Solutions to Chapter 5 Exercises SOLVED EXERCISES

S1. (a) Rs best-response rule is given by y = 10x x. L spends 1! "illion# so x = 1!. $%en

Rs best response is y = 101! 1! = 10(&) 1! = &0 1! = '&# or '& "illion. (b) si"ultaneously( x = 10(10x x)1)' 10x * x x = (10x x)1)' x = 10x x 'x = 10x x = + x = '+ y = 10'+ '+ = '+ Rs best response is y = 10x x# and Ls best response is x = 10y y. Solve t%ese

S'.

(a)

,aviers -osts %ave not -%anged# nor %ave t%e de"and .un-tions# so ,aviers best-

response rule is still t%e sa"e as in /igure +.1( 0x = 1+ * 0.'+0y. 1vonnes ne2 pro.it .un-tion is 3y = (0y ')4y = (0y ')(&& '0y * 0x) = '(&& * 0x) * (& * && * 0x)0y '(0y)'. Rearranging or di..erentiating 2it% respe-t to 0y leads to 1vonnes ne2 best-response rule( 0y = 1' * 0.'+0x. Solving t%e t2o response rules si"ultaneously yields 0x = 15.' and 0y = 1!.6. (b) See t%e grap% belo2. 1vonnes best-response -urve %as s%i.ted do2n7 it %as t%e sa"e

slope but a ne2# lo2er inter-ept (1' rat%er t%an 1+). 1vonne is able to -%arge lo2er pri-es due to lo2er -osts. $%e ne2 interse-tion point o--urs at (15.'# 1!.6) as -al-ulated above.

Solutions to 8%apter + Solved 9xer-ises

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S:.

(a)

La 3oulangeries pro.it is(

11 = 0141 41 = 01 (1& 01 0.+0') (1& 01 0.+0') = 01' * 1+01 0.+010' * 0.+0' 1&. $o .ind t%e opti"al 01 2it%out using -al-ulus# 2e re.er to t%e result in t%e ;ppendix to 8%apter +# re"e"bering t%at 0' is a -onstant in t%is situation. <sing t%e notation o. t%e ;ppendix# 2e %ave ; = 0.+0 ' 1&# 3 = 1+ 0.+0'# and 8 = 1# so t%e solution is( 01 = 3)('8) = 1+ 0.+0')(')# or 01 = =.+ 0.'+0'. $%is is La 3oulangeries best-response .un-tion. 1ou get t%e sa"e ans2er by setting Y1 ) P 1 = '01 * 1+ 0.+0' = 0 and solving .or 01. Si"ilarly# La /ro"ageries pro.it is(

Solutions to 8%apter + Solved 9xer-ises

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1' = 0'4' '4' = 0'(15 0.+01 0') '(15 0.+01 0') = 0'' * '10' 0.+010' * 01 :6. ;gain# using t%e notation in t%e ;ppendix# ; = 01 :6# 3 = '1 0.+01# and 8 = 1# 2%i-% yields( 0' = 3)('8) = '1 0.+01)(')# or 0' = 10.+ 0.'+01.

Y' ) P' = '0' * $%is is La /ro"ageries best-response .un-tion. 1ou get t%e sa"e ans2er by setting
'1 0.+01 = 0 and solving .or 01. $o .ind t%e solution .or t%e e>uilibriu" pri-es analyti-ally# substitute La /ro"ageries bestresponse .un-tion .or 0' into La 3oulangeries best-response .un-tion. $%is yields 0 1 = =.+ 0.'+(10.+ 0.'+01)# or 01 = +.'. ?iven t%is value .or 01# you -an .ind 0' = 10.+ 0.'+(+.') = 5.'. $%e best-response -urves are s%o2n in t%e diagra" belo2.

Solutions to 8%apter + Solved 9xer-ises

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(b)

8olluding to set pri-es to "axi"i@e t%e su" o. pro.its "eans t%at t%e .ir"s "axi"i@e t%e

