Take Home Assignment 1

Micro C - Autumn 2014

This problem set is due by Friday September 26. You should either give it to your class
teacher in class or arrange to leave it at their pigeon hole at the deparment (ask your class
teacher about this).
1. Consider the following game:
A
B
C

D
4, 4
5, 3
2, 3

E
7, 7
5, 7
9, 1

F
4, 5
6, 8
5, 5

(a) (5 points). Solve the above game by iterated elimination of strictly dominated strategies. Describe each step with one sentence.
(b) (5 points). Given your answer in (a), what can you say about the set of Nash Equilibria?

2. (5 points). Find all the Nash Equilibria (pure and mixed) of the following game:

U
D

L
2, 2
4, 3

R
1, 3
0, 1

3. Consider a variation on Gibbons Bertrand game: two firms choose their prices pi 0
simultaneously and independently. The market demand for firm is product is
qi (pi , pj ) =

3 pi
.
2 pj

Suppose both firms have constant marginal cost c.

(a) (2 points). Write the normal form of the game.
(b) (5 points). Write down the profit functions and derive the best response functions
for the two firms. Find the Nash Equilibrium.
(c) (5 points). Give an intuitive interpretation of the demand function - how does it
relate to the demand function in Gibbons version? Are the goods complements or
substitutes?
(d) (Extra credit question). Suppose instead the demand function is qi (pi , pj ) = a ppji
where a > 1. Find the NE prices as a function of a. Discuss and compare with
Gibbons.