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Exercise sheet 1
Exercise 1.1
Give one example of a game-like situation from your everyday life. Identify the players, the nature
of interaction, the strategies available, and the objectives that each player is trying to achieve.
Teamwork:
Group:
Interaction:
Strategic:
Rational:
a) How do person 1s preferences order the actions c, d, e associated with outcomes (1,4),
(2,1), and (3,0) respectively, where in each case the first number indicates her own income
and the second number is person 2s income?
b) Give a payoff function consistent with these preferences.
a) order the actions:
(3,0) > (2,1)
(1,4) ~ (3,0) > (2,1)
preference sign not equal ~ but indifferent
<, >, ~ are preference operators
b) they are many payoff functions
payoff vector: (x,y)
payoff x = payoff from p1
payoff y = payoff from p2
utility function = u(x,y) = x + y
u(3,0) = 3 + * 0 = 3
u(2,1) = 2 + * 1 = 2,5
u(1,4) = 1 + * 4 = 3
u (x,y) = (x + y)2
= [u(x,y)]2
monotonic transformation does not matter
W(x,y) = a + b u(x,y)
positive linear transformation with b > 0
this transformation preserves the order; it depends on a positive b
Exercise 1.4
A decision makers preferences over the action set A={a,b,c} are represented by the payoff function
u for which u(a)=0, u(b)=1, and u(c)=4.
1. a) Are the preferences of this DM also represented by the payoff function v for which v(a)=1, v(b)=0, and v(c)=2?
2. b) How about the function w for which w(a)=w(b)=0 and w(c)=8?
u(a) = 0
u(b) = 1
u(c) = 4
a) v(a) = -1; v(b) = 1; v(c) = 2
yes, because it preserves the order this order represents the same references
b) no, because we have the same payoffs for a and b
Exercise 1.5
Determine whether each of the
games differs from the Prisoners
Dilemma as introduced in the
lecture only in the names of the
actions or whether it differs also in
one or both of the players preferences.
LEFT
PD-Game has certain solution aspects: individual rationality, collective rationality, dominant
strategies, but what constitutes a PD GAME?
choice options?
Preference certain preference
For a game to be represented as a PD game it must be a 2 by 2 game with a specific order of
p2
a1
b1
a2
2,2
3,0
b2
0,3
1,1
P1; P2
A1: sit1, stand1
A2: sit2, stand2
Utility1, utility2
u1(.); u2(.)
u1(a1,a2); u2(a1,a2)
Sit1
Stand1
Sit2
2,2
1,3
Stand2
3,1
1,1
Player 2
Player 1
Sit1
Stand1
Sit2
2,2
3,0
Stand2
0,3
1,1
= 2 * u 1 + u2
attach a weights! Attach depends on taste
sit1, sit2 => Welfare
=> 2 * 2 + 2 = 6
sit 1, stand 2
=> 2 * 3 + 1 = 7
stand 1, sit2
=> 2 * 1 + 3 = 5
stand 1 , stand2
=> 2 * 1 + 1 = 3
WHAT SHOULD HAPPENED IN THE SOCIETY?
c) comfort is actually higher, when they both individual or egoistic
Exercise 2.3: Each of two players has two possible actions, quiet and fink; each action pair results
in the players' receiving amounts of money equal to the numbers corresponding to that action pair in
the game table below.
The players are not selfish; rather, the preferences
of each player i are represented by the payoff
function mi(a) + mj(a), where mi(a) is the amount
of money received by player i when the action profile is a, j is the other player, and is a given
nonnegative number. Player 1's payoff to the action pair (quiet, quiet), for example, is 2 + 2.
a) Formulate a strategic game that models this situation in the case = 1. Is this game the
Prisoner's Dilemma?
b) Find the range of values of for which the resulting game is the Prisoner's Dilemma. For
values of for which the game is not the Prisoner's Dilemma, find its Nash equilibria.
a) This game is an Example of generalization: On top of the monetary values we can form into
utility functions
what is the utility for example for quiet1 and quiet2 ?
