Microeconomics 2nd Edition Karlan Solutions Manual

Microeconomics 2nd Edition Karlan
Solutions Manual
Visit to Download in Full: https://testbankdeal.com/download/microeconomics-2nd-edi
tion-karlan-solutions-manual/
Chapter 09 - Game Theory and Strategic Thinking
CHAPTER 9
GAME THEORY AND STRATEGIC THINKING
Chapter Overview
This chapter introduced the concept of strategic games. Many real-life situations can be
analyzed as if they were strategic games, with associated rules, strategies, and potential
payoffs.
Game theory can explain the logic behind outcomes that might not seem intuitive at first.
Sometimes, for example, both players in a simultaneous game may choose to behave in a way
that makes both worse off. When games are played in turns rather than simultaneously, the
first mover’s decision can dictate the outcome of the entire game. With repeated play,
however, the first mover’s advantage weakens. Players who can communicate with each other
and agree on a strategy can often secure a better outcome than if they acted alone. Such
agreements may break down if one side tries to get ahead by defecting.
Backward induction is another useful analytical tool; it allows you to break down your decisions
and predict how they will affect others’ decisions and shape the final payoff.
When trying to solve a real-life problem, whether societal, personal, or business, it helps to
think through these strategic issues. Doing so can help you see how to “play” the game given
the rules and constraints. It also can help you see how to change the rules and constraints, if
possible, to help get to a better outcome.
Much of the analysis in this chapter involved one player guessing what the other will do and
acting accordingly. In the next chapter, we’ll see that knowing what one player is planning to do
isn’t always easy, and that a lack of information can have real economic consequences.
Learning Objectives
LO 9.1: Understand strategic behavior and describe the components of a strategic game.
LO 9.2: Explain why noncooperation is always the outcome in the prisoners’ dilemma.
LO 9.3: Identify whether or not a player has a dominant strategy in a one-time game.
LO 9.4: Identify whether or not a Nash equilibrium will be reached in a one-time game.
LO 9.5: Explain how a commitment strategy can be used to achieve cooperation in a one-time
game.
LO 9.6: Explain how repeated play can enable cooperation.
LO 9.7: Explain how backward induction can be used to make decisions.
LO 9.8: Use a decision tree to solve a sequential game.
LO 9.9: Define first-mover advantage and identify it in practice.
LO 9.10: Explain why patient players have more bargaining power in repeated games.
9-1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LO 9.11: Explain how a commitment strategy can allow players to achieve their goals by
limiting their options.
Chapter Outline
OPENING STORY: LITTERBUGS BEWARE

Games and Strategic Behavior (LO 9.1)
Rules, Strategies, and Payoffs
One-Time Games and the Prisoner’s Dilemma
Prisoner's Dilemma (LO 9.2)
Finding the Dominant Strategy (LO 9.3)
Reaching Equilibrium (LO 9.4)
Avoiding Competition through Commitment (LO 9.5)
Promoting Competition in the Public Interest
Repeated Play in the Prisoners’ Dilemma (LO 9.6)
The Tit-for-Tat Strategy
BOX FEATURE: REAL LIFE – WHAT DO PRICE-MATCHING GUARANTEES GUARANTEE?
BOX FEATURE: FROM ANOTHER ANGLE – TIT-FOR-TAT AND HUMAN EMOTIONS
Sequential Games
Think Forward, Work Backward (LO 9.7)
Deterring Market Entry: A Sequential Game (LO 9.8)
BOX FEATURE: WHAT DO YOU THINK? – SURVIVING WITH STRATEGIC THINKING
First-Mover Advantage in Sequential Games (LO 9.9)
Repeated Sequential Games (LO 9.10)
Commitment in Sequential Games (LO 9.11)
BOX FEATURE: REAL LIFE – DR. STRANGELOVE, OR HOW WE LEARNED TO
LOVE THE COMMITMENT DEVICE
Beyond the Lecture
Class Discussion: Games and Strategic Behavior (LO 9.1)

