GameTheory PS1 Script
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r64cktcsgmGameTheory PS1 Script
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r64cktcsgmGame Theory A.Y.
2023/24
Problem Set #1
Solutions can be handwritten, scanned, and returned in PDF format. Please send me your answers (either individ-
ually or in groups of maximum 5 people) by e-mail before 6 p.m. on Thursday, February 29th, 2024.
N.B. Solutions should not be shared with others.
Feel free to contact me should you have any questions.
1. (3) Consider a simultaneous game with payoffs represented in the following payoff matrix:
Player 2
L C R
U 4, 6 2, 2 2, 4
Player 1 M 2, 4 8, 2 0, 8
D 2, 0 4, 0 6, 2
a) Find all the Nash Equilibria of the game.
b) Are there any strictly dominated strategy?
c) Are there mixed strategy equilibria? If yes, provide a characterization.
2. (3) Two retailers in a small tourist town must choose the price of a good that they both sell, without knowing
the other’s choice. Each of the two can choose a low price (L), or choose a high price (H). If both choose L,
then both will get 1. If both choose H, then both will get 2. If one chooses L and the other chooses H, then
the first will get 4 and the second will get 0.
a) Describe the game in normal and extensive form.
b) Find all the Nash equilibria of the game.
c) Is this game similar to a game we have seen in class?
3. (8) Consider the following game in the extensive form:
X E
(2, 1)
L M R
1 1
(1, 2)
l r λ ρ
(3, 1) (1, 3) (1, 3) (3, 1)
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Game Theory A.Y. 2023/24
a) List the strategies of player 1 and player 2.
b) Describe the game in normal form (use a matrix where player 1 is the row player and player 2 is the
column player).
c) Identify the Nash Equilibria of the game in normal form.
d) Identify the Subgame Perfect Nash Equilibrium of the game.
e) Explain why there are some Nash Equilibrium that are not Subgame Perfect Nash Equilibrium.
4. (9) Consider the following three games where:
i) player 1 chooses a1 ∈ A1 , where A1 is the player 1’s set of feasible actions;
ii) player 2 observes a1 , and then chooses a2 ∈ A2 , where A2 is the player 2’s set of feasible actions.
(A)
player 2
1,1 3,3
player 1
2,4 4,2
(B)
player 2
2,0 0,3 2,1
player 1 4,3 5,2 1,4
2,5 3,1 6,3
(C)
player 2
0,0 1,3 2,1
player 1 2,0 2,4 0,2
1,0 2,1 3,4
a) Draw them in extensive form.
b) Find all the proper subgames.
c) Solve them by backward induction.
5. (10) Consider an oligopoly model with three firms, each producing a quantity qi , i = 1, 2, 3, of the same
product. Suppose that firm 1 is the leader over firms 2 and 3 and that the firms therefore act according to
the following scheme:
i) Firm 1 decides the quantity to produce: let q1 ∈ [0, ∞).
ii) Firms 2 and 3 observe q1 , then simultaneously decide the quantities to produce: let them be q2 ∈ [0, ∞)
and q3 ∈ [0, ∞) respectively.
iii) The payoffs are given by ui (q1 , q2 , q3 ), for i = 1, 2, 3, reported below:
ui (q1 , q2 , q3 ) = qi (a − q1 − q2 − q3 ) − cqi
a) Construct a pure-strategy Nash equilibrium.
b) Calculate the profits associated with this equilibrium.
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