Homework 4.

1.
a) In this one, there are two Nash equilibria: (U,L) and (D,R).
(U,L):

For Row player:

1 1 9
𝑢! (𝑈, 𝜎"# ) = 9 · *1 − . + 0 · = 9 −
𝑛 𝑛 𝑛
1 1 8 1 1
𝑢! (𝐷, 𝜎"# ) = 8 · *1 − . + 7 · = 8 − + 7 · = 8 −
𝑛 𝑛 𝑛 𝑛 𝑛
9 1
9− >8−
𝑛 𝑛
𝑛>8

For large n 𝑢! (𝑈, 𝜎"# ) > 𝑢! (𝐷, 𝜎"# ).

For column player:

1 1 9
𝑢" (𝜎!# , 𝐿) = 9 · *1 − . + 0 · = 9 −
𝑛 𝑛 𝑛

1 1 8 1 1
𝑢" (𝜎!# , 𝑅) = 8 · *1 − . + 7 · = 8 − + 7 · = 8 −
𝑛 𝑛 𝑛 𝑛 𝑛

9 1
9− >8−
𝑛 𝑛

𝑛>8
For large n 𝑢" (𝜎!# , 𝐿)
> 𝑢" (𝜎!# , 𝑅)
Based on the following (U,L) is a trembling-hand perfect equilibrium.

(D,R)
Row player:

1 1 1
𝑢! (𝐷, 𝜎"# ) = 7 · *1 − . + 8 · = + 7
𝑛 𝑛 𝑛
1 1 1
𝑢! (𝑈, 𝜎"# ) = 0 · *1 − . + 9 · = 9 ·
𝑛 𝑛 𝑛
1 1
+7>9·
𝑛 𝑛
 8
𝑛>
7

For colum player:

1 1 1
𝑢" (𝜎!# , 𝑅) = 7 · *1 − . + 8 · = + 7
𝑛 𝑛 𝑛

1 1 9
𝑢" (𝜎!# , 𝐿) = 0 · *1 − . + 9 · =
𝑛 𝑛 𝑛
1 9
+7>
𝑛 𝑛
8
𝑛>
7

For every n 𝑢! (𝐷, 𝜎"# ) > 𝑢! (𝑈, 𝜎"# ) 𝑎𝑛𝑑 𝑢" (𝜎!# , 𝑅) is bigger than 𝑢" (𝜎!# , 𝐿) why it is also a
trembling hand perfect equilibrium. .

b) In this game (U,L) and (D,R) is a pure strategy nash equilibria. no player has an incentive to
deviate when the other sticks to their strategy.

U,L:
Row player
1 1 3
𝑢! (𝑈, 𝜎#" ) = *1 − . · 3 + · 0 = 3 −
𝑛 𝑛 𝑛
1 1 2
𝑢! (𝐷, 𝜎#" ) = *1 − . · 3 + · 1 = 3 −
𝑛 𝑛 𝑛

3 2
3− >3−
𝑛 𝑛

𝑛<0

Column player
1 1 3
𝑢" (𝜎#! , 𝐿) = · 0 + *1 − . · 3 = 3 −
𝑛 𝑛 𝑛
1 1 2
𝑢" (𝜎#! , 𝑅) = · 1 + *1 − . · 3 = 3 −
𝑛 𝑛 𝑛
 3 2
3− >3−
𝑛 𝑛

𝑛<0
n<0 which is false, why this is not a trembling hand equilibria

C)
In this matrix we can remove U since Row player will never choose this, since he gets a
payoff on 0 in this, no matter what column chooses. Furthermore, Column player will never
choose L, since he will get 0 in payoff. There are dominated strategies. Based on this we
can conclude that (M,C) and (D,R) are pure nash equlibria.

