The LHS is the payo matrix for the case in which Firm 1 is H-type and RHS is the one for
the case in which Firm 1 is L-type. Assume that Firm 2 believes that Firm 1 is H-type with
3
probability 4 : De
2. (15 points)
Three rms (rm 1, rm 2, and rm 3) are competing in one market where the market demand function is
P = 10 Q. Each rm cost function is T C = 0. In period 1, rm 1 decides q1 as the leader.
2. (20 points)
Consider the following game.
1) (5p) Derive every pure strategy Nash equilibrium.
2) (5p) From your answer of 1), Without doing any mathematical analysis, you should know that there e
3) Derive the subgame perfect Nash equilibrium.
3. Consider the following game. Assume G(T < 1):
L
R
U
1; 1 4; 0
D
0; 4 3; 3
Derive the subgame perfect Nash equilibrium.
4. Consider the following game
Here, the rst term is the slope and the second term is Y-intercept.
Example
Find the linear function that passes through following two points. A = (2, 4) and B = (4, 2)
2.2
When f (x) = ax2 + bx + c
S
So, we have an unique equilibrium and it is a mixed Nash equilibrium. Finally,
2 3
2. (10 point) Consider the following normal form game.
1) (5p) Is this game solvable using IESDS?
2) (5p) Derive
Player 1
L
R
Player 2
B
A
3
1
D
C
1
2
2
1
0
0
1) Check how many subgames are in this extensive form game.
2) Draw the payo matrix of the strategic form game equivalent to the above extensive form
game
4) Check whether the derived answer in 3) is the ecient outcome or not.
4. Bush and Clinton plan to meet at the cinema. However, they forget to decide whether to
meet for the morning show (M) or the n
So,
Le = 2
Then,
L = 1 6= Le = 2
So, the labor demand L in a subgame perfect Nash equilibrium is not an e cient outcome.
2
2. (20 points)
Consider the following stage game. Suppose G(T = 2) and x > 5.
Handout 2 The Bertrand Model with Product
Differentiation
In the Bertrand model it is assumed that each firm sets price to maximise profits. In
what follows we provide a simple example of the case whe
Chapter 4 Sequential Games
1
Extensive Form Games
T
H
H
(1,2)
Anyfinitegameofperfect
informationhasapurestrategy
Nashequilibrium.Itcanbefound
bybackwardinduction.
T
(2,1)
T
H
(2,1)
(4,0)
Chessisafinit
Handout 1 The Cournot Model
In the Cournot model it is assumed that each firm sets output to maximise profits. As an
example, assume that there are two firms in the market, 1 and 2. The market demand