Consider showing students this brief interview with Vanessa Rousso, a professional poker
player briefly discussing the use of game theory in poker.
1. What strategic behavior occurs in poker (or similar games)?
2. How can game theory be applied in poker?
3. Can game theory give someone an advantage in poker?
Class Activity: Games, Strategic Behavior, and the Prisoner’s Dilemma (LO 9.1, LO 9.2)
Consider placing students in groups and having them work through a game theory problem. A
simple prisoner’s dilemma works well with the class. You can set up a number of scenarios for
students to discuss. Additionally, consider having students attempt one of the free game theory
applets available here.
Class Discussion: One-Time Games and the Prisoner’s Dilemma [LO 9.2]
9-2
Education.
Consider showing this clip from the British game show Golden Balls. The players must simply
decide to split or steal. If they both choose split, they split a sum of money. If one person splits
and one steals, the person who steals gets all of the money. If they both steal, they get nothing.
You can use well-timed pauses while showing the video to ask students if they understand and
what they think is going to happen. It’s a great example of the prisoner’s dilemma, attempts at
cooperative game theory, and [Spoiler Alert] a player defecting from the cooperation strategy.
Students really respond well to the “surprise” ending in this clip.
Class Discussion: One-Time Games and the Prisoner’s Dilemma [LO 9.2]
For a short comic relief, you can show this clip from the cartoon Dilbert. Keep in mind that
games only work if we assume everyone understands the game, strategies, payoffs, and rules.
If we begin to include outside influence, the strategies and payoffs can change.
Clicker Questions
There are three main purposes to clicker questions. First, they are a great way to do a quick
and instant “on demand” test of student understanding of the material. You can cover
material, and instantly get feedback on student comprehension. You can see whether you need
to explain certain topics again, or move on to the next subject. Second, they are a great
method to break up the class and take a moment away from lecture. It gets the students
actively involved. Finally, certain clicker questions can be framed in a “discussion” manner, in
which you can invite students to talk about the possible right answer with their peers. You can
instruct students to convince their classmate of a right or wrong answer.
1. What does it mean for a strategy to be dominant? [LO 9.1, LO 9.2]

A. The strategy provides the highest payoffs most of the time
B. The strategy will always make the other players lose
C. The strategy will create a positive sum outcome
D. The strategy is the best choice for you no matter what the other players choose
Feedback: Dominant strategies are best for you no matter the choice of the other players.
2. Players will be more likely to cooperate in simultaneous games when [LO 9.3]
A. The game will be repeated
B. Large positive payoffs exist for one player
C. The game is zero-sum
D. The rules and payoffs of the game aren’t understood by one of the players
3. In sequential games, backwards induction means that? [LO 9.4]