utility1(i)
utility2(j)
(quiet1, quiet2)
2 + 1* 2 = 4
2+1*2=4
(quiet1, fink2)
0+1*3=3
3+1*0=3
(fink1, quiet2)
3+1*0=3
0+1*3=3
(fink1, fink2)
1+1*1=2
1+1*1=2
Player 2
Player 1
quiet1
fink1
quiet2
4,4
3,3
fink2
3,3
2,2
quiet1
fink1
Player 2
quiet2
2+2 ; 2+2
3 ; 3
u1
2+*2
0+ *3
3+ *0
fink2
3 ; 3
1+; 1+
u2
2+*2
3+*0
0+ *3
f1,f2
1+ *1
1+ *1
fink2
3/2, 3
3/2, 3/2
Player 2
quiet2
Player 1
fink2
quiet1
fink1
2
1
0
1
Payoff2
Player 2
Player 1
stag1
hare2
stag2
2,2
1,0
hare2
0,1
1,1
one allocation is efficiency, when at least one player gets more without hunting 2,2!
two strict nash equilibria
is the action weakly dominated? No!
Pareto collective 2,2
< n, need to pursue the stag in order to catch it (assume there is only a single stag). A captured stag
is shared only by those hunters who catch it. Under each of the following assumptions on the
hunters preferences, find the Nash equilibria of the according strategic game and find out what
would be socially optimal if the caught stag and hares would be divided by all hunters:
a) Each hunter prefers the fraction 1/n of the stag to a hare.
b) Each hunter prefers the fraction 1/k of the stag to a hare, but prefers a hare to any smaller
fraction of the stag, where k is an integer with m k n.
3.2.a)
(i) suppose (stagi) Vi is the candidate solution
=> ui# = 1/n stag
((((( ui (stagj Vj , j = 1, , n)))))
Deviation payoff? ~ui = hare
Since ui# is > than ~ui, or ui# is prefer to ~ui , the candidate action profile Is a Nash
equilibrium
(ii) suppose (harei) Vi is the candidate solution
=> ui# = hare
Deviation payoff? ~ui = 0
(harei) Vi is Nash equilibrium
(iii) suppose k players with k < m hunt stag while the rest n-k players hunt hare:
Suppose playeri is one of the k stag hunters
ui# = 0
~ui = hare
=> playeri can benefit from deviation
=> candidate profile is not a Nash equilibrium
(iv) suppose k players hunt stag with m k < n while the rest n-k players hunt hare
a) suppose playeri is one the k stag hunters
ui# = 1/k stag
~ui = hare
since 1/n stag is preferred to hare and since 1/k stag is > 1/n stag , we conclude playeri prefers 1/k stag to hare
=> ui# > ~ui playeri (staghunter) can not benefit from deviation.
b) Check hare hunters Suppose playeri is one of the hare hunters
ui# = hare
~ui = 1/(k+1) stag
since 1/n stag is preferred to hare and since 1/k+1 stag 1/n stag we
conclude that playeri benefits from deviation
=> all asymmetric profiles with stag hunters and m k < n are not a nash eq'a
Overall, we conclude for 3.2.a) that only the 2 symmetric action profiles are Nash eq'a of the game
social optimal: m stag hunters and n-m hare hunters!
No equilibrium is the social optimal solution!
3.2.b)
symmetric:
(i) stagi Vi
=> ui# = 1/k stag
=> ~ui = hare
since n > k, (1/n) stag < (1/k) stag => playeri prefers have (~ui > ui#)
=> stagi Vi is not Nash eq'a
(ii) harei for all i => ui# = hare // ~ui = 0
asymmetric
(iii) suppose L players going for stag hunting L < m no stag hunting they get = 0 this is no
nash equilibrium Let L hunters hunt stag and L smaller m. The candidate profile is not a nash
equilibrium since a stag hunter benefits from deviating.
(iv) suppose L players going for stag hunting L = m
(stagi Vi = 1...m, harej Vj = m+1...n)
playeri = ui# = (1/m)stag
~ui = hare
(1/m) stag > 1/k (stag) > hare
1/m of a stag is preferred to 1/k of stag which is preferred to hare
=> i does not benefit from deviation
#
Player j: uj = hare
~uj = (1/m+1) stag
We know that player i prefers 1/k to hare
=> (1/(m+1))stag is strictly preferred to 1/k(stag)
iv a) (1/(m+1))stag > 1/k stag
if m+1 < k
no nash equilibrium
iv b) (1/(m+1))stag = (1/k)stag of m+1 = k
nash equilibrium
(v) suppose k stag hunters
(stagi Vi = 1 k, and harej Vj = k+an)
playeri : ui# = (1/k)stag, ~ui = hare
ui# > ~ui => playeri does not benefit from deviation
#
playerj : uj = hare, ~uj = (1/(k+1)) stag
We know (1/k)stag is strictly preferred to hare, but any smaller fraction of stag is
worse than hare. Therefore (1/(k+1)stag is worse than hare, which means player j does
not benefit from deviation
=> this profile is a nash equilibrium
(vi) suppose L > k hunters an l < n
suppose playeri is a stag hunter playeri ui# = 1/L stag; ~ui = hare
=> We know that 1/L stag > hare , but any smaller fraction of stay is worse than hare.