(M,C)
Row player
1 1 3
𝑢! (𝑀, 𝜎"# ) = 3 · *1 − . + 0 · = 3 −
𝑛 𝑛 𝑛
$ $ %
𝑢! (𝐷, 𝜎"# ) = 3 · >1 − #? + 1 · # = 3 − #

3 2
3− >3−
𝑛 𝑛

𝒏<𝟎
n<0 which is false, why this is not a trembling hand equilibria

For column player:

1 1 3
𝑢" (𝜎#! , 𝐶) = 3 · *1 − . + 0 · = 3 −
𝑛 𝑛 𝑛
1 1 2
𝑢" (𝜎#! , 𝑅) = 3 · *1 − . + 1 · = 3 −
𝑛 𝑛 𝑛

3 2
3− >3−
𝑛 𝑛
𝑛<0

D,R
Row player:
1 1 2
𝑢! (𝐷, 𝜎"# ) = 1 · *1 − . + 3 · = + 1
𝑛 𝑛 𝑛
! (𝑀, # ) $ $ &
𝑢 𝜎" = 0 · >1 − #? + 3 · # = #
2 3
+1>
𝑛 𝑛
𝑛>1
So when n goes towards infinite this will hold why this is a trembling hand perfect.

Column player:
1 1 2
𝑢" (𝜎#! , 𝑅) = 1 · *1 − . + 3 · = + 1
𝑛 𝑛 𝑛
1 1 3
𝑢" (𝜎#! , 𝐶) = 0 · *1 − . + 3 · =
𝑛 𝑛 𝑛

2 3
+1>
𝑛 𝑛
𝑛>1

So when n goes towards infinite this will hold why this is a trembling hand perfect.
Problem 2.
If we look at the 2 times 2 matrix, the THP equalibria will always be a prober. In this situation there
are no other options where you can mix. Therefore we don’t need to test them.

Problem 3.
a)
 b) There are two Nash equilibria in this game:
In the first Nash equilibria player 1 chooses to terminate and ends the game immediately and the
payoffs are (3,7).

In the next one player 1 continues, chooses riight, and Player 2, chooses without observing Player
1s move, also chooses "Right": ((Continue, Right), Right) with payoffs (5,4)

If Player 1 chooses to continue, then he needs to choose again between "left" and "right." Then
player 2 needs to choose after without knowing what player 1 choose.

If Player 1 chooses "Left" and Player 2 chooses "Left," the payoffs are (1,3).
If Player 1 chooses "Left" and Player 2 chooses "Right," the payoffs are (7,1).
If Player 1 chooses "Right" and Player 2 chooses "Left," the payoffs are (3,2).
If Player 1 chooses "Right" and Player 2 chooses "Right," the payoffs are (5,4).

Player 2 will therefore need to make his decision based on the expected payoffs. Player 2 wouldt
therefore prefer to choose "Left" if he thinks Player 1 will pick "Left," as it gives them a higher
payoff (3 instead of 1). Similarly, Player 2 would prefer to choose "Right" if they think Player 1
will choose "Right," to get a payoff of 4 instead of 2.

Since Player 1 moves first and Player 2 moves without knowing Player 1s choice, Player 1 would
therefore choose the option that gives him the highest payoff no matter Player 2s response. That
option is Right, which gives him a payoff of 5 if Player 2 also chooses Right.

c)
A subgame-perfect equilibrium is a set of strategies that forms a Nash equilibrium in each part
(subgame) of the overall game.

The subgame equilibria is for player 1 to choose terminate, and then player two can choose
anything between left and right in the games subgame. Player 1 never has an incentive to continue,
while player 2s choice in the subgame will be free based on plahyer 1s choice.

e)
a. When Player 1 chooses to "terminate," a sequential equilibrium is made. The payoffs from this
decision are 3 for player 1 and 7 for player 2.

b. If Player 1 chooses to continue and, both players then chooses "left," they reach a sequential
equilibrium with payoffs of 1 for Player 1 and 3 for player 2.
c. If Player 1 chooses to "continue" and then right, where player 2, unaware of Player 1's action,
chooses "right," this gives us a sequential equilibrium. The payoffs here are 5 for Player 1 and 4 for
Player 2.
d)
In this one player 1 can choose continue, and then left, where player 2 chooses "left" in response to
Player 1’s move in the "left" or "right" subgame. But player 2 chooses without knowing what
Player 1 chose. This also gives us a sequential equilibrium.
The payoffs are 3 for Player 1 and 2 for Player 2.

d) In the last one player 1 can choose "continue" and then left, where Player 2 can choose
"right" without observing Player 1's choice. This also gives us a sequential equilibrium,
where the payoffs is 7 for Player 1 and 1 for Player 2.

