ECON 1870 - Game Theory and Applications to Economics

Georoy de Clippel
Brown University (Spring 2012)
Midterm Exam (Duration: 50 minutes)
Permitted materials: non-programmable calculators, foreign language dictionaries.
Part 1: Theory
True/False: For each question, provide an argument to prove the statement if you think it
is true, or provide a counter-example if you think the statement is false.
a) (5 points) If a prole of strategies is Pareto ecient, then it is a Nash equilibrium.
b) (5 points) If a prole of strategies is a Nash equilibrium, then it is Pareto ecient.
c) (5 points) If strategy s
1
is strictly dominated by an alternative strategy s

1
, then there
is no pure-strategy Nash equilibrium where player 1 plays s
1
.
Part 2: Basic Exercises
1) (10 points) Solve the following game by iterated elimination of strictly dominated strategies:
s
1
s
2
s
3
s
4
r
1
10,4 9,1 1,5 7,10
r
2
7,4 4,3 6,7 2,2
r
3
9,10 5,0 0,0 5,0
r
4
2,3 5,7 10,5 3,8
2) Consider the extensive form game represented on the next page:
a) (10 points) What is the associated normal form and its pure-strategy Nash equi-
libria?
b) (10 points) What is the subgame perfect Nash equilibrium (can be obtained by backward
induction since the game is of perfect information)?
1
2
2
1
0
4
3
5
5
2
4
-1
6
2
L R
L
R
L R
L
R
4
3
M
3) (10 points) Compute all the Nash equilibria (pure and mixed) in the following strategic form
game.
L R
T 60,90 30,0
B 0,0 60,30
4) (10 points) Consider the following normal-form game played innitely many times. Consider
the trigger strategy for player 1 where he plays T in period 1, T at any time t such that (T, L)
was the outcome in each previous round, and B otherwise. Consider also the trigger strategy
for player 2 where he plays L in period 1, L at any time t such that (T, L) was the outcome
in each previous round, and R otherwise. What is a minimal bound on player 1 and player
2s discount factors to guarantee that these trigger stragegies form a subgame-perfect Nash
equilibrium?
L R
T 60,90 0,100
B 100,0 10,10
Part 3: Economic Application
Consider the following rst-price, sealed-bid auction. There are two bidders, labeled i = 1, 2.
Bidder i has a valuation v
i
for the object. Assume that v
1
> v
2
0. If bidder i gets the object
and pays the price p
i
, then is payo is v
i
p
i
. Bids are constrained to be any nonnegative
real numbers. Assume that each bidder has the correct information about this situation (each
bidder knows what are v
1
and v
2
correctly) but cannot know the opponents actual bid since
the bidders simultaneously submit their bids.
The higher bidder wins the object and pays the price she bid; the other bidder gets and
pays nothing. In case of a tie, bidder 1 is the winner.
(a) (5 pts) Formulate this story as a normal form game.
(b) (5 pts) Can you nd some Nash equilibrium at which each bidder i bids his valuation v
i
?
Explain your answer.
(c) (5 pts) Can you nd some Nash equilibrium at which some bidder i does not bid his true
valuation v
i
? Explain your answer. Is a Nash equilibrium unique (if it exists)?