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Problem Set 1

1. Show that in any normal form game, a player can have at most one
strictly dominant strategy.
2. Find the set of Nash equilibria (in pure and mixed strategies) of the
following game.
b 1 b2 b3
a1 5,6 7,2 0,8
a2 3,4 5,6 1,2
a3 2,7 0,2 0,0

3. The following table describes the payoffs of a 2-player game in which


each player has 4 pure strategies. Show that the unique Nash equilibrium in
pure and mixed strategies is (a2 , b2 ) played with certainty.
b1 b2 b3 b4
a1 0,7 2,5 7,0 0,1
a2 5,2 3,3 5,2 0,1
a3 7,0 2,5 0,7 0,1
a4 0,0 0,-2 0,0 10,-1

4. There are two identical firms producing a homogeneous good whose


demand curve is q = 100 p. Firms simultaneously choose prices. Neither
firm can produce more than K units of output. If both firms choose the same
price, then they share the market equally subject to the capacity constraint
of K. If the prices are unequal, say pi < pj , then the low-price firm i, sells
qi (pi , pj ) = min(100 pi , K). If qi (pi , pj ) < K, then firm j sells nothing. If
qi (pi , pj ) = K, then firm j sells min(100 qi (pi , pj ) pj , K). The cost of
production for each firm is 10 per unit.
(i) Derive the payoff function of either firm.
(ii) Suppose K = 40. Show that there is no pure strategy Nash equilib-
rium in this game.
(iii) Suppose K = 30. Show that there is a pure strategy Nash equilib-
rium.
5. A set of 100 individuals play the following game. Each individual
simultaneously announces an integer between 1 and 100. The winner is the
individual whose announcement is closest to one-thirds the average number.
A prize of 100 is shared equally amongst the winners.

1
(i) Show that no pure strategy strictly dominates any other.

(ii) Find a mixed strategy that strictly dominates 100.

(ii) Show that iterated elimination of strictly dominated strategies yields


the unique choice of 1 for each of the players.

6. Consider an electoral contest between two political parties which have


to announce (simultaneously) party positions in the policy space given by the
interval [0, 1]. Voters ideal points are uniformly distributed over the interval
[0, 1]. Each voter votes for the party whose announced position is closest to
his ideal point. In case the two parties announced point is equidistant from
a voters ideal point, then the voter votes for each party with probability
half. Each party wants to maximize its vote share.

(i) Show that there is a unique pure strategy Nash equilibrium in which
each party locates at 21 .

(ii) Suppose now that there are three parties. Show that there is no pure
strategy Nash equilibrium.