A. The game is played in reverse and the last player chooses first
B. Optimal strategies are determined starting with the last player, and going to the first, in
order to determine the outcome of optimal play
9-3
Education.
C. The last player assumes the first player doesn’t know the payoffs, so no useful predictions
can be made
D. The players in the middle of the game lose because the first and last players have an
advantage
4. The prisoners’ dilemma is a famous game, and has many real-life applications. What is true
about this type of game? [LO 9.2]
A. The Nash equilibrium is not a result of dominant strategies
B. Players cooperate as a dominant strategy
C. The Nash equilibrium is not the highest possible payoff for the players
D. Real life examples of this type of game often involve illegal behaviors
Feedback: The Nash equilibrium leads to worse payoffs for both players compared to a
cooperative outcome. However, it is the dominant strategy of both players to NOT cooperate!
5. Which of the following could most likely turn into a prisoner’s dilemma game? [LO 9.2]
A. A husband and wife each deciding how much spending money to bring on vacation
B. A student and professor trying to solve a grade dispute
C. Two teenage boys trying to embarrass each other to win the affections of a girl
D. Two countries deciding the size of their nuclear arsenal
Feedback: Perhaps a student discussion question. [C] and [D] could both be correct. For the
boys, the strategies are “embarrass” or “not embarrass” their friend, with a dominant strategy
for each being “embarrass”, even though it makes them both look bad. For the two countries,
the dominant strategy could be “get more nukes”.
Solutions to End-of-Chapter Questions and Problems
Review Questions
1. Taking an exam can be considered a game. Describe a rule, a strategy, and payoff for this
game. [LO 9.1]
Answer: Rule: The exam might have a time limit, such as one hour. Another rule could be
that you have to show your work when solving a problem in order to get full credit.
Strategy: Instead of taking the exam in order, you might decide to start with the questions
that are worth the most points, to make sure you allocate your time for the greatest payoff.
Payoff: The score/grade you receive on the exam is your payoff.
2. Why is strategic behavior required to win a presidential election? Describe some of the
rules, strategies, and payoffs that define this game in the real world. [LO 9.1]
9-4
Education.
Answer: Strategic behavior is about thinking about what your opponent is likely to do and
letting this inform your own choices. Elections involve a lot of strategic behavior; candidates
pay attention to the messages and actions of their opponents and decide the best way to
respond. Some rules of this game include guidelines for how votes are counted and limits on
sources of fundraising. Some of the strategies involve choosing where to campaign and
when, choosing what message to emphasize to certain voters, and whether to run negative
ads about your opponent. Payoffs include campaign contributions, endorsements, and
votes.
3. Felix and Sam are roommates. They both want the dishes to be washed, but each would
prefer that the other person do it. Use the decision matrix in Figure 9Q-1 to explain why Felix
and Sam are likely to end up with a sink full of dirty dishes. Their preferences are ranked from 1
(lowest) to 4 (highest). [LO 9.2]
Answer: If Sam does dishes, Felix prefers not do the dishes (4) rather than to help Sam (2). If
Sam does not do dishes, Felix prefers not to do dishes either (3) rather than do all the dishes
himself (1). No matter what Sam does, Felix prefers not to do dishes. Sam has the same
preferences as Felix. If Felix does dishes, Sam prefers not do the dishes (4) rather than to
help Felix (2). If Felix does not do dishes, Sam prefers not to do dishes either (3) rather than
do all the dishes himself (1). No matter what Felix does, Sam prefers not to do dishes. Alas,
Felix and Sam will wind up with dirty dishes.
4. Two neighbors share a pond they have stocked with catfish. They have agreed upon the
amount of fishing each can do in order for the stock of catfish to replenish itself. If one neighbor
increases the amount he fishes a little bit, the catfish stock could still replenish itself. If both
neighbors increase their fishing, the stock will not be sustainable. Both neighbors would like to
cheat and increase the amount they fish, but want the other neighbor to stick to the
agreement. [LO 9.2]
a. What is the noncooperative outcome, and why does it occur?
