Microeconomics I

Assignment 4
Due on: October 31, 2014 (before 2:30 PM)
To be submitted to Mr. Manhar (TA)

1. Suppose that strategic interactions between Snigdha and Nancy can be represented
by the following normal-form game. Is there any pure strategy Nash equilibrium of
this game? Will Snigdha randomize among her strategies in the equilibrium?
Nancy

Snigdha

Blue

Red

W hite

W hite

2, -4

-4, 2

0, 0

Red

-4, 2

2, -4

0, 0

Blue

0, 0

0, 0

2, 2

Figure 1: Game Matrix

5+15=20

2. [Groves Mechanism] Suppose that there are n consumers in an economy. The utility

function of the ith consumer is given by Ui = vi (x, i ) + mi = i x + mi , where x is

the quality of a public good (e.g. road) provided by the government, i (> 0) is the
preference parameter of the ith consumer and mi is the amount of money received
by consumer i from the government in the form of transfer payment. The cost to
provide the public good of quality x is C(x) =

x2
.
2

IGIDR

2014

Microeconomics I, Assignment 4

The government needs to decide x such that social welfare, SW = {

Pn

i=1

vi (x, i )}

C(x), is maximum. However, the government does not know consumers preference
parameters. Thus, consumers are asked to announce their preference parameters
simultaneously.
If consumer i states that her preference parameter is i (i = 1, 2, ..., n.), the govP
ernment (a) chooses x = x (1 , 2 , ..., n ) so that [{ ni=1 vi (x, i )} C(x)] is maxP
imum, and (b) transfers the amount mi = Ki + { j6=i vj (x (1 , 2 , ..., n ), j )}
C(x (1 , 2 , ..., n )) to consumer i. These are common knowledge.
(a) Will each consumer report her true preference parameter in the equilibrium?
Why or why not?
(b) What will happen, if the government sets mi = 0, i = 1, 2, ..., n, always?.
(c) Will your answer to (a) change, if the government transfers
P
mi = Ki + { nj=1 vj (x (1 , 2 , ..., n ), j )} C(x (1 , 2 , ..., n )) amount to consumer i?.
20+5+5=30

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