Unique Paper Code : 12277508

Name of Paper : GAME THEORY

Scheme/Mode of Exams : CBCS (LOCF)

Name of Course : B.A (Hons) ECONOMICS

Semester :5

Duration : 3 Hours

Maximum Marks : 75

Instruction for Candidates:

Attempt any four questions. All questions carry equal marks.

1. A) Two friends (Sameer and Ranbeer) need to divide stock of 100 muffins. Sameer being the
wiser one makes an offer to divide muffins between himself and Ranbeer in the first stage.
After knowing the choice of Sameer, Ranbeer can either accept Sameer’s offer or reject. The
strategy profile of Sameer is given by S = {0,….., 100} , with choice s meaning that Sameer
proposes to keep s of the muffins. (Muffins can be divided only in whole numbers). In
response, Ranbeer can take two actions: A (accept) or R (reject). If Ranbeer accepts, the
payoff vector is (s, 100-s). If Ranbeer rejects, the payoff vector is (0, 0).

a) Describe the extensive form of the game along with the tree diagram. (7)

b) Identify the subgame perfect equilibria of the extensive form game. (4)

B) Let us consider a duopoly where the two firms compete in quantities. Market demand is
given by the expression p = 5 – q1 – q2 and firms have incomplete information about the
marginal cost. Firm 2 privately knows whether its MC are low (MC2 = 0 with probability 0.5)
or high (MC2 = 3/4 with probability 0.5). Firm 1 does not know the Marginal Cost of Firm 2,
but his MC1 = 0 and this information is common knowledge.

Find Bayesian Nash Equilibria in the given situation. (7.75)

1. (अ) ( औ ) 100 च ण अ औ
च , उ
अ समीर की रणनीति प्रोफ़ाइल S = {0,…..,100} द्व़ाऱा दी
गई है , तिसमें चॉइस s क़ा अर्थ है तक समीर s मतिन के रखने क़ा प्रस्त़ाव करि़ा है । (
 ण ) , :A
( ) R (अ ) , अ (s, 100 - s)
अ , अ (0,0)

क ण (7)
ख (4)

( ) इ च
अ p = 5 - q1- q2 ई औ अ
2 उ MC (MC2 = 0 0.5 ) उ
(MC2 = 3/4 0.5 ) 1 2 ,
उ MC1 = 0 औ

ई (7.75)

2. Consider a two-player game. Suppose that T1 = {c,d} and T2 = {c’,d’}

M N M N M N

S 2,2 0,0 2,2 0,0 2,2 0,0

T 3,0 1,1 0,0 1,1 0,0 1,1

€, prob = £, prob = ¥, prob =

Suppose that signals for both the players are as follows:

Ꚍ1 € = € Ꚍ1 (£) = Ꚍ1 (¥) = £

Ꚍ2 € = Ꚍ 2 £ = €’ Ꚍ 2 ¥ = £’

a) Interpret the game based on signals in Bayesian Form Game. (9)

b) Illustrate how ‘Infection’ can affect equilibrium in all states. (9.75)

इ :

Ꚍ1 € = € Ꚍ1 (£) = Ꚍ1 (¥) = £

Ꚍ 2 € = Ꚍ 2 £ = €’ Ꚍ 2 ¥ = £’

क (9)
ख उ ण ' ण' (9.75)

3. A) The Star Company and the Zee Company are the only firms in a particular market. They
can build their plants on East Coast or West Coast. If both choose East Coast then Star loses
50 million dollar and Zee loses 60 million dollar. If Star chooses West Coast and Zee chooses
East Coast then Star earns 40 million dollar and Zee earns 70 million dollars. If Star chooses
East Coast and Zee chooses West Coast then Star earns 60 million dollar while Zee earns 30
million dollar. If both go for West Coast then Star loses 30 million dollar while Zee loses 40
million dollars.

a) Draw the payoff matrix and find all Nash equilibria. (4)

b) Is this a prisoners' dilemma game? Give reason for your answer. (2)

B) Assume that your favourite concert tickets are being auctioned. There are 20 other
participants in the auction. You have made up your mind that the concert is worth ₹4000 to
you. You would rather go for the concert and pay some amount less than ₹4000 than to miss
the concert (and pay nothing), but you would rather miss the concert (and pay nothing) than
go for the concert if it costs more than ₹4000. You are indifferent between missing the
concert and paying nothing and going to the concert if it costs more than ₹ 4000. To be very
specific, your payoff is 0 if you do not win the auction (and pay nothing) and it is 4000 – P if
you win the auction and pay P. You have no knowledge about other’s valuation.
 a) Suppose this is a first-price auction. Why does the strategy of bidding ₹3950 weakly
dominate the strategy of bidding ₹4000 for you? Can you compare (using dominance)
bidding ₹3950 or bidding ₹3960? Can you compare (using dominance) bidding ₹4000 and
bidding an amount more than ₹4000? (6.75)

b) Suppose this is a second-price auction. Why does the strategy of bidding ₹4000 weakly
dominate every other strategy for you? (6)

