MAT378: Spring 2018

Assignment 4

Due Friday, April 27th, by noon outside Fine 1104. Clearly write down or type all solutions, and
staple all pages together. Rigorous arguments are expected for full credit. Difficult to read or understand
work will be considered incorrect. Collaboration is encouraged, but each student must write/type the full
set of solutions in their own words. Include your name and assignment number on the top of the first page
and staple your work. No calculators or computational technology are allowed for work in this
course.

1 [4 points]
Find δ0 ∈ (0, 1) so that for all δ ∈ [δ0 , 1) the repeated game G(δ, ∞) over stage game
 
(4, 3) (−100, 10)
(20, −75) (−60, −45)

has a Nash equilibrium σ ∗ ∈ Υ with uδ (σ ∗ ) = (4, 3).

2 [4+4=8 points]
Let (A, u) be a stage game with action profile a∗ that is a Nash equilibrium in (A, u) and let G(δ, T ),
δ ∈ (0, 1) and T < ∞, be a finitely repeated game over (A, u).

2.a If strategy profile σ ∗ ∈ Υ is defined by

σi∗ (h) = a∗i for all h ∈ H and 1 ≤ i ≤ n,

show that σ ∗ is a Nash equilibrium in G(δ, T ).

2.b Suppose further that a∗ satisfies the following conditions:
• For each Player i and action profile a−i ∈ A−i ,

ui (a−i , a∗i ) > max{ui (a−i , âi ) : âi ∈ Ai \ {a∗i }}.

In other words, a∗i is the unique dominant action in Ai for Player i.

• For each Player i,
ui (a∗ ) = min{ui (a−i , a∗i ) : a−i ∈ A−i }.
Show that any Nash equilibrium σ ∗ ∈ Υ must have its path π(σ ∗ ) = (π 1 (σ ∗ ), . . . , π T (σ ∗ )) satisfy

π t (σ ∗ ) = a∗ for all 1 ≤ t ≤ T.

3 [4+4=8 points]
(Exercise 4.5 in the text) Suppose that in a first price-auction there are two possible valuations v and
v such that 0 < v < v. The valuations are private to each player and independently drawn according
to probabilities ρ(v) = ρ(v) = 1/2. The admissible bids for each Player i is the set
 
v+v
Ai = v, v, .
2

3.a Describe this situation formally as a Bayesian game.

3.b Obtain a Bayesian Nash equilibrium in pure strategies.

Hints
Hints may or may not be helpful depending on your work.

2.b Show by induction that the last k action profiles in the path are a∗ for 1 ≤ k ≤ T .

3 Look to Definition 4.4.1 for a (more general) example.