# Markets, Games, and Strategic Behavior/2010

his page is an experiment in student generated answers to homework questions. In Markets, Games, and Strategic Behavior, we covered a diverse number of topics. The lecturer will pose a question and the students will provide the answer(s). Feel free to improve on other students' answers, put alternate answers and pose new questions. Feel free to clarify the questions as well.

### Question 1[edit | edit source]

Take from class, the Diamond Dybvig model with and , two impatient depositors and two patient depositors. Each depositor has $1000 to deposit in the bank. Let us say that deposits are insured up to fraction . For what values of is there only one equilibrium and what values are there two equilibria? (For each dollar put in the bank yesterday, early withdrawers are guaranteed to get and late get .)

### Answer 1[edit | edit source]

The bank expects the two impatient depositors to withdraw today and the two patient depositors to withdraw tomorrow. Hence, yesterday, the bank sets aside $2000 for today and invests $2000 for tomorrow. Now today, the depositors must decide whether to withdraw today or tomorrow. We assume that the impatient depositors withdraw today. Now We can examine this as a game between the two patient depositors. Each has to decide whether or not to withdraw today. When the payoffs as discussed in class.

Today | Tomorrow | |

Today | $750, $750 | $1000, $0 |

Tomorrow | $0, $1000 | $2000, $2000 |

For a general , we must calculate again each of the payoffs. If both withdraw today, the bank can pay the first 3 depositors the $1000. The last depositor will receive . Thus, the expected payoff is . If one withdraws today and the other withdraws tomorrow, the bank will be able to pay all three today, and the depositor withdrawing tomorrow receives . Rewriting the game yields.

Today | Tomorrow | |

Today | $750+1000*(f/4), $750+1000*(f/4) | $1000, $2000*f |

Tomorrow | $2000*f, $1000 | $2000, $2000 |

We see that if one patient depositor withdraws today, the second patient depositor only has incentive to withdraw today if . Hence, if and only if , there is a possibility of two equilibria.

### Question 2[edit | edit source]

**Part A.**

Examine the second treatment of the Beer-Quiche game where there is a 2/3 chance of the proposer being strong.

Payoffs: Proposer, Responder

Flee | Fight | |

Beer (Strong) | $1.40, $1.25 | $0.60, $0.75 |

Quiche (Strong) | $1.00, $1.25 | $0.20, $0.75 |

Beer (Weak) | $1.00, $0.75 | $0.20, $1.25 |

Quiche (Weak) | $1.40, $0.75 | $0.60, $1.25 |

Can there be a pooling equilibrium where both proposers choose Quiche and the responder flees? Does this seem reasonable to you?
**Part B.**

fold | call | |

raise (Strong) | $1.00, -$1.00 | $2.00, -$2.00 |

fold (Strong) | -$1.00, $1.00 | -$1.00, $1.00 |

raise (Weak) | $1.00, -$1.00 | -$2.00, $2.00 |

fold (Weak) | -$1.00, $1.00 | -$1.00, $1.00 |

Assume the odds of a strong hand is 80%. Find any equilibrium. Is it signalling or pooling? Extra hard: what happens if it is 60%?

### Answer 2[edit | edit source]

(shaked zin)

**Part A.**

Pooling equilibrium 1 - always choose beer. Pooling equilibrium 2 - always choose quiche - can't be a real equilibrium since it doesn't make sense. TECHNICALLY, IT IS AN EQUILIBRIUM IF THE PROPOSER BELIEVES THE RESPONDER WILL THINK HE IS WEAK IF HE DRINKS BEER. IT DOESN'T MAKE SENSE (NOT INTUITIVE) ACCORDING TO CHO-KREPS SINCE A WEAK PROPOSER WOULD HAVE NO POTENTIAL GAIN FOR DRINKING BEER THUS A PROPOSER DEVIATING MUST BE STRONG.

**Part B.**

Pooling equilibrium, when the odds are 80% to be strong any player would pretend to be strong and choose to raise the pot.

because: 0.8*(-2)+0.2*2= -1.2 < -1

extra hard: 0.6*(-2)+0.4*2= -0.4 > -1 In this case a weak A knows B would call anyone if all weak A's lie - therefore a weak A will fold and B will fold to anyone raising. its worth mentioning that its good for weak A's to lie once in a while and pretend to be strong and raise - as long as not many of them does so - B will always fold unless more than 0.375 weak A's will lie.

