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ch10_solutions_solved edit - Solutions to Chapter 10...

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Solutions to Chapter 10 Exercises SOLVED EXERCISES S1. The statement is true because promises, when successfully used as strategic moves, require that you follow through on the promised action; you will not promise an arbitrarily large reward. You may threaten an arbitrarily large punishment, however, if you can be certain your threat will work so that you won’t have to follow through on the threat. Severe threats are not a good idea in general because they may not be credible due to their size, they may damage your reputation (future credibility), and because of the ever-present risk of error (misinterpretation of moves, etc.). (Large threats are not automatically not credible, but it may be harder to establish their credibility.) S2. (a) (i) There are two pure-strategy equilibria (Down, Left) and (Up, Right); there is also a mixed-strategy equilibrium in which Row uses Up with probability 2/3 and Column uses Left with probability 2/3. The payoffs from the mixed-strategy equilibrium are 2/3 to each player. (ii) If Row commits to Up, he ensures himself a payoff of 2. Similarly, if Column commits to Left, he ensures himself a payoff of 2. (b) (i) Both players have dominant strategies; equilibrium: (Up, Right); payoffs (3, 4). (ii) Row can achieve his best payoff of 4 by using the threat Down if Right. (c) (i) Both players have dominant strategies; equilibrium: (Up, Right); payoffs (2, 2). (ii) Either player can make a promise that moves the game to (Down, Left) and payoffs to (3, 3). Row can promise Down if Left; Column can promise Left if Down. S3. (a) See the game tree below. The subgame-perfect equilibrium is (Harsh, Always be mischievous) for payoffs of (2, 2) to the Nanny and the Kids.
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This note was uploaded on 08/08/2011 for the course ECON 171 taught by Professor Charness,g during the Spring '08 term at UCSB.

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ch10_solutions_solved edit - Solutions to Chapter 10...

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