Aoint-pro.it .un-tion( 1 = 11 * 1' = 1!01 * '1.+0' 01' 0'' 010' +'. $o ans2er 2it%out -al-ulus# use t%e result in t%e ;ppendix. <sing t%at notation to solve .or 0 1# ; = '1.+0' 0'' +'# 3 = 1! 0'# and 8 = 1# so t%e solution is( 01 = 3)('8) = 1! 0')(')# or 01 = 6 0.+0'. Si"ilarly# solving .or 0'# ; = 1!01 01' +'# 3 = '1.+ 01# and 8 = 1# so t%e solution is( 0' = 3)('8) = '1.+ 01)(')# or 0' = 10.=+ 0.+0'. Solving t%ese t2o e>uations si"ultaneously yields t%e solution 01 = :.+ and 0' = 5. 1ou -an get t%e sa"e ans2er by partially di..erentiating t%e Aoint-pro.it .un-tion 2it% respe-t to ea-% pri-e. 0ro.its "ust be "axi"i@ed 2it% respe-t to bot% 0 1 and 0'# so 2e need Y ) P 1 = 1! '01 0' = 0 and Y ) P' = '1.+ 01 '0' = 0. (-) B%en .ir"s -%oose t%eir pri-es to "axi"i@e Aoint pro.it# t%ey a-t as a single .ir" and

ignore any individual in-entives t%at t%ey "ig%t %ave to deviate .ro" t%e Aoint pro.it goal. Co2ever# given t%eir partners -ollusive pri-e# ea-% -o"pany -an reap "ore pro.it individually by -%arging "ore. /or instan-e# plugging t%e Aoint-pro.it-"axi"i@ing value o. La 3oulangeries pri-e into La /ro"ageries individual best-response rule 2ill not yield La /ro"ageries Aoint pro.it-"axi"i@ing pri-e( 0' = 10.+ 0.'+(:.+) = 5.!'+ 5. LiDe2ise# plugging t%e Aoint-pro.it-"axi"i@ing value o. La 3oulangeries pri-e into La /ro"ageries individual best-response rule gives( 01 = =.+ 0.'+(5) = &.=+ :.+. $%us# t%e t2o Aoint pro.it-"axi"i@ing pri-es are not best responses to ea-% ot%er7 t%at is# t%ey do not .or" a Eas% e>uilibriu".

Solutions to 8%apter + Solved 9xer-ises

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(d)

B%en .ir"s produ-e substitutes# a drop in pri-e at one store %urts t%e sales o. t%e ot%er.

$%us# as your rival drops %er pri-e# you also 2ant to drop yours to atte"pt to "aintain sales (and pro.its). Fn t%e bistro exa"ple in t%e text and in Exercise 1 above# t%is result led to best-response -urves t%at 2ere positively sloped and Eas% e>uilibriu" pri-es t%at 2ere lo2er t%an t%e Aoint-pro.it-"axi"i@ing pri-es. Cere# t%e .ir"s produ-e -o"ple"ents# so a drop in pri-e at one store leads to an in-rease in sales at t%e ot%er. Fn t%is -ase# as one store drops its pri-e# t%e ot%er -an sa.ely in-rease its pri-e so"e2%at and still "aintain sales (and pro.its). $%us# t%e best-response -urves are negatively sloped# and t%e Eas% e>uilibriu" pri-es are %ig%er t%an t%e Aoint-pro.it-"axi"i@ing pri-es.

S&.

$o rationali@e t%e nine possible out-o"es# you need a separate argu"ent .or ea-% one. Be o..er

Aust one exa"ple# leaving you to -onstru-t t%e rest. Eote t%at you need not -onsider t%e strategy -o"bination (;# ;) sin-e t%at is a Eas% e>uilibriu" and t%ere.ore rationali@able. 8onsider (;# 8) leading to t%e payo..s (0# '). 8 is a possible best response .or 8olu"n i. %e t%inDs t%at Ro2 is playing ;. B%y does 8olu"n believe t%isG 3e-ause %e believes t%at Ro2 believes t%at 8olu"n is playing 3. 8olu"n Austi.ies t%is belie. by t%inDing t%at Ro2 believes t%at 8olu"n believes t%at Ro2 is playing 8. $%e belie.s in t%is -%ain are all per.e-tly rational be-ause ea-% strategy o. eit%er player is a best response (or a"ong t%e best responses) to so"e strategy o. t%e rival player.

S+.

Eo "atter 2%at belie.s 8olu"n "ig%t %old about 2%at Ro2 is playing# Sout% is never 8olu"ns

best response. $%ere.ore Sout% is not a rationali@able strategy .or 8olu"n. Sin-e Ro2 re-ogni@es t%is# and sin-e 9art% is Ro2s best response only against 8olu"ns Sout%# Ro2 does not play 9art%. Sin-e Eort% is 8olu"ns best response only against 9art%# 8olu"n 2ill not play Eort%. Sin-e 8olu"n 2ill never play Eort% or Sout%# Bind is never a best response .or Ro2. $%e re"aining strategiesHBater and /ire .or Ro2 and 9ast and Best .or 8olu"nHare used in t%e t2o pure-strategy Eas% e>uilibria# so t%ey are -ertainly rationali@able.

