IS2238: Assignment 3

Due: April 12

Instructions
• Please read each question carefully and select the most appropriate answer.

• Enter your answers in Canvas by the due date.

• Ensure that your submission is your own work and adhere to the academic integrity
policy.

Questions
Consider a sequential game among three players shown in Figure 1.

1. Suppose that Player 1 chooses A. What would Player 2 choose?

(a) Player 2 chooses C.

(b) Player 2 chooses D.
(c) Unclear

2. What is the Nash equilibrium of this game?

(a) Player 1 chooses A, Player 2 chooses C, Player 3 chooses E.

(b) Player 1 chooses B, Player 2 chooses H, Player 3 chooses J.
(c) Player 1 chooses B, Player 2 chooses G.
(d) None of the above

Consider a duopoly where two firms, Firm A and Firm B, simultaneously decide on
the quantities to produce of a homogeneous product. The market demand is given
by P = 120 − Q, where P is the market price and Q = qA + qB is the total quantity
produced by both firms. Each firm has zero production costs.

3. What is the equilibrium level of prices and social welfare if a social planner aims to
maximize total social welfare?

(a) The equilibrium price is zero.

(b) The equilibrium price is greater than zero.

1
 Player 1

A B

Player 2 Player 2

C D G H

Player 3 4,2,3 4,3,3 Player 3

E F I J

2,4,6 3,5,2 1,5,3 6,2,5

Figure 1: A three-player game.

(c) The maximum of the total social welfare is 7000.

(d) None of the above.

4. The firms choose quantities qA and qB simultaneously to maximize their profits.

What are the equilibrium profits and consumer surplus?

(a) Each firm earns 1600 and consumer surplus is 3200.

(b) Each firm earns 3200 and consumer surplus is 3200.
(c) Each firm earns 3200 and consumer surplus is 6400.
(d) None of the above.

5. Assume that both firms experienced an earthquake and lost substantial capacity,
being able to produce up to 30 units each. The capacity loss is common knowledge
(https://en.wikipedia.org/wiki/Common_knowledge_(logic)). Firms still com-
pete as in a simultaneous move game as before the earthquake. What happens to
the equilibrium profits and total social welfare?

(a) Firms will earn more profit and social welfare will be lower.
(b) Firms will earn more profit and social welfare will be higher.
(c) Firms will earn less profit and social welfare will be lower.
(d) Firms will earn less profit and social welfare will be higher.

2
 A consumer of type θ has a willingness to pay W T P = θ, where θ follows a uniform
distribution over the interval [0, 1]. The cost of serving one consumer of type θ is
given by C(θ) = c0 +c1 θ, where c0 and c1 are constants. Let q represent the quantity
of sales. The market size (i.e., the total number of consumers) is normalized to 1.

6. For a given price p, what is the sales q?

(a) 1 − p
(b) p · (1 − p)
(c) p
(d) None of the above

7. What is the total cost (TC) for a given level of sales q?

(a) c0 + c1 · (1 − q)
(b) c0 + c1 · (1 − 21 q)
(c) q · c0 + c1 · (q − 21 q 2 )
(d) None of the above

8. Which of the following is true if c1 > 0?

(a) AC is increasing with sales and equals MC.

(b) AC is decreasing with sales and smaller than MC.
(c) Higher valuation consumers are more costly to serve.
(d) None of the above.

9. What is the relation between equilibrium level of q e (when p = AC) and the optimal
level of q o (when p = M C) if c1 > 0?

(a) Equilibrium q is greater than optimal q.

(b) Equilibrium q is smaller than optimal q.
(c) Equilibrium q is the same as the optimal q.
(d) None of the above.

Consider the following 3 × 3 payoff matrix for a two-player game, where the rows
represent Player 1’s strategies and the columns represent Player 2’s strategies. The
entries in the matrix are in the form (x, y), where x is Player 1’s payoff and y is
Player 2’s payoff.
A B C
X (3, 3) (2, 1) (0, 0)
Y (1, 2) (0, 0) (2, 1)
Z (1, 0) (0, 2) (3, 4)

10. Is there any dominated strategy in this game?

3
 (a) Yes
(b) No
(c) Unclear

11. Can the game be solved by elimination of dominated strategy in this game?

(a) Yes
(b) No
(c) Unclear

12. How many equilibria are present in this game?

(a) 0
(b) 1
(c) 2
(d) None of the above

13. Start from (Y, B) and let Player 2 respond first. What would the best response
mapping yield?

(a) An equilibrium point (X, A)

(b) An equilibrium point (Z, C)
(c) It will not converge at any equilibrium point
(d) None of the above

14. If Player 1 tells Player 2 that she will choose Z, should Player 2 consider the claim
credible?

(a) Yes
(b) No
(c) Unclear

Figure 2: A technology adoption game

4
 Consider the simultaneous move technology adoption game shown in Figure 2. The
choices {N, O} represent choosing New (N) vs Old (O) technology. Assume that
a1 > 0 and a2 > 0.

15. Which of the following is a sufficient condition to generate a unique equilibrium

where both players adopt new technology?

(a) b1 − c1 > a1 and b2 − c2 > a2

(b) b1 − c1 > 0 and b2 − c2 > 0
(c) b1 > 0 and − c1 > a1 and b2 > 0 and − c2 > a2
(d) None of the above

Figure 3: Reputation

16. Consider an e-commerce game that involves asymmetric information, as illustrated

in Figure 3. This game is somewhat akin to the ”chocolate war” discussed in our
lectures but differs in presentation. In this scenario, Nature randomly determines
the seller’s type: with probability p, the seller is of a good type and will send a
high-quality product; with probability (1 − p), the seller is of a bad type and will
send a counterfeit product. The seller, after being informed of her type by Nature,
decides on her action based on this private information. The buyer, moving before
Nature, cannot observe the seller’s type and thus must form a belief about the
seller’s type based on the ex-ante probability p. The buyer then decides whether
to trust (or buy from) the seller. Conditional on the buyer’s choice, the seller acts
according to her true type. The outcomes are defined in the game tree’s payoffs.
Which of the following statements is true?

(a) When p = 0.5, trade can occur whenever the seller’s type is good.
(b) When p = 0.7, trade can occur in equilibrium, although abuse happens with
a 30% chance.

5
 (c) When p = 0.9, trade can occur in equilibrium, and abuse never happens.
(d) None of the above.

End