These are sequential equilibrium because they are the best response to each other at every node of
the game, and there is no incitive to deviate for either player at any stage of the game.

4.
Exercise 2:

neither of the equilibria meet the requirements of the Intuitive Criterion. They are unstable, as
players can gain higher payoffs by deviating from the established strategies.

Exercise 3:
Exercise 4:

Problem 5.
 a)

b)

We know that the Bayes rule can be written in with this:

Pr(𝐵|𝐴) · Pr (𝐴)
Pr(𝐴|𝐵) =
Pr(𝐵|𝐴) · Pr(𝐴) + Pr(𝐵|𝐴̅) · Pr (𝐴̅)
We rewrite this:
𝑃(𝑚|𝑠) · 𝑃(𝑠)
𝑃(𝑠|𝑚) =
𝑃(𝑚|𝑠) · 𝑃(𝑠) + 𝑃(𝑚|𝑡) · 𝑃(𝑡)
We will put in each probability based on the game tree:
2 1
𝑃(𝑠|𝑚) = 3·2 =
2
2 1 1 1 3
3·2+3·2

$
Based on this we can conclude that 𝑃(𝑡|𝑚) = &
'(𝑛|𝑡 )·'(,)
We will now calculate 𝑃(𝑡|𝑛) = '(𝑛|𝑡)·'(,)-'(𝑛|𝑠)·'(.)

We will put in each probability and calculate:

 2 1
𝑃(𝑡|𝑛) = 3·2 =
2
2 1 1 1 3
· + ·
3 2 3 2
$
Based on this we can conclude that: 𝑃(𝑠|𝑛) = &

We can now calculate the expected payoffs:

𝑈/0 (a∣m): The expected payoff for choosing action a after receiving message m.
𝑈/0 (b∣m): The expected payoff for choosing action b after receiving message m.
𝑈/0 (c∣m): The expected payoff for choosing action c after receiving message m.

2 1
𝑈/0 ( 𝑎 ∣ 𝑚 ) =·9+ ·0=6
3 3
2 1
𝑈/0 (𝑏|𝑚) = · 0 + · 9 = 3
3 3
2 1
𝑈/0 (𝑐|𝑚) = · 6 + · 6 = 6
3 3

𝑈/0 (a∣n): This is the expected payoff for the policy maker if they choose action a after receiving
the message n.

𝑈/0 (b∣n): This is the expected payoff for the policy maker if they choose action b after receiving
the message

𝑈/0 (c∣n): This is the expected payoff for the policy maker if they choose action c after receiving
the message n.

1 2
𝑈/0 ( 𝑎 ∣ 𝑛 ) = ·9+ ·0=3
3 3
1 2
𝑈/0 ( 𝑏 ∣ 𝑛 ) = · 0 + · 9 = 6
3 3
1 2
𝑈/0 ( 𝑐 ∣ 𝑛 ) = · 6 + · 6 = 6
3 3

Given these expected payoffs, the policy maker would choose action a if message m is received and
either action b or c if message n is received, because both give the same highest expected payoff of
on 6.

If we look at the strategies of the experts:

For expert type s: Knowing that the policy maker will choose action a if receiving message m, and
given that action a provides the highest payoff for type s on 9, the expert type with type s would
always prefer to send message m, because he wants the policy maker to choose action a, suggesting.
Based on this, P(m∣s) should be 1.
If we look at expert type t: Knowing that the policy maker will choose action b if receiving message
n, and given that action b gives the highest payoff for type t on 9. Based on this the expert type t
would prefer to always send message n, because then the policy maker will choose action b.
Therefore P(n∣t) should be 1.

%
The given mixed strategy where type s sends message m with the probability & and type t sends
%
message n with a probability on & cannot be an equilibrium if the experts have a dominant strategy
of sending a specific message that will give them a higher payoff.
Based on the payoff calculations and the best responses of the policy maker, the claim that the game
does not have a PBE with the given probabilities seems valid.