Thus 1/k of stag is worse than hare
=> playeri benefits from deviation
=> candidate profile is not a nash equilibrium
Collecting results of our analysis
3 types of equilibria:
- harei Vi i = n
- stagi Vi i = 1 k-1
harei Vj j = k n
- stagi Vi i = 1 k
harej Vj j = k+1 n
Exercise 3.3: (Hawk-Dove Game). Two animals are fighting over some prey. Each can be passive
(dove) or aggressive (hawk). Each prefers to be aggressive if its opponent is passive, and
passive if its opponent is aggressive. Furthermore, each animal prefers the outcome in which its
opponent is passive to that in which its opponent is aggressive. Formulate the situation as a strategic
game and find its Nash equilibria.
Players:
p1, p2
action profiles:
(agg1, agg2), (agg1, pass2), (pass1, agg2), (pass1,pass2)
preferences:
(i)
u1 (agg1, pass2) > (pass1,pass2)
prefers to be aggressive, if opponent is passive
(ii)
u2 (pass1, agg2) > (agg1, agg2)
(iii)
1,3
2,2
of the players payoff functions are u1(a1, a2) = a1(a2 a1) and
a) Find the best response functions.
b) Find the Nash equilibria.
a)
u1 (a1, a2) = a1(a2 a1)
Vai Ro
u2 (a1, a2) = a1(1 a1 a2)
i = 1,2
Max u2 (a1, a2) best response function player2
a2
derivative
du1(a1,a2) / da1 = 0
<=> a2 - 2a1 = 0
<=> 1 = a2
Best response generic on a2 Best response function
2
d u1(.) / da21 = -2 < 0
1 is a maximal point (best reply)
du2(a1,a2)/ da2 = 0
<=> 1- a1 = 2a2
<=> 2 = a1
Best response function of player2
d2u2 (.) / da22 = -2 < 0
2 is a maximal point (best reply)
b) => Condition (1) and (2) must hold simultaneously
=> (1) into (2):
a2 = * (a2)
<=> a2 = a2
<=> a2 # a2 =
<=> a2 (1+ ) =
<=> a2 * 5/4 =
<=> a2# = 4/5 * = 2/5
a2# into (1) : a1# = a2# = * 2/5 = 1/5
Nash equilibrium = (a1#, a2#) = (1/5,2/5)
Equilibrium payoff:
u1# = u(a1#,a2#) = 1/5 (2/5 1/5) = 1/25
u2# = u(a1#,a2#) = 2/5 (1 1/5 2/5) = 4/25
Exercise 4.2: (Cournot Duopoly Game). Two firms compete in a market by producing and selling
homogenous goods. Let qi with i = 1, 2 represent individual quantities and let the market price p per
unit of output sold be determined according to the following function (inverse demand function):
p = 36 q with q representing the sum of both firms quantities (industry output). Let firm is
production cost per unit of output be equal to 1. Suppose each firms goal is to maximize profit i.
a) Model the given situation as a strategic game.
b) Determine and draw the best-response functions.
c) Dermine the Nash equilibria. In additon compute industry output, market price and firms
profits.
d) Suppose the two firms form a cartel: They coordinate on individual outputs and share the
sum of profits. Determine the Nash equilibria of the cartel. In additon compute industry
output, market price and firms profits.
e) Determine the firms benefits from forming a cartel according to the percentage increase
in profits. Also, compute the percentage changes in price and quantity due to the cartel.