3. (अ) औ ष अ
अ ई च 50 औ
60 अ च औ ई
च 40 औ 70 अ
ई च औ च 60 30
अ 30
40

( ) अ इ औ (4)

( ) ? अपने उत्तर क़ा क़ारण दीतिए। (2)

( ) 20 अ
अ 4000
4000 अ
4000 अ
4000 च औ
च , 0
(औ )औ 4000 - P
औ P ई

( ) 3950 ण
4000 ण ? (
उ ) 3950 औ 3960 ?
( उ ) 4000 औ 4000 अ
? (6.75)

( ) 4000 ण
ण ? (6)
4. A) Harry and Ron are visiting France for the first time and their owner offers both of them an
8- slice pizza for free on certain conditions. Both of them simultaneously decide how many
slices they would like to take, i.e each player I є {1,2} names his desired number of slices of
pizza, 0 ≤ bi ≤ 8. If b1 + b2 ≤ 8 then the players get their demands and the owner eats any
leftover slices). If b1 + b2 > 8 and b1 and b2 are different, then the person who named smaller
amount receives that amount and the other receives the remaining amount. If b1 + b2 > 8 and
b1 and b2 are same, then each person receives 4 slices of pizza.

a Represent each player’s best response correspondence. (6.75)

b) What outcomes can be supported as pure-strategy Nash Equilibria? (4)

B) Suppose that Intel and PowerHouse Systems Inc, are the only two firms that can produce a
particular type of microprocessor. If both Intel and PowerHouse enter the market, then Intel
makes a profit of 10 million dollars whereas Power House makes a loss of 40 million dollars.
If Intel enters while PowerHouse stays out, then the former gains 250 million dollars and the
latter gets zero. On the other hand, if PowerHouse enters and Intel stays out, then the former
gains 200 million dollars and the latter gets zero. If both stay out, none makes any profit or
loss.

a) Represent this as an extensive form game assuming that Intel has a head start over
PowerHouse and can make a first move. (3)

b) Find all Nash Equilibria and SPNE. (5)

4. (अ) औ औ उ उ 8- इ
इ च ,
I є {1,2} अ इ , 0 ≤ bi ≤ 8. b1 + b2
≤ 8, उ (औ च इ )
b1 + b2 > 8 औ b1 औ b2 , उ इ
औ ष इ b1 + b2 > 8 औ b1 औ b2 ,
4 इ

( ) च (6.75)

( ) ण ण ? (4)

( ) इ औ उ इ , ष
इ उ इ औ उ ,
इ 10 उ 40
इ उ , 250
औ , उ
 औ इ , 200 औ
, ई

( ) इ , इ उ
औ च च (3)

( ) औ ई (4)

5. There is a perennial rivalry between two kingdoms, ruled by Pandavas and Kauravas
respectively. Pandavas are either strong or weak with equal probability. Pandavas can choose
to keep weapons (W) or not keep weapons (N). Pandavas know whether they are strong or
weak but Kauravas don’t. However, Kauravas can observe whether Pandavas have kept
weapons or not. After observing Pandavas’ decision, Kauravas decides whether to attack A
their kingdom or refrain from attacking (R) them. The payoff details are as follows:

Attack Refrain Attack Refrain

Weapons 0,0 2,1 Weapons 1,2 1,0

No No
4,0 1,3 0,1 2,4
Weapons Weapons

Strong Pandavas Weak Pandavas

Compute the perfect Bayesian equilibria in this situation. (18.75)

5. औ च च
(W) (N) च
,
,
उ आक्रमण (A) उ आक्रमण च (R) अ
णइ :
 आक्रमण आक्रमण आक्रमण आक्रमण

च च

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

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

मिबूि प़ाांडव

इ ण (18.75)

6. A) Using backward induction, find all subgame perfect equilibria of the following game:
(9.75)

B) Firm Meta has to choose between I and II, while Firm Alexa chooses between 1 and 2. If
Alexa chooses 1 and Meta chooses I then payoffs are (50, 80) respectively. If Alexa chooses
2 and Meta chooses I then the payoffs are (70, 40) respectively. If Alexa chooses 1 and Meta
chooses II then payoffs are (90, 60) respectively. If Alexa chooses 2 and Meta chooses II then
the payoffs are (80, 30) respectively.

a) Does Firm Meta have a dominant strategy? If so, what is it? (2)
b) Does Firm Alexa have a dominant strategy? If so, what is it? (2)
c) What is the solution to this game? Is it a Nash equilibrium? (3)
 d) Does this particular game reflect the characteristics of a prisoners' dilemma? Give
reason. (2)

6. (अ) इ उ , :
(9.75)

( ) I औ II चच , 1औ 2 चच
1च औ Iच (50, 80) 2च
औ Iच (70, 40) 1च औ II च
अ (90, 60) 2च औ II च अ
(80, 30)

( ) ई ण ?अ ? (2)

( ) ई ण ?अ ? (2)

( )इ ? ? (3)

(घ) ष ? (2)