b. What is the cooperative outcome, and how could the neighbors achieve this outcome?
Answer:
a. The noncooperative outcome is for both neighbors to increase fishing, which will make
them both worse off. This outcome occurs because they both have an incentive to cheat
if the other neighbor sticks to the agreement. They both know they can be better off by
cheating if the other neighbor doesn’t, so both wind up cheating.
b. The cooperative outcome is to stick to the original agreement about the amount of
fishing that is sustainable without having to restock the pond. The neighbors could
achieve this outcome if they can agree to a commitment strategy, such as sole financial
responsibility to restock the pond if one of the neighbors cheats.
5. You have been texting with your friends trying to make plans for this evening. Your best
friend Jocelyn is not sure if she will finish her homework in time to come out, but if she does,
she wants to go to a new restaurant on the north end of town that you've both been wanting to
9-5
Education.
try. Another group of friends is going to a restaurant on the south end of town, but you've
already been to this restaurant and it was only okay. No one is returning your calls, but you
need to get on the subway and head into town if you want to do anything this evening. You
have to decide whether to head north or south. Do you have a dominant strategy? Explain why
or why not.
Answer: Something can only be a dominant strategy if you want to choose it no matter
what the other players are doing. It's true that you would prefer to head north if you knew
Jocelyn is coming out, but if you knew Jocelyn was staying home, you would prefer to head
south. Thus, you do not have a dominant strategy in this case.
6. You have just played rock, paper, scissors with your friend. You chose scissors and he chose
paper, so you won. Is this a Nash equilibrium? Explain why or why not.
Answer: Even though you don't regret your choice, your friend regrets his choice. A Nash
equilibrium is reached when all players choose the best strategy they can, given the choices
of all other players. In other words, this is a point in a game when no player has an incentive
to change his or her strategy, given what the other players are doing. Because your friend
regrets his choice, this is not a Nash equilibrium.
7. Two firms each have the option of polluting during production or cleaning up their
production process such that they don't pollute. Of course, polluting is cheaper than not
polluting. The payoffs for each of the choice combinations are shown in the decision matrix in
Figure 9Q-2. The government would like to stop pollution by making it illegal and charging a
fine if a firm is found polluting. How large does the fine need to be to keep a firm from
polluting?
Answer: If the government charges a fine for pollution, this changes the payoffs. A fine of,
say, $10,000 is too small. There is still an incentive to pollute. But a fine of $65,000 is just
enough to incentivize the firms to choose not to pollute.
8. Explain how you could use a tit-for-tat strategy to motivate your roommate to do his share
of the cleaning. [LO 9.6]
Answer: Tit-for-tat involves taking the same action (or inaction) as the other player. If your
roommate does not pull his weight on cleaning, tit-for-tat would mean you stop doing your
portion of the cleaning as well. Of course, this may be difficult for you if your roommate has
a higher tolerance for a mess than you do. If that is the case, you could find some other
chore of importance to your roommate, such as taking turns buying snacks, and refuse to
cooperate.
9-6
Education.
9. Toni and Kala are new coworkers. They make a plan to go out together every Thursday
night. On their first Thursday night out, Toni buys a pitcher of beer and shares it with Kala. Kala
is excited to discover that her Thursday night outings will include free beer as well as a way to
have fun with her new coworker. Explain why Kala is likely to be disappointed. [LO 9.6]
Answer: It is unlikely that Toni was signaling that she will always buy the drinks when they
go out on Thursdays. Customarily, people take turns buying rounds. If Kala does not
respond with tit-for-tat buy buying the next pitcher, Toni will likely respond with tit-for-tat
by not buying more pitchers either.
10. Suppose your goal is to be promoted at your job. Use backward induction to determine
what you should do to work toward that goal right now, and describe each step in your logic.
[LO 9.7]
Answer: If your goal is to be promoted, you would start by finding out the requirements and