S!.

<sing t%e t%ird-round range o. ,# 2e %ave t%at 1 = 1' ,)' "ust be at "ost 1' 5)' = 1' &.+

= =.+ (not%ing ne2 %ere) and at least 1' 1'.=+)' = 1' !.:=+ = +.!'+ (a narro2ing o. t%e range( a.ter t%e t%ird round# t%e lo2er bound 2as &.+). Si"ilarly# using t%e t%ird-round range o. 1# 2e .ind t%at , = 1+ 1)' "ust be at "ost 1+ &.+)' = 1+ '.'+ = 1'.=+ (not%ing ne2) and at least 1+ =.+)' = 1+ :.=+ = 11.'+ (a narro2ing o. t%e range( in t%e t%ird round# t%e lo2er bound 2as 5). Be see t%at in even rounds t%e lo2er bounds get tig%ter# and in odd rounds t%e upper bounds get tig%ter.

Solutions to 8%apter + Solved 9xer-ises

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S=.

(a)

8art 0 serves x -usto"ers and 8art 1 serves (1 x)# 2%ere x is de.ined by t%e e>uation

1p0 * 0.+x' = p1 * 0.+ (1 x)'. 9xpanding t%is e>uation yields p0 * 0.+x' = p1 * 0.+ x *0.+x'# and solving .or x yields x = p1 p0 * 0.+. $%us 8art 0 serves p1 p0 * 0.+ -usto"ers# and 8art 1 serves 1 x, or p0 p1 * 0.+# -usto"ers. (b) 0ro.its .or 8art 0 are (p1 p0 * 0.+)(p0 0.'+). 0ro.its .or 8art 1 are sy""etri-(

(p0 p1 * 0.+)( p1 0.'+). 9xpanding t%e expression .or 8art 0 pro.its yields ( p1 p0 * 0.=+)p0 (0.'+ p1 * 0.1'+). Solving .or t%e pro.it-"axi"i@ing value o. p0 by -o"pleting t%e s>uare or di..erentiating 2it% respe-t to p0 yields p0 = 0.+p1 * 0.:=+. 8art 1s best-response rule is sy""etri-( p1 = 0.+p0 * 0.:=+. (-) $%e grap% is s%o2n belo2. $%e Eas% e>uilibriu" pri-es are t%e values o. p0 and p1 t%at

solve si"ultaneously t%e t2o best-response rules .ound in part (b). Substituting 8art 1s best-response rule into t%at .or 8art 0# 2e .ind( p0 = 0.+(0.+p0 * 0.:=+) * 0.:=+ = p0 * 0.+!'+. Solving .or p0 yields p0 = 0.=+ (=+I)7 8art 1s pri-e is p1 = 0.=+ (=+I) also.

S6.

(a)

Sout% Joreas pro.it is

1Jorea = >JoreaK0 -JoreaK>Jorea = >Jorea(160 4) :0>Jorea = >Jorea(160 >Jorea >Lapan) :0>Jorea = >Jorea' * (160 :0)>Jorea >JoreaK>Lapan. <sing t%e notation in t%e ;ppendix yields ; = 0# 3 = 1+0 >Lapan# and 8 = 1# so Sout% Joreas best response is( >Jorea = 3)('8) = 1+0 >Lapan)(')# or >Jorea = =+ 0.+>Lapan.

Solutions to 8%apter + Solved 9xer-ises

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YKorea ) q Korea = $%is is Sout% Joreas best-response .un-tion. 1ou get t%e sa"e ans2er by setting

'>Jorea * 1+0 >Lapan = 0 and solving .or >Jorea. Sin-e Lapan %as t%e sa"e pri-e and -ost per s%ip as Sout% Jorea# Lapans pro.it is 1Lapan = >Lapan' * (160 :0)>Lapan >JoreaK>Lapan. Si"ilarly# Lapans best-response .un-tion is( >Lapan = =+ 0.+>Jorea. (b) $o .ind t%e solution .or t%e e>uilibriu" pri-es# substitute Lapans best-response .un-tion

.or >Lapan into Sout% Joreas best-response .un-tion. $%is yields( >Jorea = =+ 0.+>Lapan = =+ 0.+(=+ 0.+>Jorea) = :=.+ * 0.'+>Jorea >Jorea = +0

$%ere.ore( >Lapan = =+ 0.+(+0) = +0. $%e pri-e o. a ML88 is given by t%e expression 0 = 160 4 2%ere 4 = > Jorea * >Lapan = +0 * +0 = 100. $%ere.ore P 160 100 = 60# or 60 "illion.

