Econ 318: Game Theory P.S.

#5

Problems Set #5:

Due on 11/22 at 5:00 PM Eastern Time. Please upload your answers to the following
questions to Canvas as a single pdf.

Practice Exercises to be graded based on perceived effort and completeness (15

points)

1. Ch. 10, #1
2. The Red Sox are considering signing a free-agent right-fielder. Their alternative
is to let a young prospect play the position instead. Scott Boras, a sports-agent,
has a client who is a good but not great hitter who plays right-field. The Boras
client has been in the majors for 7 years and has recorded consistently above
average statistics for hitting and played well on defense. The quality of the
potential alternative is less certain. Media reports have predicted three possible
profiles for the player: he could be above average hitter and play well on defense,
he could be average at both, or he could be below average at both. Boras’ scout
predicts a 25% chance he’s at either extreme and a 50% chance he is average.
Boras believes the Red Sox are the most likely to pay for his free agent player and
must decide whether to play “hard-ball” (HB) in the negotiations or not (NHB).
If he plays hardball and the Red Sox agree to sign the player, the player gets $20
mil per year. If he doesn’t play HB and the Red Sox sign the player, the player
gets $10 mil. If the player doesn’t sign with the Sox, he will most likely get $8
mil from another team. Boras gets 10% of any money the player signs for. The
outcome for the Red Sox depends on the quality of the prospect they have. The
Red Sox have very good data on their minor leaguers and once they sit down to
analyze it (which they’ll do before signing a free-agent) they can predict with near
certainty what type of player the prospect will be. If he is an above average
player, he would be an equivalent fill-in for the free-agent and therefore there is
no added benefit to adding him (though there is a cost if they sign him to a
contract). If he is average, the free-agent would be a better player to have but the
team values that difference at $12 mil. If the prospect is below average, the free
agent has a value of $22 million to the Red Sox. If they don’t sign the player,
we’ll assume they get 0 no matter what type the prospect is since they are no
better or worse off than they were before not signing the free agent.
a) Set up the above scenario as a Bayesian Game. For this game, you can
assume that the player has given Boras full bargaining authority and
therefore does not have any decisions to make in this game.
b) What is the Bayes-Nash Equilibrium to this game?
c) Assuming the probability of the prospect being above average stays at
25%, at what probabilities for the other two types is the Boras indifferent
between playing hardball and not?

3. A football head coach, on offense, is trying to decide whether to attempt a 55-yard

field goal or go for it on 4th down. The problem for the coach is that the other
head coach, currently on defense, is enigmatic and is sometimes aggressive and

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sometimes conservative. In this case, an aggressive coach is going to get extra

benefit from trying to block a field goal or sack a quarterback with a blitz (B),
while a conservative coach is going to get more benefit from playing things safe
(S) with extra defensive players in coverage. In this game, the offensive coach
must first decide whether to kick the field goal (K) or go for it (G). The defensive
coach, seeing the offensive coach’s choice and their own type, decides whether to
blitz or play it safe. For the offensive coach, the payoffs are: (K; B) = 50, (K; S)
= 100, (G; B) = 80, and (G; S) =10. For the defensive coach, the payoffs are (K;
B) = 50, (K; S) = 0, (G; B) = 20, and (G; S) =90 when he’s in a conservative
mood, but he gets a 100-unit benefit from blitzing if he’s in an aggressive mood,
regardless of the other coach’s choice. The probability that the defensive coach is
aggressive is p and that he’s conservative is 1-p.
a) Draw the Bayesian game described above
b) If p = 0.25, what is the Bayesian Nash equilibrium (BNE)?
c) For what values of p should the offensive coach kick (K) and for what
values should he go for it (G)?

4. Assume two people are interested in Patriot’s tickets. Both value the tickets at
either $100 or $200, depending on their mood (which they know) when they have
the chance to buy them. Let’s assume they are happy 50% of the time and willing
to value the tickets at the high amount and sad 50% of the time and value them at
the low amount. A pair of tickets is posted on the college message board and the
poster says they’ll collect bids which must be limited to $25 increments. Any ties
will be broken so each tying bid has an equal chance of winning.
a) If this is a first price auction, find a Bayes-Nash Equilibrium.
b) Does the BNE you found above still hold if the odds of being happy go up
to 75%? Show why or why not.
c) If this is instead a 2nd price auction with the original probabilities, does
your BNE from part a hold? If not, find a new BNE.
d) Returning to a first price auction, find a BNE if there is a third bidder.

5. Ch. 10, #3 (Allow a 50/50 coin flip determine winner of ties)

6. Ch. 10, #4
7. While walking the streets of New York, you see a person (the dealer) taking bets
on three-card Monte. The game is played with three cards, 1 queen and two
others. The dealer shows the player the queen, then proceeds to quickly move the
cards around on a table. When the dealer is done moving the cards around, the
player is asked to “find the queen.” The player’s bet is doubled if they find it and
lost if they do not. This game is usually played as a confidence game so that the
player can’t win, but for our purposes we’ll assume it is honest.
a) Say the game is run like the Monty Hall game. The player chooses a card
initially, then the dealer removes one of the two remaining cards and the
player has the opportunity to switch their choice. What are the odds that
each card (the one initially selected and the one remaining unselected

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card) are the queen? If the player has bet $10, what is the expected value
of each choice?
b) Say the game includes 4 cards instead of 3 and the dealer removes 2
unselected cards. What are the odds that each card (the one initially
selected and the one remaining unselected card) are the queen? If the
player has bet $10, what is the expected value of each choice?
c) Say the game is again played with 4 cards, but now the player will get two
turns to select with the dealer removing one card after each of the two
selections. That is: the player initially chooses a card, the dealer removes
one of the three, the player can reselect their initial card or select a
different card, and the dealer removes one of the two unselected cards in
the second round. Is the player better off sticking with their initial choice
or changing after the first round?

8. Ch. 11, #1
9. Ch. 11, #5

Graded Problem to be graded based on the accuracy of answers (5 points)

1. Use the following extensive form game to answer the questions below:

P1

L R

P2 P2

U D U D

10 5 8 3
? ? ? ?

a) P2 has 3 possible types. The payoffs if she is “average” are 5, 7, 9, and 10

(reading across left to right). If the P2 is known to be average (i.e. no
private information), what would be the SPNE for this game.
b) Again assuming P2 is known to be average, find all SPNE if P2 doesn’t
see P1’s choice before deciding.
c) Return to the case where P2 sees P1’s choice. P2’s other two potential
types are “above” and “below” average and her type is private
information. If she is above average, the payoffs following up (U)
increase by 3 compared to the “average” payoffs. If she is below average,

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Econ 318: Game Theory P.S. #5

the payoffs for down (D) increase by 4 compared to the “average” payoffs.
Depict this as a Bayesian game including the correct payoffs.
d) What is the BNE to this game if there is a 25% chance that P2 is above
and below average and a 50% chance P2 is average?
e) If P2 started the game instead by choosing a color, red or black, and it is
known that below average types pick red while average and below average
types pick black, what are the updated probabilities of each type (all 3) if
P1 observes P2 choose black at the beginning of the game?

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