MOOC: Strategy an Introduction to game theory

Solutions to Assignment 1:
The game table for the divide the dollar game is as given below. The various actions of the players are
{0,25,50,75,1}. Player 1 is the row player

0
25
50
75
100

0
100,0
75,25
50,50
25,75
0,100

25
0,0
75,25
50,50
25,75
0,100

50
0,0
0,0
50,50
25,75
0,100

75
0,0
0,0
0,0
25,75
0,100

100
0,0
0,0
0,0
0,0
0,100

1. u1(25,75) is payoff to player 1 when he chooses 25 and player 2 chooses 75. From table this can
be seen to be 0. Answer (c)
2. u2(25,75) is payoff to player 2, when he chooses 25 and player 1 chooses 75. Remember, since
we are talking about payoff to player 2, the action of player 2 is mentioned first. From table it
can be seen to be 75. Answer (d)
3. It can be seen that corresponding to action 50 by player 2, action 50 yields the highest payoff of
50 for player 1. Therefore best response is 50. Answer (b)
4. Best responses of the row player and column player have been marked using blue and red boxes
in the above table. It can again be seen from the table that only (25,25) is a Nash equilibrium out
of the given options since the best responses intersect. Answer (a)
5. Observe that only (25,100) is NOT Pareto optimal since both receive 0. Both can for instance
receive a higher payoff of 50 each by choosing the outcome (50,50). Rest all are Pareto optimal.
Answer (b)
6. Action 75 of player 1 dominates action 100, because 75 always yields a higher or equal payoff
i.e. either 25 or 0 when compared to action 100, which always yields a payoff of 0. Answer (c)
7. In the game it can be seen then all choosing 0 is the only Nash equilibrium. Because if all choose
0, then average = 0 and 1/3 rd average is 0. Therefore everybody splits the prize. In any other
outcome, lets say consider people choosing x1, x2,, x15. The average will lie between the min
and the max of all these numbers. Therefore, 1/3 average is strictly less than the max of the
numbers, which means the person having the maximum number has an incentive to deviate to a
lower number. Therefore, Nash equilibrium occurs only when all are equal and 1/3 average =
average, which means each is 0. Answer (d)
8. Nash equilibrium is Pareto optimal. In fact any outcome is Pareto optimal since this is a constant
sum game i.e. the one rupee is split between the winners. Therefore, in any outcome, since the
total payoff is constant i.e. 1 rupee, one cannot increase the payoff of all the players
simultaneously. This would violate the constraint of total payoff adding up to 1 rupee. Answer
(a)
The game table for the price competition game is given below

0
1
2
3
4
5
6

0
0,0
0,0
0,0
0,0
0,0
0,0
0,0

1
0,0
2.5,2.5
0,5
0,5
0,5
0,5
0,5

2
0,0
5,0
4,4
0,8
0,8
0,8
0,8

3
0,0
5,0
8,0
4.5,4.5
0,9
0,9
0,9

4
0,0
5,0
8,0
9,0
4,4
0,8
0,8

5
0,0
5,0
8,0
9,0
8,0
2.5,2.5
0,5

6
0,0
5,0
8,0
9,0
8,0
5,0
0,0

For example, if p1, p2 i.e. prices set by firm 1,2 respectively are p1 = 3, p2 = 4, then firm 1 with
lower price p1 captures entire market and quantity sold = 6-p1 = 3. Revenue = 3 X 3 = 9.
Therefore, payoff is (9,0). On the other hand, if p1 = p2 = 3, both capture equal share of 0.5 * (6p) = 0.5 * 3 = 1.5. Payoff = 3 * 1.5 = 4.5 for both
9. It can be seen from the table above that u1(2,3) i.e. payoff to player 1 with player 1 choosing
2 and player choosing 3 is 8. Answer (b)
10. Similarly, the quantity u2(3,4) i.e. payoff to player 2 where player 2 chooses 3 and player 1
chooses 4 is 9. Answer (d)
11. From the table it can be seen that best response of player 1 to action 3 of player 2 is to set price
= 2. Answer (a)
12. It can be seen that (1,1) is the only Nash equilibrium and unilateral deviation yields a payoff of 0
to each player, which is lower than the payoff of 2.5 to each at (1,1). Answer (d)
13. It can be seen that (0,0) is the only Nash equilibrium in the choices provided, since (0,0) yields a
payoff of 0 to each and unilateral deviation only gives 0 to the deviating player. Therefore, no
incentive to deviate. Answer (c)
14. It can be seen that action p = 4 ie setting price = 4 dominates setting price p = 5,6 by player 1.
Therefore, answer (c)
Game table for the game is given as,
Bonds
Bonds
1100,1100
venture
1000,1100

venture
1100,1000
1200,1200

15. From table above it can be seen that both investing in bonds or both investing in venture are
Nash equilibria. Answer (c)