Quiz II

Game Theory and Its Applications [Course code: BITS F314]

Total marks: 10 marks Date: 11 Nov 2019

1) Consider two firms who compete by simultaneously choosing prices (a Bertrand game). If Firms 1 and 2 choose
prices p1, and p2, respectively, the quantity that consumers demand from each firm is:
q1 ( p1 , p 2 )  a  p1  bp2
q 2 ( p1 , p 2 )  a  p 2  bp1
Firm 2 has constant marginal cost c. With probability  firm 1 has constant marginal cost cH while with probability
( 1   ) firm 1 has constant marginal cost cL. Assume that there are no fixed costs. Prices must be nonnegative (
p1  0, p2  0 ) and firms wish to maximize profit.
Let   1 / 2, a  108, b  1 / 2, cH  16, cL  8, and c  12.
a) Find the best response functions for Firms 1 and 2.
b) Find the pure strategy Bayes Nash equilibrium to this game. [4+3=7 marks]

Ans. a)

Ans. b)

1
2)

N  {Firm( F ), Wor ker(W }

TF  {t F }, Tw  {high, low}
AF  {hire, don' t hire}, Aw  {work , shirk}

Tw=high Tw=low
Work Shirk Work Shirk
Hire 1,2 0,1 Hire 1,1 -1,2
Don’t hire 0,0 0,0 Don’t hire 0,0 0,0

Consider the firm: [3 marks]

At his only type tF, his belief about the other types are:

PF (high t F )  3 / 4;PF (low t F )  1 / 4

For p=3/4, consider the Bayesian Nash equilibrium of the game between the firm and the worker in which “the firm
hires and worker works if and only if Nature chooses high”. Compute the following:

a) Firm’s expected utility from the action “hire”

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b) Firm’s expected utility from the action “don’t hire”

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c) Worker’s utility from work if he is of high type.

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d) Worker’s utility from shirk if he is of high type.

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