preferred qualifications of the job you want. Next, you would assess your own skills,
experience, and education to determine how they match up with the job requirements and
preferences. As of today, you would work on obtaining or enhancing skills, experience, and
knowledge in alignment with the necessary qualifications for the job you want. Perhaps you
sign up for an advanced economics course!
11. You are playing a game with a friend. It’s your move but you don’t have a dominant
strategy. Your payoff depends on what your friend does after your move. You consider flipping
a coin to decide what to do. You are about to reach for a coin, but then you realize that your
friend has a dominant strategy. Explain how using backward induction (rather than a coin toss)
will now determine your next move. [LO 9.7]
Answer: If you don’t have a dominant strategy because your payoff depends on what your
friend does after your move, it’s unclear how you should decide. However, if you reason
that your friend has a dominant strategy, you can use your expectation of what they will do
to work backward. Knowing that your friend has a dominant strategy takes the guesswork
out of what they will do next. You can now choose your own move based on confidence
that your friend will follow his dominant strategy.
12. Melissa let Jill cheat off of her during a history exam last week. Now Melissa is threatening
to tell on Jill unless Jill pays her $50. Use the decision tree in Figure 9Q-3 to explain whether Jill
will pay Melissa to keep her quiet. [LO 9.8]
Answer: Jill will not pay Melissa. Jill knows that Melissa will also be expelled if she reveals
that she let Jill cheat. Jill knows Melissa will not want to get expelled for $50 and will call
Jill’s bluff.
9-7
Education.
13. Nicolas has asked for a raise. His boss must decide whether to approve his request. If
Nicolas doesn’t get the raise, he will have to decide whether to stay at his job or quit. Construct
a decision tree for these sequential decisions and choose a payoff structure where Nicolas has a
dominant strategy to stay at his job even without getting the raise. [LO 9.8]
Answer: Numbers are arbitrary, but students should choose a payoff structure such that
Nicolas has a dominant strategy to stay even if he is not offered the raise. If Nicolas’s boss
knows his payoff structure, he will not offer the raise. A sample decision tree is below.
14. Job offers could be considered a one-round bargaining game with a first-mover advantage:
The company offers you a job at a certain salary, and you can take it or leave it. Explain why the
company might not capture all the surplus in this game, even if you can’t make a counteroffer.
[LO 9.9]
Answer: Even if you cannot make a counteroffer, you do still have options. Presumably,
you have applied to more than one place. At least the company who plans to hire you
should assume that you are looking into other options and may even have other offers
on the table. Therefore, they would want to make you an offer attractive enough that
you accept it over some other offer you may have.
9-8
Education.
15. Muriel likes her job, but her boss gives lousy bonuses. Muriel was recently offered a new
job with better rewards, and her friend wants to know if she intends to take it. “It depends on
whether the bonus this year is generous. Let’s wait and see. We’ll find out next week.” Explain
why Muriel is likely to be accepting the new job. How could she improve her strategy if she
wants to stay at her cur-rent job and be better rewarded? [LO 9.9]
Answer: Waiting to see what her bonus is this year is not a good strategy. There is no
reason she should expect her boss to behave differently than usual. Her boss would have no
reason in increase the size of bonus unless Muriel moves first and tells him that she has
another offer she is prepared to take if her bonus structure does not increase by a certain
amount.
16. Suppose you are moving out of the country and need to sell your car fast. Explain why you
are likely to get lower offers from used-car dealers if they find out that you are moving away
soon. [LO 9.10]
Answer: If dealers know you are moving soon, they know that you do not have time to be
patient and wait for a good offer. Due to the limits on your time, dealers will have the upper
hand in negotiating a price. They have other cars to sell and can be more patient.
17. Hal is negotiating his salary for a job offer. Hal’s potential employer moves first by making
an offer. Hal knows he will accept the offer but asks for a couple of weeks to think it over. If the
