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e360_apks_hw6_solns

# e360_apks_hw6_solns - For a risk-neutral agent...

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Homework 6 Answer Key 1. It turns out that strategy (M,L) survives iterated elimination of strictly dominated strategies. 2. Player II (s 2 ) 0 1/4 1/2 3/4 1 0 0,0 0,1/4 0,1/2 0,3/4 0,1 Player I (s 1 ) The dominated strategies are: s 1 =0, s 1 =1, s 2 =0, s 2 =1. Pareto sub-optimal points are (s 1 =1/4, s 2 =3/4) and (s 1 =3/4, s 2 =1/4). Pareto optimal point is (s 1 =1/2, s 2 =1/2). 3. Note that E(X)=0.5*100+0.25*150+0.25*50=100 For a risk-averse agent: U(100)>Expected utility, choose 100 dollar;
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Unformatted text preview: For a risk-neutral agent: U(100)=Expected utility, indifferent between the two choice; For a risk-loving agent: U(100)<Expected utility, choose the lottery. 4. (600,600) (800,200) (200,800) (400,400) D N D N Pepsi Pepsi D N Coke 1/4 1/4,0 1/4,1/4 1/4,1/2 1/4,3/4 0,0 1/2 1/2,0 1/2,1/4 1/2,1/2 0,0 0,0 3/4 3/4,0 3/4,1/4 0,0 0,0 0,0 1 1,0 0,0 0,0 0,0 0,0 The outcome is that both Coke and Pepsi will choose to develop a new product and each gets 600. 1...
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