ECON-SHU 216 Problem Set 1

Fall 2018

Due Sep 25th in class

Problem 1. The Final Problem

In their book “Theory of Games and Economic Behavior”, von Neumann and Morgen-
stern described the following story from Arthur Conan Doyle’s “The Final Problem”:
Sherlock Holmes desires to proceed from London to Dover and hence to the Continent
in order to escape from Professor Moriarty who pursues him. Having boarded the train
he observes, as the train pulls out, the appearance of Professor Moriarty on the platform.
Sherlock Holmes takes it for granted - and in this he is assumed to be fully justified - that
his adversary, who has seen him, might secure a special train and overtake him. Sherlock
Holmes is faced with the alternative of going to Dover or of leaving the train at Canterbury,
the only intermediate station. His adversary - whose intelligence is assumed to be fully
adequate to visualize these possibilities - has the same choice. Both opponents must choose
the place of their detrainment in ignorance of the other’s corresponding decision. If, as a
result of these measures, they should find themselves, in fine, on the same platform, Sherlock
Holmes may with certainty expect to be killed by Moriarty. If Sherlock Holmes reaches Dover
unharmed he can make good his escape.

The game could be represented by the 2-by-2 matrix below:

Holmes
Dover Canterbury
Dover 2, −2 0, 0
Moriaty
Canterbury −1, 1 2, −2

Suppose that Moriaty choose Dover with probability p and Canterbury with probability
(1 − p), and that Holmes chooses Dover probability q and Canterbury with probability
(1 − q).

(1) Write down Moriaty’s expected payoff uM a function of p, given that Holmes chooses
Dover (or q = 1). Let’s call it uJ (p, 1).

(2) Write down Moriaty’s expected payoff uM a function of p, given that Holmes chooses
Canterbury (or q = 0). Let’s call it uJ (p, 0).

(3) Plot uM (p, 1) and uM (p, 0) on the same diagram, with uM on the y-axis and p on the
x-axis.

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 Canterbury (p = 0) Dover (p = 1)

(4) What is Moriaty’s maximin strategy?

(5) Repeat parts (1)-(4) for Holmes (give uH (1, q), uH (0, q), plot them, and solve for
Holmes’s maximin strategy).

(6) Write down Moriaty’s expected payoff uM as a function of p, given that Holmes is using
his maximin strategy, which you got from (5). What would be Moriaty’s choice of p
that maximizes his payoff, given that Holmes plays maximin?

(7) Write down Holmes’s expected payoff uH as a function of q, given that Moriaty is using
his maximin strategy, which you got from (4). What would be Holmes’s choice of q
that maximizes his payoff, given that Moriaty plays maximin?

(8) What can we say about the consistency of them using maximin strategies?

Problem 2. Iterated Dominance

Bob
B1 B2 B3 B4
A1 6, 4 7, 3 5, 5 6, 4
A2 7, 3 3, 7 3, 6 5, 5
Ann
A3 8, 2 7, 4 3, 7 7, 7
A4 3, 7 5, 5 4, 6 5, 5

(1) Identify all the strategies that survive Strict IEDS (Iterated Elimination of Strictly
Dominated Strategies). Write down the strategy eliminated in each round, and point
out which strategy or strategies dominate the eliminated strategy.

(2) Identify all the strategies that survive Weak IEDS (Iterated Elimination of Weakly
Dominated Strategies). Write down the strategy eliminated in each round, and point
out which strategy or strategies dominate the eliminated strategy.

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 Problem 3. Cournot Duopoly
Two identical firms, Firm 1 and Firm 2, simultaneously determine production quantities,
q1 and q2 . Their costs of production could be written as ci (qi ) = 20qi . The market price of
the good is determined by p = 100 − (q1 + q2 ).

(1) Given that Firm 2 produces q2 , what’s Firm 1’s best response?

(2) Do the two firms have any strictly dominated strategy? If so, clearly show how they
are dominated.

(3) After the first round elimination, do the two firms have any strictly dominated strategy
in the reduced game? If so, clearly show how they are dominated.

(4) After the second round elimination, do the two firms have any strictly dominated strat-
egy in the reduced game? If so, clearly show how they are dominated.

(5) After the third round elimination, do the two firms have any strictly dominated strategy
in the reduced game? If so, clearly show how they are dominated.

Problem 4. Voting
Two candidates, A and B, are running for office. There are 9 citizens, labeled as Player
1, Player 2,..., Player 9, who may vote for either candidate. The candidate who obtains the
most votes wins. (A tie is impossible since there are odd number of voters.)
Each voter has two strategies, A and B. The nine of them could be divided into two
groups: A-supporters and B-supporters, but we don’t know the exact sizes of these two
groups. A-supporters have the utility function ui (A wins) = 1 and ui (B wins) = 0. And
vice versa for B-supporters.
Suppose Player 1 is an A-supporter. Show that voting for B is a weakly dominated
strategy for him.