offer was acceptable to Hal, why did he do this? [LO 9.10]
Answer: If Hal is not desperate to get paid right away, asking for more time may increase
his offer. Hal is hoping that by asking for time the employer will see this as a sign that he is
considering other options. Hal is also hoping that the employer is less patient for the work
to begin and will increase the offer in order to get a quicker decision.
18. Many warrior cultures have codes of conduct that make retreat from battle and other
cowardly behaviors extremely dishonorable. Warriors are expected to die bravely in battle
rather than surrender; if they do retreat, they face an enormous social stigma. Paradoxically,
these codes could help warriors to win their battles. Explain. [LO 9.11]
Answer: The cultural pressure and stigma essentially remove the option for retreat. If a
warrior knows that retreat is never going to be an acceptable option, his only choice is to
fight. Knowing that he must win his battles or die trying, he will fight harder.
9-9
Education.
19. A town’s two gas stations are each considering lowering prices to attract more sales. How
this affects the profits for each gas station depends on whether the other station also lowers
prices. The decision matrix in Figure 9Q-4 shows the payoffs, depending on what each player
decides to do. Suppose both gas stations lower their prices, and they find themselves in the
worst-case scenario in which both have also lowered their profits. Now suppose gas station A
announces in an advertisement that it is committed to keeping the new low prices. Why would
gas station A do this? What outcome would you expect? [LO 9.11]
Answer: Gas station A is using a commitment strategy to signal to gas station B that it won’t
be returning to higher prices. Gas station A is best off if it has low prices while gas station B
has high prices. However, gas station B might keep prices low in hopes that gas station A is
the one to retreat (switch back to higher prices). With the public announcement, gas station
A has “burned its bridges,” and gas station B knows that it will have higher profits ($65,000
rather than $35,000) if it returns to higher prices. This will leave gas station A with the
higher profits at $125,000.
Problems and Applications
1. Say whether each of the following is a rule, a strategy, or a payoff. [LO 9.1]
a. In chess, when you capture your opponent’s king, you win the game.
b. In Monopoly, players frequently mortgage their existing properties to raise cash to buy new
ones.
c. In chess, the rook piece can move any number of spaces directly forward, back-ward, or to
either side, but it cannot move diagonally.
d. In rock-paper-scissors, you might always play rock.
Answer: Rules define the actions that are allowed in a game. Strategies are the plans of
action that players follow to achieve their goals. Payoffs are the rewards that come from
particular actions.
a. Payoff: In chess, when you capture your opponent’s king, you win the game.
b. Strategy: In Monopoly, players frequently mortgage their existing properties to raise cash
to buy new ones.
c. Rule: In chess, the rook piece can move any number of spaces directly forward, backward,
or to either side, but it cannot move diagonally.
d. Strategy: In rock-paper-scissors, you might always play rock.
2. Sharon is going to an auction. Say whether each of the following is a rule, a strategy, or a
payoff. [LO 9.1]
a. Bids must increase in increments of $20.
b. The highest bid wins the item being auctioned.
c. Sharon waits until the bidding is just about to close before she enters a bid.
d. The money raised from the auction goes to charity.
9-10
Education.
Answer: Rules define the actions that are allowed in a game. Strategies are the plans of
action that players follow to achieve their goals. Payoffs are the rewards that come from
particular actions.
a. Rule. Bids must increase in increments of $20.
b. Payoff. The highest bid wins the item being auctioned.
c. Strategy. Sharon waits until the bidding is just about to close before she enters a bid.
d. Rule. The money raised from the auction goes to charity.
3. Two families are trying to decide whether to donate to a fund to build a public park. The
payoffs are shown in Figure 9P-1. [LO 9.2]
a. What is the mutually beneficial outcome?
b. Acting in their best interests, what strategy will each family choose?
c. Explain why this game is or is not an example of a prisoners' dilemma.
Answer: In the prisoners' dilemma, noncooperation is the outcome. If Family B donates,

