Spring Semester 2015

February 12, 2015

IE 616: Decision Analysis and Game Theory

Problem Set - 2
Exercise 1. (Odd or Even) Players I and II simultaneously call out one of the numbers one or two.
Player I wins if the sum of the numbers is odd. Player II wins if the sum of the numbers is even. The
amount paid to the winner by the loser is the product of the numbers chosen (but who wins, depends on
the sum). Find the table for the payoff function A, and analyze the game to find the value and optimal
strategies of the players. Is the game fair?
Exercise 2. (The Pascal Matrix Game) The Pascal matrix of order n is the n n matrix Bn of
elements bij , where


i1
bij =
if i j, and bij = 0 if i < j.
j1
The ith row of Bn consists of the binomial coefficients in the expansion of (x + y)i . Show that the inverse
of Bn is the the matrix An with entries aij , where aij = (1)i+j bij . Using this, find the value and optimal
strategies for the matrix game with matrix An .
Exercise 3. Apply iterated elimination of dominated strategies to normal form games. Verify that the
resulting solution is a Nash equilibrium of the game.

0
1
2
3
4

0
4,5
13,5
12,5
11,5
10,5

1
4,14
3,4
12,4
11,4
10,4

2
4,13
3,13
2,3
11,3
10,3

3
4,12
3,12
2,12
1,2
10,2

4
4,11
3,11
2,11
1,11
0,1

5
4,10
3,10
2,10
1,10
0,10

Exercise 4. Consider the following game What are the Nash equilibrium? Identify them as payoff

X
Y

X
75,75
60,25

Y
25,60
60,60

dominant and risk dominant. Give reasons for your choice.

Exercise 5. Consider the following 3-person simultaneous game. Here Player 1 chooses between the
rows U and D, Player 2 chooses between the columns L and R, and Player 3 chooses between the matrices
A and B. Find the Nash equilibrium. Is it unique?

Exercise 6. Find all the possible pure Nash equilibria for the following games:

A
B
C

A
(0,0)
(1,-1)
(0,0)

B
(1,-1)
(0,0)
(1,-1)

C
(0,0)
(1,-1)
(0,0)

(i)
(ii) (Matching pennies)

U
D

L
1,-1
-1,1

R
-1,1
1,-1

L
3,1
0,0

R
0,0
1,3

(iii) (Battle of the Sexes)

U
D

Exercise 7. (von Nuemanns Theorem) Show that every equilibrium of a 2-person zero-sum game
has the same payoff.
Exercise 8. (Oligopoly): Firm 1 and Firm 2 are the only competitors in a market for a good. The
price in the market is given by the inverse demand equation P = 10(Q1 + Q2 ) where Q1 is the output
of Firm 1 and Q2 is the output of Firm 2. Firm 1s total cost function is C1 = 4Q1 and Firm 2s total
cost function is C2 = 2Q2 . Each firm wants to maximize its profits and they simultaneously choose their
quantities. What will be the (Cournout) Nash equilibrium in this market?
Exercise 9. Determine the Nash Equilibrium for the following games:

U
D

L
1,1
0,0

R
0,0
0,0

U
D

L
2,2
1,0

R
0,1
1,1

Exercise 10. Determine the Nash equilibrium in the following setting:

1
2
3
4
5

1
0,0
-1,1
1,0
1,-1
1,1

2
1,-1
0,1
-1,-1
-1,0
0,0

3
1,1
1,0
0,1
1,-1
-1,-1

4
-1,0
0,0
-1,1
0,0
0,0

Exercise 11. Find the mixed strategy Nash equilibrium in the following Battle of the sexes game:
Wife husband
Opera
Football

Opera
75,75
60,25

Football
25,60
60,60

Exercise 12. Give an example showing that every rationalizable strategy need not be a Nash equilibrium.
Exercise 13. Find set of all rationalizable strategies in the following game.

T
M
B

L
3,4
5,1
1,2

C
3,6
6,2
1,2

R
4,5
3,1
5,3

Exercise 14. Assuming every student taking IE 616 is perfectly rational, choose an integer between 0
and 100 ) both included. Your objective is to choose a number closest to the average of the entire class.
Note that every student is playing this game along with you. Which number would you choose and why?
Exercise 15. Considering the elections, lets try understanding a game theoretic approach to how
candidates need to position themselves on a political spectrum. Think of the population being divided
equally into 10 segments numbered 1 to 10. 1 being the Far-Left on the political and 10 being the
Far-Right on the political spectrum. There are two candidates who have to decide what position to take
on the political spectrum in order to win. The candidates gets the votes of the segments closest to him.
Thus if candidate 1 positions himself at 2 and candidate 2 positions himself at 7 the candidate 1 will get
40% of the total votes and candidate 2 will get 60% of total votes. If there is a tie assume the winner
is picked at random. Also, if a segment is equally close to both candidates then the votes get divided
50:50. In such a situation what political position should each candidate take up and why?
Exercise 16. Imagine that you are driving a vehicle down the road and you see another vehicle coming
down the road. You have two options to swerve or to go straight. The same options exist with he other
driver as well. If you both serve then nobody is injured so both people are safe and the payoff is 0 for
both players. If one person swerves and the other doesnt then the one who swerved feels disappointed
that he had to do all the work and gets a payoff of -1 while the person who went straight feels good
about not doing the work and gets +1. If both go straight , they will crash and get a pay-off of -10 each.
Write this down in matrix form and determine the Nash equilibrium in this game.
Exercise 17. (Market Location) Suppose two firms compete for customers who are located at nine
different positions along a road. Each firm must simultaneously choose one of the locations. Each
consumer purchases from the firm that is closest. If the firms are equidistant, then it randomizes equally
between the two firms. The VNM payoff to each firm is its expected number of customers. Find the set
of rationalizable strategies for each firm.
Exercise 18. (Model of Partnership) A and B have set up a partnership to run a business. The
total profit depends on the time xi that each partner i devotes to the business according to the function
(x1 , x2 ) = 4(x1 + x2 ) + 2x1 x2
The personal cost to each partner depends on the amount of time he devotes to the business according
to the function
c(xi ) = x2i
The total VNM payoff to each player is his share of the profit minus the cost he/she incurs.The two
players must simultaneously choose the time they devote to the business, which cannot be less than 0 nor
more than 4. Plot the best response functions for each player. Also find their rationalizable strategies.