IME636: Introduction to game theory

Problem Set -1

(1) Person 1 cares about both her income and person 2s income. Precisely, the value she
attaches to each unit of her own income is the same as the value she attaches to any two
units of person 2s income. For example, she is indifferent between a situation in which her
income is 1 and person 2s income is 0, and one in which her income is 0 and person 2s is 2.
How do her preferences order the outcomes (1,4), (2,1) and (3,0), where the first
component in each case is her income and the second component is person 2s income?
Give a payoff function consistent with these preferences.
(2) Ace-King-Queen is a simple card game for two players, which is played as follows. The
players each bet a stake of Rs. 5. Each player then chooses a card from the set {Ace, King,
Queen} and places it face down on the table. The cards are turned over simultaneously, and
the winner of the hand is decided by the following rule: an Ace (A) beats a King (K); a
King beats a Queen (Q); and a Queen beats an Ace. The winning player takes Rs. 10
in the pot. If both the players choose the same card (both A, both K, or both Q), the game is
drawn and the Rs 5 stake is returned to each player. Formulate this situation as a strategic
form of the game and represent the players utilities by means of a pay-off table.
(3) There are N firms in an industry. Each can try to convince the Government to give the
industry a subsidy. Let denote the number of hours of effort put in by firm i, and
( )
( ) , where is a positive constant, be the cost of this effort to firm i. When
the effort levels of the firms are (
), the value of the subsidy that gets approved
is
( ), where and are constants. Consider a game in which the firms
decide simultaneously and independently how many hours they will each devote to this
effort. Find a necessary and sufficient condition (in terms of ) for each firm to have a
strictly dominant strategy. What is firm is strictly dominant strategy when this is so? (Hint:
You may assume that each firms payoff equals the difference between the total value of the
subsidy that gets approved and the cost of its own individual effort.)
(4) Consider the following instance of the prisoners dilemma problem with the following payoff of two players 1 and 2, with the rows indicating the payoff of player 1 and the columns
indicating the payoff of player 2.
NC
NC -4,-4
C
-x,-2
Find the values of x for which

C
-2,-x
-x,-x

a) The profile (C,C) is a strictly dominant strategy equilibrium.

b) The profile (C,C) is a weakly dominant strategy equilibrium but not a strictly dominant
strategy equilibrium.

c)

The profile (C,C) is a Nash equilibrium but not a dominant strategy equilibrium.

d) The profile (C,C) is not even a Nash equilibrium.

In each case say whether it is possible to find such an x. Justify your answer in each case.
(5) Assume that two merchants A and B have the option of selling any one of three products X,
Y, and Z. If A decides to sell X and B decides to sell X, then A makes a profit of 100 and B
makes a loss of 100. We represent this as UA (X,X) = 100 and UB(X,X)= - 100. With this
notation, following is the list of all utilities:
UA (X,X) = 100 and UB(X,X)= - 100
UA (X,Y) = 100 and UB(X,Y)= 100
UA (X,Z) = 100 and UB(X,Z)= - 50
UA (Y,X) = - 100 and UB(Y,X)= - 100
UA (Y,Y) = - 100 and UB(Y,Y)= 100
UA (Y,Z) = -50 and UB(Y,Z)= - 50
UA (Z,X) = 50 and UB(Z,X)= - 50
UA (Z,Y) = -50 and UB(Z,Y)= 100
UA (Z,Z) = 100 and UB(Z,Z)= 100
Compute all the pure strategy Nash equilibria for this problem. How many of these are
dominant strategy equilibria?
(6) Each of three people announces an integer from 1 to K. If the three integers are different,
the person whose integer is closest to 2/3 of the average of the three integers wins $1. If
two or more integers are the same, $1 is split equally between the people whose integer is
closest to 2/3 of the average integer. Is there an integer k such that the strategy profile
(k,k,k), in which every person announces the same integer k, is a Nash equilibrium. If so,
then find such a k.
(7) Consider the following n-player game. Simultaneously and independently, the players each
select either X,Y, or Z. The payoffs are defined as follows. Each player who selects X obtains a
payoff equal to , where is the number of players who select Z. Each player who selects Y
obtains a payoff of , where is the number of players who select X. Each player who
selects Z obtains a payoff of , where is the number of players who select Y. Note that
. For n = 2 represent this game in normal form and find the pure strategy
Nash equilibrium, if it exists. Suppose that n = 11. Does this game have a Nash equilibrium?
If so, describe an equilibrium and explain how many Nash equilibria there are.