2008SpringHomework2

2008SpringHomework2 - SABANCI UNIVERSITY ECON 201 A GAMES...

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SABANCI UNIVERSITY ECON 201 – A GAMES AND STRATEGY ASSIGNMENT 2 Date due: March 25, 2008, at 11.30 Late submissions will not be accepted Instructor: Mehmet Baç Total points: 100. 1 ( 25 points ). A pedestrian and a motorist play the following game: Each player has three strategies: exercise NO CARE, SOME CARE, and DUE CARE. An accident happens with probability %2 (0.02) if both players choose “due care.” In all other cases, an accident happens for sure (with probability 1). When an accident happens, pedestrian’s cost is 100 , whereas motorist has no cost. For each player, exercising no care is costless , to exercise “ some care” costs 1 , and to exercise due care costs 3 . The payoffs are (0,0) if no accident occurs (any care cost must be subtracted). Consider the following legal liability rule: Liability rule: If the motorist exerts more care than the pedestrian, the motorist has no liability. If the players exert the same level of care, when an accident happens, the motorist compensates the pedestrian for half of the damage. In all other cases, the motorist is liable for any harm that the pedestrian may incur. (i) [10p] Construct the strategic form game under the liability rule given above. (ii) [5p] What are each player’s rationalizable strategies? (iii)
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2008SpringHomework2 - SABANCI UNIVERSITY ECON 201 A GAMES...

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