Sout% Joreas pro.it is 1Jorea = >Jorea' * (160 -Jorea)>Jorea >JoreaK>Lapan = (+0)' * (160 :0)(+0) (+0)(+0) = '+00 * =+00 '+00 = '+00. LiDe2ise# Lapans pro.it is 1Lapan = >Lapan' * (160 -Lapan)>Lapan >JoreaK>Lapan = '+00. $%ere.ore bot% -ountries "aDe '.+ billion in pro.its. (-) Sout% Joreas ne2 best-response .un-tion is( >Jorea = 50 0.+-Jorea 0.+>Lapan = 50 0.+('0) 0.+>Lapan = 60 0.+>Lapan. Lapans ne2 best-response .un-tion is( >Lapan = 50 0.+-Lapan 0.+>Jorea = 50 0.+(&0) 0.+>Jorea = =0 0.+>Jorea. $o .ind t%e solution .or t%e ne2 e>uilibriu" pri-es# substitute Lapans ne2 best-response .un-tion .or >Lapan into Sout% Joreas best-response .un-tion. $%is yields( >Jorea = 60 0.+>Lapan = 60 0.+(=0 0.+>Jorea)# or >Jorea = !0. ?iven t%is value .or >Jorea# >Lapan = =0 0.+>Jorea = =0 0.+(+0)# or >Lapan = &+.

Solutions to 8%apter + Solved 9xer-ises

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Sout% Joreas "arDet s%are is !0 ) (!0 * &+) N +=O# and Lapans "arDet s%are is approxi"ately &:O. Sout% Joreas pro.it is( 1Jorea = >Jorea' * (160 -Jorea)>Jorea >Jorea>Lapan = (!0)' * (160 '0)(!0) (!0)(&+) = :!00 * 5!00 '=00 = ::00# or :.: billion. Lapans pro.it is( 1Lapan = >Lapan' * (160 -Lapan)>Lapan >Jorea>Lapan = (&+)' * (160 &0)(&+) (!0)(&+) = '0'+ * !:00 '=00 = 1+=+# or 1.+=+ billion.

S5.

(a)

Sout% Joreas pro.it is 1Jorea = >Jorea0 -Jorea>Jorea = >Jorea(160 4) :0>Jorea = >Jorea(160

>Jorea >Lapan >8%ina) :0>Jorea = >Jorea' * (160 :0)>Jorea >Jorea>Lapan >Jorea>8%ina. <sing t%e notation in t%e ;ppendix# ; = 0# 3 = 1+0 >Lapan >8%ina# and 8 = 1# so t%e solution is >Jorea = 3)('8) = (1+0 >Lapan >8%ina))'# or >Jorea = =+ 0.+>Lapan 0.+>8%ina. $%is is Sout% Joreas bestYKorea ) q Korea = '>Jorea * 1+0 >Lapan >8%ina response .un-tion. 1ou get t%e sa"e ans2er by setting

= 0 and solving .or >Jorea. Sin-e Lapan and 8%ina .a-e t%e sa"e pri-e (0 = 160 4) and -ost (- Jorea = -Lapan = -8%ina) as Sout% Jorea# t%e best response .un-tions .or Lapan and 8%ina are( >Lapan = =+ 0.+>Jorea 0.+>8%ina >8%ina = =+ 0.+>Jorea 0.+>Lapan (b) $o .ind t%e solution .or t%e e>uilibriu" pri-es# .irst substitute 8%inas best-response

.un-tion into Lapans best-response .un-tion( >Lapan >Lapan = =+ 0.+>Jorea 0.+(=+ 0.+>Jorea 0.+>Lapan) = +0 >Jorea):.

Eext# substitute Lapans best-response .un-tion into 8%inas best-response .un-tion( >8%ina >8%ina = =+ 0.+>Jorea 0.+(=+ 0.+>Jorea 0.+>8%ina) = +0 >Jorea):.

$%en substitute t%ese expressions .or >Lapan and >8%ina into Sout% Joreas best-response .un-tion(

Solutions to 8%apter + Solved 9xer-ises

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>Jorea = =+ 0.+>Lapan 0.+>8%ina = =+ 0.+(+0 >Jorea):) 0.+(+0 >Jorea):) = '+ * >Jorea): >Jorea = :=.+.

