Quiz 3

Question 1

a) Does either player have a dominant strategy? Explain.

b) Suppose that Player B has adopted the strategy of Staying 1/5 of the time and swerving 4/5 of the
time. Show that Player A is indifferent between swerving and staying.

c) If both player A and Player B use this probability mix, what is the chance that they crash?

Question 2

If firm #1 announces they will offer a warranty regardless of what firm #2 does, is this a credible threat?
Why or why not?
Question 3

Joanna has a credit card account with Card Bank. Card Bank's available strategies are raise
Joanna's credit card interest rate or do nothing. Joanna's available strategies are transfer her Card
Bank account balance to another creditor or do nothing. If Card Bank raises Joanna's interest
rate and Joanna does nothing, Card Bank increases profits by $1,000 while Joanna receives $-
1,000. If Card Bank raises Joanna's interest rate and Joanna transfers her account to another
creditor, Card Bank receives $-300 while Joanna receives $-100. If Card Bank does nothing and
Joanna does nothing, each player receives $0. If Card Bank does nothing and Joanna transfers
her account to another creditor, Card Bank receives $-300 while Joanna receives $-150.
Diagram the game tree for this sequential game. Indicate any Nash equilibria.

A) Show this game in strategic form. Find a mixed strategy Nash equilibrium in which each of them has a
positive probability of going to each of the movies. What is the expected payoff to each player in this
mixed strategy Nash equilibrium?