Family A is best off not donating. If Family B does not donate, Family A is best off not
donating. The same is true for Family B: If Family A donates, Family B is best off not
donating. If Family A does not donate, Family B is best off not donating. Thus, both families
choose not to donate. But it is clear that they could be better off by cooperating at
donating. However, acting in their best interests yields a less-than-optimal outcome. Thus,
this is an example of the prisoners' dilemma.
4. In Figure 9P-2, what is the dominant strategy for Player A? What is the dominant strategy
for Player B? [LO 9.3]
Answer: A dominant strategy is a strategy that is the best one for a player to follow no
matter what strategy other players choose. Player A should choose Strategy 1: If Player B
chooses Strategy 1, Player A should choose Strategy 1 (–2 versus –3). If Player B chooses
Strategy 2, Player A should choose Strategy 1 (1 versus 0). Thus, Player A has a dominant
strategy to choose Strategy 1.
Player B should choose Strategy 1: If Player A chooses Strategy 1, Player B should choose
Strategy 1 (–2 versus –3). If Player A chooses Strategy 2, Player B should choose Strategy 1
(1 versus 0). Thus, Player B has a dominant strategy to choose Strategy 1.
5. A town’s two gas stations are each considering lowering prices to attract more sales. How
this affects the profits for each gas station depends on whether the other also lowers prices.
The decision matrix in Figure 9P-3 shows the payoffs, depending on what each player decides to
do. Identify any Nash equilibria. [LO 9.4]
Answer: A Nash equilibrium is an outcome in a game that is reached when all players
choose the best strategy they can, given the choices of all other players. There are two Nash
equilibria: (1) Gas station B lowers price and gas station A keeps higher price, and (2) Gas
station A lowers price and gas station B keeps higher price. In these two quadrants, neither
9-11
Education.
player can unilaterally improve its position by changing its strategy unless the other player
also changes its strategy.
6. Consider again the two families trying to decide whether to donate to a fund to build a public
park. The payoffs are shown in Figure 9P-1. [LO 9.4, 9.5]
a. What is the Nash equilibrium?
b. Suppose Family A agrees to match the donation of Family B. Under these new circumstances,
what strategy will each family choose?
Answer: Each family has a dominant strategy to not donate. Thus, the Nash equilibrium is
where neither family donates. When both players have a dominant strategy, playing the
dominant strategy will always result in a Nash equilibrium. Remember that a Nash
equilibrium is reached when all players choose the best strategy they can, given the choices
of all other players. In other words, this is a point in a game when no player has an incentive
to change his or her strategy, given what the other players are doing.
When Family A agrees to match Family B's donation, Family B knows that they don't have to
worry about Family A not donating. They will choose to donate, and Family A will also
donate.
7. In which of the following situations, a or b, is a tit-for-tat strategy more likely to be

