only once, the outcome minimizes total jail time.

Intermediate Microeconomics EC202
Lekima Nalaukai Semester II, 2020

Tutorial 12 Suggested Solutions
Chapter 14


Part B: Conceptual Questions
1. What is special about the prisoners’ dilemma game? Is every game presented in this
chapter a prisoners’ dilemma?

A prisoners’ dilemma game illustrates the conflict between self-interest and collective-interest.
In the Nash equilibrium of a prisoners’ dilemma game, each player chooses a non-cooperative
action even though it is in the players’ collective interest to pursue a cooperative action.
No, not every game in the chapter is a prisoners’ dilemma. For example, the game of Chicken
presented in Table 14.7 is not a prisoners’ dilemma.
2. What is the difference between a dominant strategy and a dominated strategy? Why
would a player in a game be unlikely to choose a dominated strategy?

A dominant strategy is a strategy that is better than any other strategy the player might follow no
matter what the other player does. A player has a dominated strategy when it has other
strategies that give it a higher payoff no matter what the other player does. A player would be
unlikely to choose a dominated strategy because the player could always improve his payoff by
choosing another strategy regardless of the strategies chosen by the other players.

3. Can a game have a Nash equilibrium even though neither player has a dominant strategy?
Can a game have a Nash equilibrium even though neither player has a dominated
strategy?

Yes, a game can have a Nash equilibrium even though neither player has a dominant or
dominated strategy. In fact, every game has a Nash equilibrium, possibly in mixed strategies.
The game of Chicken is an example of a game with no dominant or dominated strategies but
which has a Nash equilibrium.

4. What is the difference between a pure strategy and a mixed strategy?

A pure strategy is a specific choice of strategy among the possible moves a player may choose in
a game. With a mixed strategy, a player chooses among two or more pure strategies according
to pre-specified probabilities.

Intermediate Microeconomics EC202
Lekima Nalaukai Semester II, 2020

Tutorial 12 Suggested Solutions
Chapter 14


Part C: Calculations
1. What is the Nash equilibrium in the following game?

The Nash Equilibrium is: Player 1 chooses Up while Player 2 chooses Left.

2. Ignoring mixed strategies, does the following game have a Nash equilibrium? Does it
have more than one Nash equilibrium? If so, what are they?

There are two Nash equilibria. Nash equilibrium #1: Player 1 chooses SOUTH, Player 2
chooses WEST. Nash equilibrium #2: Player 1 chooses NORTH, Player 2 chooses EAST

3. Coca-Cola and Pepsi are competing in the Brazilian soft-drink market. Each firm is
deciding whether to follow an aggressive advertising strategy, in which the firm
significantly increases its spending on media and billboard advertising over last year’s
level, or a restrained strategy, in which the firm keeps its advertising spending equal to
last year’s level. The profits associated with each strategy are as follows:

What is the Nash equilibrium in this game? Is this game an example of the prisoners’ dilemma?
Intermediate Microeconomics EC202
Lekima Nalaukai Semester II, 2020

Tutorial 12 Suggested Solutions
Chapter 14

In this game, “Aggressive” is a dominant strategy for both firms. Thus, the Nash equilibrium
strategy for both firms is to choose “Aggressive.”
This game is an example of the prisoners’ dilemma. In this game both players have a dominant
strategy that leads to an outcome that does not maximize the collective payoffs of the players in
the game. If both players chose the “Restrained” strategy, then both players would increase
their profits and the collective payoff would be maximized.
4. Suppose market demand is P = 130 - Q.
A. If two firms compete in this market with marginal cost c = 10, find the Cournot
equilibrium output and profit per firm.

Each Cournot firms produces until MR = MC, or 130 – 2Qi – Qj = 10. The Cournot equilibrium
output per firm is then Qi = 40. The market price is P = 50, and profit per firm is then πi = (50 –
10)*40 = 1600.

B. Find the monopoly output and profit if there is only one firm with marginal cost c = 10.
A monopolist produces until 130 – 2Q = 10, implying Q = 60, P = 70, and π = 3600.

C. Using the information from parts (a) and (b), construct a 2 x 2 payoff matrix where the
strategies available to each of two players are to produce the Cournot equilibrium
quantity or half the monopoly quantity.

When both firms choose the Cournot quantity, each earns the Cournot profit. Similarly,
producing half the monopoly output garners each firm half the monopoly profit. When, for
instance, firm 1 produces the Cournot output Q1 = 40 while firm 2 produces half the monopoly
output Q2 = 30, the market price would be P = 60. Firm 1 earns π1 = 2000 and firm 2 earns π2
= 1500. When the roles are reversed, so are profits.
Firm 2
Q2 = 30 Q2 = 40
Q1 = 30 1800, 1800 1500, 2000
Firm 1
Q1 = 40 2000, 1500 1600, 1600

D. What is the Nash equilibrium (or equilibria) of the game you constructed in part (c)?
The game in part (c) is a typical Prisoners’ Dilemma game, where the unique Nash equilibrium
is for each firm to produce the Cournot output.