Lapan and 8%ina %ave sy""etri- best response .un-tions# so > Lapan = :=.+ and >8%ina = :=.+. 9a-% -ountry produ-es :=.+# so ea-% %as a "arDet s%are o. ::.:O. Sin-e ea-% -ountry %as t%e sa"e "arDet s%are# pri-e# and -ost# t%ey 2ill all earn t%e sa"e pro.it. Sout% Joreas pro.it is( 1Jorea = >Jorea' * (160 :0)>Jorea >JoreaK>Lapan >JoreaK>8%ina = (:=.+)' * (1+0)(:=.+) (:=.+)(:=.+) (:=.+)(:=.+) = 1&0!.'+# or 1#&0!.'+ "illion. (-) Fn t%e duopoly situation# ea-% -ountry produ-ed +0 ML88s per year at a pri-e o. 60

"illion ea-%# .or a pro.it o. '.+ billion per -ountry. Fn t%e triopoly# ea-% -ountry produ-ed :=.+ ML88s per year at a pri-e o. !=.+ "illion ea-%. $%e t%ird produ-er in-reases t%e total output (supply)# lo2ering t%e pri-e per ML88 and t%ere.ore t%e pro.its "ade per -ountry. $%ere is a greater nu"ber o. ML88s available .or pur-%ase# but t%is lo2ers t%e pri-e and t%ere.ore also t%e -olle-tive pro.its (roug%ly &.' billion versus + billion)# 2%i-% are no2 split a"ong t%ree -ountries instead o. bet2een t2o.

S10.

(a)

Sin-e t%e Aoint pro.its o. t%e partners%ip are split e>ually# Poni-a and Ean-y ea-% get a

payo.. o. 0.+(&" * &n * "n) = '" * 'n * 0.+"n# "inus %er o2n e..ort -ost. $%ere.ore Poni-as payo.. is '" * 'n * 0.+"n "' and Ean-ys payo.. is '" * 'n * 0.+"n n'. F. " = n = 1# ea-% partner re-eives a payo.. o. '(1) * '(1) * 0.+(1)(1) 1 = :.+# or :+#000. (b)
'

Be .ind Ean-ys best-response .un-tion by "axi"i@ing t%e expression 1 n = '" * 'n *

0.+"n n . <sing t%e notation in t%e ;ppendix# ; = '"# 3 = ' * 0.+"# and 8 = 1# so Ean-ys bestresponse .un-tion is( n = 3)('8) = ' * 0.+")(') = 1 * 0.'+". 1ou get t%e sa"e ans2er by setting Yn / n = -'n * ' * 0.+" = 0 and solving .or n. B%en Poni-a puts in e..ort o. " = 1# Ean-ys best response is( n = 1 * 0.'+" = 1 * 0.'+(1) = 1.'+. (-) Be Dno2 .ro" part (b) t%at Ean-ys best-response .un-tion is n = 1 * 0.'+". $%e ga"e

is sy""etri-7 Poni-as best-response .un-tion is " = 1 * 0.'+n. $o .ind t%e solution .or t%e e>uilibriu" e..ort levels# substitute Ean-ys best-response .un-tion into Poni-as best-response .un-tion(

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" = 1 * 0.'+(1 * 0.'+")

" = &):.

?iven t%is value o. "# Ean-ys e..ort 2ill be( n = 1 * 0.'+(&):) &):.

$%e Eas% e>uilibriu" to t%is ga"e %as bot% Poni-a and Ean-y putting in an e..ort o. &):.

S11.

3e-ause ,avier -annot rationally believe t%at 1vonne 2ill -%arge a negative pri-e# and be-ause

