77 - ECON 3600 Assignment 7. Due Thursday, March 22nd 1....

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ECON 3600 Assignment 7. Due Thursday, March 22nd 1. (Adapted from Bierman and Fernandez) The Centipede Game is a two-person dynamic game that is played as follows: There is a pot of money. Initially, the pot has $2 in it. Player 1 moves first. He can either stop the game and take all the money in the pot ($2) or let the game go to round 2. In round 2, money is added to the pot so that now there are $2 2 = $4 in the pot, and Player 2 can either stop the game and take all the money in the pot ($4) or let the game go on to Round 3. And so on. Player 1 moves in odd- numbered rounds. Player 2 moves in even-numbered rounds. In each round the pot grows so that if the Nth round is reached the pot is worth $2 N . The game ends when a player stops it or when round 6 is reached. In round 6, Player 2 gets all the money in the pot and the game ends. a. Draw the game tree for the Centipede Game. b. Determine the subgame perfect equilibrium strategies for both players. What is the equilibrium outcome? The SPE is for each player to stop at every node. So, the outcome will be for player 1 to stop in the first round. c. In experiments with real money, where there is a constantly increasing pot (the pot has $N in it at the Nth round) and the maximum number of rounds is 100, players go as long as 50 rounds before somebody takes the pot. How does this compare to the equilibrium outcome you found? How would you account for the experimental results? This is not the SPE outcome. Perhaps people are altruistic or don't care about trivial amounts of money (any reasonable answer is fine for this part). Stop Stop Stop Stop 1 1 1 2 2 2,0 0,4 8,0 0,16 32,0 0,64 Stop Go Go Go Go Go
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2. (From Yale Open Course) Information and Nuclear Safety. Consider the following game involving two real players and a chance move by `nature'. America and Russia have the nuclear
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77 - ECON 3600 Assignment 7. Due Thursday, March 22nd 1....

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