**what is it 0.375???**

### Question 4[edit | edit source]

There is a Beersheva to Haifa train line. Travellers either go between Haifa and Tel Aviv with demand , Tel Aviv and Beersheva 12-p, Haifa and Beersheva. , Say it is all owned by one profit maximizing monopolist with marginal cost of zero. For simplicity assume that the monopolist must set the price of the Haifa-Beersheva route equal to the sum of the other two. a) What would he charge for all three routes?

b) Now say the government thinks it needs to add competition to the rail industry. It divides things into two companies. One takes care of the Haifa-Tel Aviv route and the other the Tel Aviv-Beersheva route. The price of the combined trip is the sum of the other two. What are the new prices? Who wins and who loses?

ANSWERS למי שיש דעות אחרות בנושא?

אבל יש ביקוש עבור כל קו בנפרד, ולא מדובר על קו שלם. לכן לדעתי סכום של רווחים עבור כל קטע מהווה רווח של מונופול עבור קו שלם לכן תשובות שלי, כמו שרשום ב א & ב

a)

p1=3 p2=3 for each small trip P=6 for all trip

b)

p1=p2=6 p=12

### Answer (start):[edit | edit source]

a. The monopolist would want to choose a p1 and p2 to maximize (12-p1)p1+(12-p2)p2+(18-(p1+p2))(p1+p2)

b. With separate firms, firm 1 would choose p1 to maximize (12-p1)p1+(18-(p1+p2))p1 and firm 2 would choose p2 to maximize (12-p2)p2+(18-(p1+p2))p2.

### ANSWERS[edit | edit source]

(according to Tomer Zalmanson, Ariel Sawicki & Shaked Zin)

a) P1=P2=5 P3=10

b) P1=P2=6 P3=12

### Question 5[edit | edit source]

Students like to go to the Haifa Ball depending upon how many other students go there. Tickets cost 32 NIS each. There are 1000 students indexed by i from 1 to 1000. Student i has value vi=i. Student i has utility (in shekels) for going to the Ball of , where n is the total number of students going to the Ball. (i) If everyone believes , which students will be willing to go to the ball? (ii) What is the threshold number of tickets sold above which it will be a success and below which it will be a failure? (iii) What is the equilibrium of tickets sold if the ball is a success? (iv) What is the equilibrium of tickets sold if the ball is a failure?

(i)n=680, students that their value vi>= 320

(ii) 200

(iii) 800

(iv) 0

### Question 6[edit | edit source]

A monopoly has marginal cost of 5 and faces a demand of q=20-p. What price should he charge to maximize profits? Let us say it is a vertical market of two firms: supplier and retailer. What would the price would the supplier charge the retailer? What would be the price charged to the end consumer? If the supplier charged a franchise fee in addition to wholesale price, what would they be? Extra: Solve the above problem for the general case of marginal cost of c facing demand of q=A-p where (A>c).

Answers

1. a monopoly case: p=12.5

2. Vertical markets

Ps=12.5 Max ProfitR= (20-q-Ps)*q FOC: 20-2q-Ps=0 -> q= 10-Ps/2 = 3.75 -> Pc=20-3.75=16.25

3. Franchise:

Ps=MC=5 -> q=10-Ps/2=7.5 Pc=12.5 Profit 0f retailer Pc*q-Ps*q-F= 56.25-F -> F=56.25-E

4. General case

Ps=(A+c)/2 q=A/4-c/4 Pc=3A/4+c/4

### Question 7[edit | edit source]

El Al and British Air are competing for passengers on the Tel Aviv- Heathrow route. Assume marginal cost is 4 and demand is Q = 18 ? P. If they choose prices simultaneously, what will be the Bertrand equilibrium? If they can collude together and fix prices, what would they charge. In practice with such competition under what conditions would you expect collusion to be strong and under what conditions would you expect it to be weak. Under what conditions should the introduction of BMI affect prices?

למישהו יש רעינות נוספים?

