International Economics Relations EC 271 Problem Set 1 Answers Chapter 2 (all problems on pp.

39-40 of Dixit and Skeath)

Prof. Murphy

1. a. Decision: Reason is that there is no interaction among the players here. b. Game: Assuming that the girls are acting strategically to have a good-looking dress that is not duplicated by another attendee at the prom. c. Game: College student must take into account how he/she will act at future decision points in their career path. d. Game: The prices that Microsoft and Netscape charge for their browsers will influence the adoption of browsers by internet users and will influence the price set by the other browser maker. By setting its price at zero, Microsoft effectively drove Netscape to a smaller market share, forced Netscape to charge a price of zero as well, and allowed Microsoft to attain the dominant position among in the browser marketplace. e. Game: In picking a particular running mate, the candidate for governor must take into account how this choice will influence voters and how it may influence the campaign of his opponent, and must take into account the possible running mates that the other candidate may choose. 2. a. Simultaneous. Possibly zero sumif only the winner gets rewarded, but this is not clear. Could be repeatednot clear. Full-information as long as rules have been explained to all players. Rules are fixed. Cooperative agreements may be possibledepends on whether players can talk to each other before playing. b. Sequentialplayers (voters) cast votes sequentially. Zero-sum for the candidates, but the candidates are passive players in this game. Clearly is zero-sum for the voterseither your candidate wins or loses. Game is not repeated. Full information, assuming that each voter knows the preferences of the other voters and the candidates, rules are fixed, cooperative agreement may be possible if voters can caucus before the vote. c. Simultaneous. Zero-sum in the sense that only one person wins and others lose. Oneshot gamenot repeated. Full information, assuming the players know the preferences of each other. But, obviously, they do not know the exact amount of the sealed bids by other players. Rules are fixed. Cooperation may be possible, if players can talk ahead of time and plan their bids accordingly, but we cant know for sure.

3. False. Quite possible that a game player would prefer an outcome where every player gets a little profit rather than one where they alone get all the profit. For example, this could be true if the player valued equity or fairness in the outcome rather than the monetary value of their own payoff. 4. To calculate the expected payoffs, simply compute the average payoff: a. Expected Payoff = (0.5 x 20) + (0.1 x 50) + (0.4 x 0) = 15 b. Expected Payoff = (0.5 x 50) + (0.5 x 0) = 25 c. Expected Payoff = (0.1 x 20) + (0.1 x 50) + (0.8 x 0) = 7 5. Predictive tool: Game theory can help predict the outcomes of interactions between individuals, businesses, governments or other entities. An example would be trying to predict how the outcome in terms of market share for, say, four large companies that enter the market place with a new product. Prescriptive Tool: Game theory can help us formulate policies so as to ensure the best outcomes in situations where there are interactions, say between two governments. An example might be the current standoff with North Korea, where the governments might use signaling to establish credibility or screening to learn about underlying motivation in order to then understand more fully how the game is likely to play out under different policies. Understanding more fully the motivation of the other side will help in the formulation of policy, i.e., should we get tough with the North Koreansbreaking off negotiations or should we start offering some concessionscontinue to negotiate.