successful at maintaining cooperation? [LO 9.6]
a. An agreement of mutual support between players on a reality television show, in which the
relatively worst-off player is eliminated every episode.
b. A peace treaty between neighboring countries.
Answer: A tit-for-tat strategy is one in which a player in a repeated game takes the same
action that his or her opponent did in the preceding round. Thus, a peace treaty between
neighboring countries would likely be more successful at maintaining a cooperative
equilibrium.
8. Which of the following are examples of tit-for-tat strategies? [LO 9.6]

a. A friend forgets to send you a birthday card this year, so you decide not to send one to her
on her next birthday.
b. Your friend let you borrow her class notes last week, so you decide to skip class again this
week.
c. You and your roommate take turns buying toilet paper, milk, and other shared items.
d. Your book club chooses a book you don’t want to read, so you decide not to go this month.
Answer: a and c. A tit-for-tat strategy is one in which a player in a repeated game takes the
same action that his or her opponent did in the preceding round.
9-12
Education.
9. Using backward induction in Figure 9P-4, decide which class a hypothetical college student
should take her freshman and sophomore years, assuming that she wants to be an economics
major. [LO 9.7]
Answer: Backward induction is the process of analyzing a problem in reverse, starting with
the last choice, then the second-to-last choice, and so on, to determine the optimal
strategy. To be an economics major in her junior year, she needs to take Intro Statistics in
her sophomore year. To take Intro Statistics in her sophomore year, she needs to take
Algebra in her freshman year.
10. You need to travel from Minneapolis to Copenhagen; it’s now Tuesday morning. You know
you need to arrive in Copenhagen no later than 4 pm on Wednesday. Using backward induction
in Table 9P-1, choose your travel itinerary. Enter the flight numbers for each leg of your trip.
[LO 9.7]
Answer: First leg: Flight 1252. Second leg: Flight 2004. Third leg: Flight 803
11. In the sequential game shown in Figure 9P-5, what choice should Player A make now to
achieve the highest payoff at the end of the game? [LO 9.8]
Answer: Player A should choose Strategy 2. Even though the highest payoff for Player A is if
Player A chooses Strategy 1 and Player B chooses Strategy 4, Player B will not choose
Strategy 4 if Player A chooses Strategy 1. If Player A chooses Strategy 1, Player B is better off
choosing Strategy 3, which leaves Player A with a payoff of only 5. However, if Player A
chooses Strategy 2, Player B is better off to choose Strategy 4, which leaves Player A with a
payoff of 8. Because 8 is better than 5, A chooses Strategy 2. B will then choose Strategy 4.
12. Company A is considering whether to invest in infrastructure that will allow it to expand
into a new market. Company B is considering whether to enter the market. Assume the
companies know each other’s payoffs. Using Figure 9P-6, choose the outcome that will occur
from the list below. [LO 9.8]
a. A invest, B enter.
b. A invest, B don’t enter.
c. A don’t invest, B enter.
d. A don’t invest, B don’t enter.
Answer: a. Company B has a dominant strategy to enter. Given this, Company A is better off
to invest.
9-13
Education.
13. In the sequential game shown in Figure 9P-7, does Player A have a first-mover advantage?
[LO 9.9]
Answer: Yes. If Player A chooses Strategy 1, Player B is better off to choose Strategy 1. This
will leave player A with a payoff of 4 while Player B has a payoff of 9. However, if Player A
chooses Strategy 2, Player B is better off to choose Strategy 2. This will leave Player A with a
payoff of 9 and Player B with a payoff of 8. Player A has the first-mover advantage and will
choose Strategy 2.
14. Which of the following are examples of first-mover advantage? [LO 9.9]
a. You make an offer on a house. The seller can only accept or reject the offer.
b. You and your roommate are dividing chores. The chores are written on slips of paper and
drawn from a hat. You get to draw first.
c. You are first in line to buy a raffle ticket.
d. You can take vacation whenever you like, as long as no other employees are also scheduled
to take vacation. You submit your vacation requests first this year.
Answer: a and d.
15. Which player is likely to have higher bargaining power: a city government responding to
angry citizens’ demands that the trash be collected regularly or the sanitation workers’ union?
Explain your answer. [LO 9.10]
Answer: The sanitation workers’ union has higher bargaining power because the union can
be more patient than a government under pressure from angry citizens.
16. Which player is likely to have higher bargaining power: a large, established company
shopping around for a new parts supplier, or a start-up company trying to sell its parts? Explain
your answer. [LO 9.10]
Answer: The established company shopping around for a new parts supplier is in a better
position to be patient for a good deal than a start-up company that needs to build business.
Therefore, the established company has more bargaining power.
9-14
Education.
17. Figure 9P-8 shows a sequential game in which one player decides whether to injure another
player. The injured player can then choose whether to sue, which involves costly legal fees. [LO
9.11]
a. What is the predicted outcome in this “game”?
b. The injured party threatens to always sue when injured. Is this a credible threat? What is the
predicted outcome if the injured party has threatened to always sue when injured?
c. What is the predicted outcome if the injured party has made a binding commitment to
always sue when injured?
Answer:
a. The injurer gets the highest payout if he does harm and does not get sued, which is what
will happen because the injured party is worse off if he sues than if he doesn’t when the
injurer does harm.
b. Even if the injured party threatens to sue, the injurer knows that the injured will be worse
off if he sues than if he doesn’t when the injurer does harm. Thus, the injurer does not
believe the threat. It is not a credible threat. Because the injurer does not believe the
threat, the outcome of the game is unchanged.
c. Now that the injured party has made a binding commitment to always sue, the injurer is
worse off if he gets sued than if he does no harm. He will choose not to do harm.
18. Two companies are considering whether to enter a new market. The decision matrix in
Figure 9P-9 shows each company’s payoff, depending on whether one, both, or neither enters
the market. Company A is in Costa Rica. Company B is in Nicaragua. [LO 9.8]
a. If Company A enters, what should Company B do?
b. If Company B enters, what should Company A do?
c. Suppose the Nicaraguan government releases a press statement that it will cover any profit
losses for Company B. How much will this policy cost the Nicaraguan government? (Hint: Think
carefully about what Company A’s best choice would be.)
Answer:
a. Company B should not enter, to avoid losing $1M.
b. Company A should not enter, to avoid losing $3M.
c. If the Nicaraguan government releases a press statement that it will cover any profit
losses for Company B, Company B will enter. Knowing this, Company A will
not enter because if it enters when Company B does, it will lose $3 million. So, Company B
will earn $3 million, and the Nicaraguan government will not have to pay any money.
9-15
Education.

Microeconomics 2nd Edition Karlan Solutions Manual

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Microeconomics 2nd Edition Karlan Solutions Manual

Uploaded by

Copyright:

Available Formats

Microeconomics 2nd Edition Karlan

OPENING STORY: LITTERBUGS BEWARE

Beyond the Lecture

Class Discussion: Games and Strategic Behavior (LO 9.1)

1. What does it mean for a strategy to be dominant? [LO 9.1, LO 9.2]

3. In sequential games, backwards induction means that? [LO 9.4]

Solutions to End-of-Chapter Questions and Problems

Problems and Applications

Answer: In the prisoners' dilemma, noncooperation is the outcome. If Family B donates,

7. In which of the following situations, a or b, is a tit-for-tat strategy more likely to be

8. Which of the following are examples of tit-for-tat strategies? [LO 9.6]

You might also like