ANSWER:
If they choose prices simultaneously, what will be the Bertrand equilibrium? p1=p2=4 - the player cut off the price till it become MC

If they can collude together and fix prices, what would they charge. p=11

### Question 8[edit | edit source]

Solve a three stage ultimatum game where in the first stage player A offers player B an offer for a $10 pie. If this offer is rejected, then the pie shrinks to $8 and player B makes the offer. If this offer is rejected, then the pie shrinks to $6 and player A makes the offer. If this final offer is rejected, then the payoffs are 0 to both players. (Assume the possibility of continuous offers.)

(8,2)

**Question 9**[edit | edit source]

You get in a taxi. Should you bargain over the price at the beginning or end of the trip? Why?

**Question 10**[edit | edit source]

Home Box Office is a pay-TV service that is based in the US. After showing only
movies they decided to increase subscribers by introducing shows such as Sex and
the City and the Sopranos.
A person enjoys a show for its quality and whether they can talk about it
next to the water cooler the next day at work. Given that someone has seen the
show, the probability that one can talk about it f is just the number of people
who have seen the show divided by the total number of people.
We index the possible viewers by i (from 1 to 1000). Viewer i has parameter
v_{i} where v_{i} = i. Viewer i values subscribing to HBO 9+ (v_{i}/10)· f. Note that 9 is the
value of HBO from the sheer quality. The price charged for HBO is 30.
(i) If everyone believes f = .4, which people will subscribe to HBO?
(ii) What is the threshold number of subscribers above which HBO will be a
success and below which HBO will be a failure?
(iii) What is the equilibrium number of subscribers if HBO is a success?
(iv) What is the equilibrium number of subscribers if HBO is a failure?
i.475
ii.300
iii.700
iv.0

## Lab report 2 questions: Bertrand Complements[edit | edit source]

Which price should be higher: monopoly or Bertrand price competition?

Which to consumers should be higher: monopoly or Bertrand Complements?

When demand is 15-p and mc=6, what should a monopolist charge?

When demand is 15-(p1+p2) and mc=3 for both firms, what is the equilibrium price (it is Bertrand Complements)?

## Answers to Lab Report 2[edit | edit source]

Monopoly price is higher than Bertrand competition.

Bertrand complements price is higher than monopoly price

The monopoly will charge 10.5$

p1=p2=6, P=12

## Lab report 3 questions: Bank Runs[edit | edit source]

If they value R tomorrow less than 1 today, Impatient depositors will always want to withdraw today: True or False?

For no matter what values of L and R (L<1, R>1) and any number of depositors, there will always be two equilibria in the Diamond Dybvig model: True or False

For 4 depositors (2 impatient and 2 patient), L=.6 and R=1.5 what are the payoffs for (today, today)?

For 4 depositors (2 impatient and 2 patient), L=.6 and R=1.5 what are the payoffs for (today, tomorrow)?

**Answers**

1. True

2. False

3. 800/800

4. 1000/500

## Lab report 4 questions: Network Externalities[edit | edit source]

If in the Network Experiment values were drawn from 0,10 and p=2.1, then what is the expected proportion of consumers buying in the success equilibrium.

.2 .3 .4 .5 .6 .7 *** .8

If in the Network Experiment values were drawn from 0,10 and p=2.1, then what is the threshold/tipping point?

.2 .3 *** .4 .5 .6 .7 .8

If in the Network Experiment values were drawn from 0,10, then for what prices is failure the only equilibrium?

p=2.5

Give an example of Network Externalities that wasn't mentioned in class.

## Lab report 5 questions: Vertical Market[edit | edit source]

The profit of a monopolist is higher than the upstream firm in a vertical monopoly.

True *** False

If the upstream firm can charge a franchise fee, how much would it charge per item in addition to this fee if its marginal cost is 3

0 between 0 and 3. 3 *** twice the marginal cost (i.e., 6). = this other

Say demand is D=16-p and mc=0. How much would a monopolist charge? p=8

Say demand is D=16-p and mc=0. How much would the consumer pay if there is a vertical market (upstream and downstream)? Pc=12

## Lab report 6 questions: Holdup[edit | edit source]

A buyer's investment cost is C. The gains in profits is G. The supplier can raise price by R. If the buyer switches the loss is B. By what amount R (in a one shot game) will it be rational for the buyer to stay with that firm?

any R no R. R>G G>R G-C-R>B (tomer)

When will the buyer choose not to invest?

