Solutions for Problem set 9

Q1.

We denote player 1 as P1 and player 2 as P2.

a) If P2 plays ‘X’, P1 plays ‘B. If P2 plays ‘Y’, P1 plays ‘B’. If P2 plays ‘Z’, P1 plays ‘A’.
If P1 plays ‘A’, P2 plays ‘Y’. If P1 plays ‘B’, P2 plays ‘X’. If P1 plays ‘C’, P2 plays ‘Z’.

So, {B, X} is the Nash equilibrium for this game.

Please note that the Nash equilibrium is always the strategies the players play, and not the payoffs they
receive. For example, for this game, the payoffs for the players at Nash Equilibrium are 7 and 8 respectively,
but we mention Nash equilibrium as the strategies which yield those payoffs.

b) Yes, this Nash equilibrium is dominance solved as well. For P1, strategy ‘C’ is strictly dominated by
strategy ‘B’. For P2, no strategy is strictly dominated in the full game. But after deletion of strategy ‘C’,
strategy ‘Z’ is strictly dominated by strategy ‘X’. After deletion of ‘Z’ in the pruned game, strategy ‘A’ is
strictly dominated by strategy ‘B’ for P1. After deletion of strategy ‘A’, strategy ‘Y’ is strictly dominated
by strategy ‘X’ for P2. Thus, {B, X} is the unique Nash equilibrium for this game.

Q2.

a) In this game, both players’ dominant strategy is to choose P = 5 Million dollars. Thus, {5 Million, 5
Million} is the Nash equilibrium for this game.

b) If Boeing contemplates deviating from a P = 10 Million dollar strategy, it should weigh the following
two income streams and related payoffs to choose the right strategy:

P = 5 Million dollars 270 30 30, … 30 270 + 40(30) = 1470 Million dollars

P = 10 Million dollars 50 50 50 … 50 50 + 40(50) = 2050 Million dollars

Clearly, Boeing would like to continue playing P = 10 Million strategy.

Q3.

In the simultaneous move game, Firm 1 plays its dominant strategy Passive and Firm 2, knowing that Firm
1 will play its dominant strategy, will play Aggressive. Thus the Nash equilibrium is {Firm 1, Firm 2} =
{Passive, Aggressive}.

b) If Firm 1 can choose first, then if it chooses “Aggressive” Firm 2 will choose “Passive” and Firm 1 will
receive 33. If Firm 1 instead chooses “Passive,” then Firm 2 will select “Aggressive” and Firm 1 will receive
a payoff of 30. Therefore, if Firm 1 can move first, it does best to select “Aggressive” in which case Firm
2 will select its best response “Passive” earning Firm 1 a payoff of 33 and Firm 2 a payoff of 10.
 Firm 2's Payoff - Payoff -
decision Firm1 Firm 2

Aggressive 25 9
Aggressive
Passive 33 10
Firm 1's
decision
Aggressive 30 13
Passive
Passive 36 12