%is best-response .un-tion is Px = 1+ * 0.'+Py, %is o2n pri-e Px -an never be belo2 1+. ; si"ilar -al-ulation done by 1vonne ensures t%at %er pri-e Py -annot be less t%an 1+ eit%er. Fn t%e se-ond round o. t%is t%inDing# ea-% sees t%roug% t%e ot%ers .irst-round t%inDing# and t%ere.ore does not set a pri-e less t%an 1+ * 0.'+(1+) = 16.=+. Co2ever# t%is narro2s t%e range o. pri-es only .ro" belo2 t%e Eas% e>uilibriu". $o narro2 .ro" above# 2e need a starting point# na"ely an upper li"it to t%e pri-es# su-% t%at no rational player 2ould ever -onte"plate -%arging anyt%ing %ig%er. F. t%ere 2ere a pri-e so %ig% t%at you 2ould sell not%ing i. you -%arged t%at# no "atter t%e ot%ers pri-e# t%at 2ould do. Co2ever# .or t%e linear .un-tions stipulated %ere# t%at is not t%e -ase. 8onsider ,avier. Pig%t %e -%arge Px = 1#000G $%at 2ould be %is best response i. %e believed t%at 1vonne 2ould -%arge Py = (Px 1+))0.'+ = & 56+ = :#5&0# in 2%i-% -ase %e 2ould sell Qx = && ' 1#000 * :#5&0 = 1#56&. ;nd %e "ig%t believe t%at 1vonne 2ould -%arge Py = :#5&0 be-ause %e t%inDs s%e believes t%at %e 2ould -%arge Px = (:#5&0 1+))0.'+ = 1+#=00# in 2%i-% -ase s%e 2ould expe-t to sell Qy = && ' :#5&0 * 1+#=00 = =#6!&. ;nd so on. Q. -ourse t%ese are absurd pri-es .or "eals# but t%at is be-ause t%e linear .un-tions 2e stipulated are unliDely to be valid over su-% a large range. F. it is not rational .or anyone to -%arge a pri-e %ig%er t%an# say# +00# t%en be-ause t%ey Dno2 t%is# in t%e se-ond round o. t%inDing it is not rational .or eit%er to -%arge a pri-e %ig%er t%an 1+ * 0.'+ +00 = 1&0. Fn t%e t%ird round o. t%inDing t%is upper li"it drops to 1+ * 0.'+ 1&0 = +0# and so on# eventually -onverging to t%e Eas% e>uilibriu" level o. '0.

S1'.

(a)

$%e average o. all nu"bers "ust be bet2een 0 and 100. $%us t%e target nu"ber "ust be

bet2een ('):)K0 and ('):)K100# or 0 and !!.!=. $%ere.ore -%oosing any nu"ber above !!.!= is a stri-tly do"inated strategy. (b) F. all o. 9lsas -lass"ates -%oose &0# t%en , = R&5(&0) * nS)+0 = (15!0 * n))+0# 2%ere n

is t%e nu"ber 9lsa sele-ts. $o 2in# 9lsas nu"ber "ust be -loser to t2o-t%irds , t%an &0. 3e-ause o. t%is#

Solutions to 8%apter + Solved 9xer-ises

10 o. 11

2e Dno2 t%at 9lsa 2ill sele-t a nu"ber less t%an &0. $%en 2e solve .or &0 ('):), T ('):), n# or &0 ('):)R(15!0 * n))+0S T ('):)R(15!0 * n))+0S n# 2%i-% si"pli.ies to n T 1'.!0. $%ere.ore t%e set o. best responses in t%is situation is 1'.!0 U n V &0. (-) Si"ilarly# i. 9lsa Dne2 t%at all o. %er -lass"ates 2ould sub"it t%e nu"ber 10# t%en , =

R&5(10) * nS)+0 = (&50 * n))+0. /or 9lsa to 2in# %er nu"ber "ust be -loser to t2o-t%irds , t%an 10. ;gain# 2e Dno2 t%at 9lsa 2ill sele-t a nu"ber less t%an 10. $%en 2e solve .or 10 ('):), T ('):), n# or 10 ('):)R(&50 * n))+0S T ('):)R(&50 * n))+0S n# 2%i-% si"pli.ies to n T :.1+. $%ere.ore t%e set o. best responses in t%is situation is :.1+ U n V 10. (d) ;t a sy""etri- Eas% e>uilibriu"# all students 2ill be -%oosing t%e sa"e nu"ber. /ro"

parts (b) and (c) above# 2e see t%at t%ere is an in-entive to deviate .ro" any nu"ber played by everyone else in t%e -lass i. t%at nu"ber is positive. Wero# %o2ever# 2orDs as a sy""etri- Eas% e>uilibriu" strategy be-ause it is its o2n best response( 0 = ('):)K0. (e) $o .ind rationali@able strategies to t%is ga"e# use iterated eli"ination o. never-best

responses. Be Dno2 .ro" part (a) t%at any nu"ber greater t%an !!.!= is never a best response. Qn t%e basis o. t%is .a-t# 2e deter"ine t%at ('):)K!!.!= = &&.&+ is also never a best response. 1ou -ontinue t%is iterated eli"ination until you are le.t 2it% t%e only rationali@able strategy in t%e ga"e# 2%i-% is -%oosing @ero.

Solutions to 8%apter + Solved 9xer-ises

11 o. 11