G-C-R<0 *** G-C>0 G-B<0 G-C-B<0

Assume C=2000. Give a case of R, B, G where the subgame equilibrium is inefficient?

Assume C=2000. Give a case of R, B, G where the subgame equilibrium is efficient?

### Lab report 7 questions: Draft[edit | edit source]

If a team goes up in order of the draft (can select earlier), then

the team will always get better players the team will never get better players the team will sometimes get worse players *** the team will always get the same players

Teams selecting players by a draft will

Always be Pareto Efficient Only sometimes be Pareto Efficient *** Never be Pareto Efficient Can always be improved by allowing trading afterwards

If Team 1 prefers A to B to C to D (A>B>C>D) and Team 2 prefers B to C to D to A, then what are the sincere choices.
1 - AC
2 - BD

If Team 1 prefers A to B to C to D (A>B>C>D) and Team 2 prefers B to C to D to A, then what are the sophisticated choices. 1 - BA 2 - CD

## Lab report 8 questions: Subgame Perfection[edit | edit source]

In the centipede game, the subgame perfect equilibrium will be:

The first player will stop. *** The game will continue to the end. The game will stop just be for the end. None of the above.

In the centipeded game, the outcome with the highest joint payoffs will be the subgame perfect equilibrium.

True False ***

Explain why in experiments the results tend not to coincide with the subgame perfect equilibrium.

Is it benefically to be smart (and this trait known) in the centipede game?

## Lab report 9 questions: Kiyotaki Wright Model[edit | edit source]

In the model, one would never gain from trading for an object one didn't need.

True False ***

What was the commodity money?

1*** 2 3 there was none.

Explain how (at least for some parameters) there may be a speculative equilibrium.

Explain how under the parameters of the experiment, assuming that a player always would accept his desired good, a type 3 player should never accept a (2) good from a type 1 player.

## Lab report 10 questions: Signalling[edit | edit source]

A peacock's tail is an example of signalling.

True False

In treatment 2, what is the minimum fraction of strong types needed for a pooling equilibrium?

3/4 2/3 1/2 1/3

What was the reason that Cho Kreps gave for why pooling could not occur having both types each quiche?

Give an example of signalling in the real world.

## Lab report 11 questions: Information Cascades[edit | edit source]

If you see a red ball you should always choose the cup that is color of your ball.

True False***

If there are 10 people choosing before you and all 10 choose blue then at least 9/10 times blue would be correct choice.

True False***

If everyone chooses rationally and there are 5 blue cups chosen out of 5 choices what are the odds that the cup is blue?

80%

מישהו יכול להסביר למה זה יוצא 80%... בבקשה

מחשבים הסתברות רק לפי שניים הראשונים כי כל השאר מפל מידע, נקבע על סמך 2 ראשונים

What is the connection between this experiment and a cascade?

## Lab report 12 questions: Rent Seeking[edit | edit source]

In a rent-seeking game, in equilibrium players make on average zero profits.

True False***

In a rent-seeking game, in equilibrium a player's profits goes down with his marginal cost.

True False***

What is the equilibrium effort when there are 5 players competing for $10 with marginal cost of $2? - 0.8

When the number of players goes to infinity, what is the limit of the total effort? - v/mc

## Lab report 13 questions: Taxes[edit | edit source]

A seller would prefer which of the following?

A $2 per unit tax on sellers A $2 per unit tax on buyers depends upon the shape of the demand and supply curves indifferent between the two options.

A buyer would prefer which of the following?

A $2 per unit tax on sellers A $2 per unit tax on buyers depends upon the shape of the demand and supply curves indifferent between the two options.

Buyers have valuations 10, 9, 8, 7, 5 Sellers have costs 1 4 5 6 7 what is the equilibrium price/quantity?

Buyers have valuations 10, 9, 8, 6, 5 Sellers have costs 1 4 5 6 7 what is the equilibrium price/quantity?