Exercises 2 - ANSWERS

1. Consider the following game,

Player 2
L M R
A 2,0 3,1 0,0
Player 1 B 1,1 2,2 1, 2
C 3,2 2,2 2,1

a) Is there a dominant strategy equilibrium of the game?

If Player 2 chooses strategy L, Player 1 chooses strategy C. If Player 2 chooses strategy M,

Player 1 chooses strategy A. There is no need to continue checking because we already see
that Player 1 does not have a dominant strategy. Therefore, the game lacks a dominant
strategy equilibrium.

b) Find the Nash equilibrium of the game.

There are two Nash equilibria of the game:

If Player 2 chooses strategy L, Player 1 chooses strategy C, and if Player 1 chooses strategy
C, Player 2 chooses strategy L or M. Therefore, (C,L) is a Nash equilibrium.

If Player 2 chooses strategy M, Player 1 chooses strategy A, and if Player 1 chooses strategy
A, Player 2 chooses strategy M. Therefore, (A,M) is a Nash equilibrium.

c) What is the outcome of the iterative elimination of (weakly) dominated

strategies?

For Player 1, B is (weakly) dominated by C. Then, for Player 2, R is (weakly) dominated by

M and L is (weakly) dominated by M. Finally, for Player 1 C is (strictly) dominated by A.
So, (A,M) = (3,1) is the outcome of the iterative elimination of dominated strategies.

Note that, since we eliminated also the weakly dominated strategies, one of the Nash
equilibria (C,L)=(3,2) is eliminated and the other becomes the result of the iterative
elimination procedure.

d) Find the pareto efficient outcomes of the game.

(C,L) =(3,2) pareto dominates each of the other outcomes in the game. So, it is the only
pareto-optimal outcome.
 2.
Player 2
L M R
A -3,2 -1,4 -2,0
Player 1 B 4,1 -1,0 2, x
C 0,4 3,-1 1,2

Consider the above normal form game.

a) What must be the value of x, if (B,R) is the unique Nash equilibrium?

Besides (B,R) = (2,x), none of the outcomes other than (B,L) =(4,1) has the potential to be
a Nash equilibrium. So, in order for (B,R) to be the unique Nash equilibrium of the game,
Player 2 needs to diverge to R if Player 1 plays B. For that, x needs to be greater than 1.

b) Let x=0. Find the pareto efficient outcomes of the game.

(C,L) pareto dominates (A,L), (A,M), (A,R) and (B,M).

(B,L) pareto dominates (B,R) and (C,M).
(B,L), (C,L) and (C,R) are not pareto dominated by any other outcome. So, (B,L), (C,L) and
(C,R) are the pareto efficient outcomes of the game.

3. Consider the following scenario:

Melis and Ahmet are going to the same conference, and each is expecting the other
to be there, but they haven't seen each other yet. The conference participants are
offered two alternative activities on the free day before the conference starts:
swimming or hiking. They both hope to see each other -- if they don't they will have
no fun, and each prefers swimming over hiking. They must each decide what to do
before knowing where the other is going.
a) Design a 2x2 normal form game that represents the scenario.

Ahmet
swim hike
swim 2,2 0,0
Melis hike 0,0 1,1

b) Is there a dominant strategy equilibrium of the game?

No. Melis chooses to swim if Ahmet swims and she chooses to hike if Ahmet hikes. The
same is true also for Ahmet. That is, none of the players has a dominant strategy, so the
game lacks a dominant strategy equilibrium.
 c) Is there a Nash equilibrium of the game?

There are two Nash equilibria of the game: (swim, swim)= (2,2) and (hike,hike)=(1,1)

d) What are the pareto-efficient outcomes of the game?

There is only one pareto efficient outcome of the game: (swim, swim). It pareto dominates
every other outcome.

4. Consider the following game:

Player 1 and Player 2 simultaneously choose one side of a coin. If the sides match,
because they both showed heads or both showed tails, Player 1 wins, Player 2
looses. Otherwise, Player 2 wins, Player 1 looses.

a) Draw the 2x2 normal form representation of the game.

Player 2
Heads Tail
Heads 1,-1 -1,1
Player 1 Tail -1,1 1,-1

b) Is there a dominant strategy equilibrium of the game?

No because if Player 2 chooses Heads Player 1 chooses Heads but if Player 2 chooses Tails,
then Player 1 chooses Tails. So, Player 1 does not have a dominant strategy. Similarly, we
can show that Player 2 does not have a dominant strategy either. Hence, the game lacks a
dominant strategy equilibrium.

c) Find the Nash equilibrium of the game.

There is no Nash equilibrium in this game. At each outcome, one of the players diverge for
another outcome.

d) Find the pareto efficient outcomes of the game.

None of the outcomes in the game is pareto dominated by another outcome. So, all
outcomes are pareto efficient.