40.

316: Game Theory Summer 2022

Homework 4 (last homework)

Due: 11:59pm on 5 August 2022 (Week 12’s Friday)

Question 1: There are two players and suppose that player 2 has complete information
about it’s two types: type L and type H. Type L loves going out with player 1 whereas type
H hates it. Player 1 has only one type and is uncertain about player 2’s type and believes
the two types are equally likely. The two actions available to each player is: {F, B}. The
payoff matrices are as follows:

Player 1 chooses a row between F (upper row) and B (lower row). Player 2 chooses a column
between F (left column) and B (right column). What is the Bayes-Nash equilibrium of the
game?

Question 2: Two people are involved in a dispute. Person 1 does not know whether person
2 is strong or weak; she assigns probability α to person 2’s being strong. Person 2 is fully
informed. Each person can either fight or yield. Each person’s preferences are represented
by the expected value of a payoff function that assigns the payoff of 0 if she yields (regardless
of the other person’s action) and a payoff of 1 if she fights and her opponent yields; if both
people fight, then their payoffs are (-1,1) if person 2 is strong and (1,-1) if person 2 is weak.
Formulate this situation as a Bayesian game and find its Bayes-Nash equilibria if α < 1/2
and if α > 1/2.

Question 3: Consider the Cournot duopoly model with imperfect information about costs
as discussed in class. That is, consider the situation where firm 1’s unit cost (c) is known
by both firms, but only firm 2 knows its own unit cost. Firm 1 believes that firm 2’s cost
is cL with probability θ and cH with probability 1 − θ, where 0 < θ < 1 and cL < cH . Now
assume that the (inverse) demand in the market is given by: P (Q) = α − Q for Q ≤ α and
P (Q) = 0 for Q > α. Assuming that all outputs are positive in the Bayes Nash equilibrium,
what is the equilibrium?

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40.316: Game Theory Summer 2022

Question 4: Consider a variant of the Bayesian game of first-price auction discussed in class
in which the players are risk averse. Specifically, suppose each of the n players’ preferences
are represented by the expected value of the payoff function x1/m , where x is the player’s
monetary payoff and m > 1. Suppose also that each player’s valuation is distributed uni-
formly between 0 and 1. Show that thegame has  a symmetric Bayes-Nash equilibrium in
n−1
which each type vi of each player i bids n−1+ 1 vi .
m

Question 5: Consider the all-pay auction as discussed in class. There are n bidders and
vi is independently and identically distributed according to the uniform distribution [0, 1].
The payoff to a bidder i is vi − bi if bi > maxj6=i bj and −bi if bi < maxj6=i bj . Find the
symmetric (Bayes-Nash) equilibrium bidding function. (Hint: First write down the expected
payoff for a player i assuming everyone bids according to the symmetric equilibrium. Then
write down the first order condition and use inverse function theorem. Finally, solve the
resulting differential equation.)

Question 6: Consider the following auction problem: a seller has a single item for sale
worth nothing to him. There are two buyers, each draws a “type” independently with equal
probability from the set {$8, $12}. Consider a sealed bid second price auction in which the
only possible bids are $8 or $12. Let p denote the second price in the auction. What is the
expected revenue to the seller if each buyer i values the item equal to his own type ti ? That
is, the winner gets ti − p and the loser gets 0.

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