HE3001 Tutorial 2

1. Consider the following game where a Kicker goes against the Goalie in a penalty shootout.

The probability that the kicker will score if he kicks to the left and the goalie jumps to the right is 0< p< 1
.
We want to see how the equilibrium probabilities in the mixed strategy NE changes as p changes.

Kicker

Kick left Kick Right

Goalie Jump Left 1,0 0,1
Jump Right 1− p , p 1,0

(a) If the goalie jumps left with probability π G, what is the expected utility of the kicker if he kicks right?

(b) If the goalie jumps left with probability π G, what is the expected utility of the kicker if he kicks left?

(c) Find the probability π G that makes the kicker indifferent between kicking left and kicking right (Your
answer will be a function of p.)

(d) If the kicker kicks left with probability π K , what is the expected utility of the goalie if he jumps left?

(e) If the kicker kicks left with probability π K , then what is the expected utility of the goalie if he jumps
right.

(f) Find the probability π K that makes the expected utility to the goalie equal from jumping left or
jumping right.

(g) What is the unique mixed strategy Nash equilibrium in the game?

(h) The variable p tells us how good the kicker is at kicking the ball into the left side of the goal when it is
undefended. As p increases, does the equilibrium probability that the kicker kicks to the left increase or
decrease? Explain why this happens in an intuitive manner.
2. Two software companies sell competing products.

These products are substitutes, so that the number of units that either company sells is a decreasing
function of its own price and an increasing function of the other product’s price. Let p1 be the price and
x 1 the quantity sold of product 1 and let p2 and x 2 be the price and quantity sold of product 2. Then
1 1 1 1
x 1=1000(90− p1 + p 2) and x 2=1000(90− p2 + p 1).
2 4 2 4
Each company has incurred a fixed cost for designing their software and writing the programs, but the
cost of selling to an extra user is zero. Therefore, each company will maximize its profits by choosing the
price that maximizes its total revenue.

(a) Write an expression for the total revenue of company 1, as a function of its price p1 and the other
company’s price p2.

(b) Company 1’s best response function BR1 (p 2) is defined as the price for product 1 that maximizes
company 1’s revenue given that the price of product 2 is p2. Write down BR 1 ( p 2) .

(c) Use a similar method to solve for company 2’s best response function B R 2 (p 1).

(d) Solve for the Nash equilibrium prices.

Let us try to solve for the “equilibrium” when companies move sequentially. This will be done via
backward induction which will be discussed in greater detail in lecture 3.

(e) Suppose that company 1 sets its price first. Company 2 knows the price p1 that company 1 has chosen
and it knows that company 1 will not change this price. If company 2 sets its price so as to maximize its
revenue given that company 1’s price is p1, then what price will company 2 choose?

(f) If company 1 is aware of how company 2 will react to its own choice of price, what price will company
1 choose?
3. Victoria and Albert are roommates for 1 week. Each of them prefers a clean room to a dirty room, but
neither likes housecleaning. Their payoffs are as hence as follows.

Victoria
Clean Don’t Clean Game A
Albert Clean 5,5 2,6
Don’t Clean 6,2 3,3

a) Derive all Nash equilibrium of this static game A, where they decide on their actions simultaneously.

Suppose now, in the second week, they are planning to eat out on Saturday. They are deciding whether
to have Korean BBQ or Macdonalds. They both prefer Korean BBQ to Macdonalds, especially if they have
happened to have the meal together. The payoffs are hence as follows.

Victoria
BBQ Macs
Albert BBQ 5,5 2,1 Game B
Macs 1,2 3,3

(b) Derive all Nash equilibria of this static game B, where they decide on their actions simultaneously.

(c) Draw the extensive form of the entire game where Game B is played (in Week 2) after Game A (in
Week 1), and where both of them observe perfectly, the outcome in Game A, before Game B is played.

4. This is an example of the game of “Chicken.” Two teenagers in souped-up cars drive toward each
other at great speed. The first one to swerve out of the road is “chicken.” The best thing that can happen
to you is that the other guy swerves and you don’t. Then you are the hero and the other guy is the
chicken. If you both swerve, you are both chickens. If neither swerves, you both end up in the hospital.

A payoff matrix for a chicken-type game is the following:

Player 2
Swerv Don’t Swerve
e
Player 1 Swerve 1,1 1,2
Don’t Swerve 2,1 0,0

(a) Does this game have a dominant strategy? Why?

(b) What are the two Nash equilibria in pure strategies?

(c) Find the Nash equilibrium in mixed strategies for this game.