Economics 440/640 Problem Set 1 Due 2/1/2012 You are allowed to work in groups of up to four people.

Only one problem set copy needs to be turned in per group. If you have any questions please email me or stop by my ofce. All questions are equally weighted.

Gibbons Questions
1.2 1.6 1.10

Additional questions
Question 1. A Blotto Game (From Binmore, Fun and Games). Colonel Blotto and Count Baloney are opposing generals in a military campaign. Colonel Blotto has four companies that he can distribute among two locations in three different ways: (3, 1), (2, 2), and (1, 3) (where (x, y ) x companies in location 1 and y companies in location 2). His opponent Count Baloney has three companies that he can distribute in two different ways: (2, 1) and (1, 2). Suppose that Blotto sends m1 companies to location 1 and Baloney sends n1 companies to location 1. If m1 = n1 , the result is a stand-off and each commander gets a payoff of zero for location 1. If m1 = n1 , the larger force overwhelms the smaller force without loss to itself. If m1 > n1 , Blotto gets a payoff of n1 and Baloney gets a payoff of n1 . If m1 < n1 , Blotto gets a payoff of m1 and Baloney gets a payoff of m1 . Each players total payoff is the sum of his payoffs at both locations. A) Describe in words Colonel Blotto and Count Baloneys aims. B) Find the normal-form of this game. C) Determine a mixed-strategy Nash equilibrium of the game.

Question 2. Geometry of Best Response Functions. person games with two strategies for each player: S1 = {Up, Down} and

For this question, consider two-

S2 = {Left, Right}

We can represent a mixed-strategy combination as a point in the unit square where x = probability 2 plays Right and y = probability that 1 plays Up. For example, the point (3/4, 1

1/3) represents player 1 playing Up 1/3 of the time and Down 2/3 of the time, and player 2 playing Left 1/4 of the time and Right 3/4s of the time.

A) Draw both players best response curves for the following game. L 2, 2 4, 0 R 0, 4 1, 1

U D

B) Find payoffs that would produce the following best response diagram. (The solid line is player 1s best response and the dashed line is player 2s). Hint: you may want to work out numbers that will give you the approximate shapes rst and only then focus on the point where the curves intersect.
Pr. Up

(1/2, 1/3)

(0, 0)

Pr. Right

C) Find payoffs that would produce the following best response diagram.
Pr. Up (2/5, 4/5)

(0, 0)

Pr. Right

Question 3. Zero-Sum Games. A zero-sum game is a game where where players payoffs can be represented by the form x, x for each strategy combination (where the xs vary). For example, the Blotto Game is a zero-sum game.

A) Are the equilibria of a zero-sum game more likely to be mixed-strategy equilibria? B) Either provide an intuitive argument for your answer to the last question or prove your answer for 2 2 games. I would much rather get a good intuitive answer than a bad proof.

Question 4. A Patent Race. Firm 1 and rm 2 each decide on a research investment of ri that is either $0, $1 million, or $2 million. If ri > rj , rm i has a breakthrough worth $5 million while rm j is too late and gets no benet from its research expenditure. If ri = rj , neither rm gets the $5 million gross prot from the breakthrough because it is eaten up by patent disputes.

A) Find the normal-form of this game. B) Determine a mixed-strategy Nash equilibrium of the game.