What does this mean for consumers?
a)
Players:
action/ action profiles:
preferences/utilities:
2 firms
q1 Ro+ , q2 R0+ (actions); (q1,q2) action profile
profit
profit = Revenue minus cost
Cost = 1 * quantitiy unitcost
1 = p * q1 1 * q1
2 = p * q2 1 * q2
with p = 36 q and
q = q1 + q 2
(1)
(2)
use in (1) and (2)
1
= (36 -q1 q2) * q1 q1
= 36 q1 q2 q2q1 q1
2
= (36 -q1 q2) * q2 q2
= 36 q2 q2 q1q2 q2
b) max 1 d1/dq1 = 0
<=> 36 2q1 - q2 -1 = 0
<=> 35 -q2 = 2q1
<=>
<=> ^q1 = 35/2 q2 best response function player1
maximize ~u2 d2 (.) / dq2 = 0
<=> 46 q1 2q2 1 = 0
<=> 35 q1 = 2q2
<=> ^q2 = 35/2 q1 Best response functions player2
q2 35
^q1: ^q1 = 0 if q2 = 35
q1 = 35/2 if q2 = 0
^q2: if q1 = 0 ^q2 = 35/2
if q2 = 0 => q1 = 35
35/2
35/2
35
q2
=> two pure equilibria (arrows) and one equilibria in mixed strategies
Exercise 5.2: Players 1 and 2 each choose a positive integer up to 4. If the players choose the same
number, then P1 pays 1 to P2; otherwise no payment is made. Each players preferences are
represented by the expected monetary payoff.
a) Represent the game in game matrix.
b) Show that the game has a mixed strategy Nash equilibrium in which each player chooses
numbers 1 to 4 with probability 1/4.
c) Assume a generalization such that every player may choose a positive integer up to K.
Show that the game has a mixed strategy Nash equilibrium in which each player chooses
each positive integer up to K with probability 1/K.
a)
player2
b)
1
2
3
4
player1
2
0,0
-1,1
0,0
0,0
1
-1,1
0,0
0,0
0,0
3
0,0
0,0
-1,1
0,0
4
0,0
0,0
0,0
-1,1
player1
player2
1
2
1
-1,1
0,0
0,0
2
0,0
-1,1
0,0
4
0,0
0,0
-1,1
reply (2)
Check best-reply condition for player2:
EU2 (p, a2) = 1 * 1/K = 1/K
Va2 A2 (Va1 = 1,2,,K)
=> Player2 can mix rationally (1) and thus qj = 1/K V i= 1,2,,K is a best
reply (2)
Analysis gives two answers, two conclusions (1)+(2)
=> Thus the proposed strategy profile is a Nash equilibrium in mixed strategies.
Additional exercise:
PLAYER1
PLAYER2
T
M
B
L
-, 2
-,-,4
C
3,3
0,5,1
R
1,1
2,0,7
((( zero sum games Chess one part wins, one part looeses
constant sum games election
non constant sum game coordination games: multiple nash-equilibria. Some of them are
preferred by some players. Prediction what rational players will do Nash-equilibrium but if
you have multiple nash-equilibrium, the best-reply will not help you to conclude which action you
have to use PARETO Some nash-equilibria are social better than other nash-equilibrium.)))
Exercise 5.3: (A coordination game.) Two people can perform a task if, and only if, the both exert
effort. If they do so, they are better off than if nobody exerts effort. The worst outcome for a person
is reached if she exerts effort while the other person doesnt. Let the game be represented as below
with c being a parameter for cost (disutility) of effort with 0 < c < 1:
a) Determine both player best-response correspondences, show them in a graph and determine
all mixed strategy Nash equilibria.
b) How do the equilibrium choices vary with c?
two pure strat. equilibria
Def.:
q
1-q
p
1-p
12.1.15
if q < 1-c
<=> 0 < 1 q c
<=> EU1 (no effort1,Q) < EU1 (effort1,Q)
=> p1 always chooses effort1 , i.e. , chooses effort1, with probability = 1 or 1 p = 1
or p = 0 best-reply-choice p = 0
If q > 1 c
<=> 0 > 1 q c
<=> EU1(no effort1,Q) > EU1 (effort,Q)
=> Player1 chooses no effort with p = 1 best reply choice i p = 1
best reply correspondence for player1 1is
0
if q < 1 c
p=
p [0,1]
if q = 1 c
1
if q > 1 c
simi... fr player 2 (symmetry):
best-reply-correspondence player 2:
(1,0),
if p > 1 c
B2 (p, 1-p) =
(q, 1-q)
if p = 1 c
(0,1)
if p > 1 c
B1(q,1-q) =
(1,0)
(p,p-1)
(0,1)
if q < 1 c
if q = 1 c
if q > 1 c
(1-c,c) (1-c,c)
(B1) (B2)
Pure Equilibrium dont ??? with c. just mixed strategy
Correction EX 3.2.b) subcu)e : m+1 = k