Game Theory

Giorgi Piriashvili Homework 3 Fall 2023

Goals and Instructions.

This homework aims to help you familiarize yourself with Mixed Strategy Nash Equilibrium (MSNE)
concept. I encourage you to work in groups but upload your own work! The best learning happens when you
share ideas and absorb ideas of others (working in groups) and when you work independently (write down
your own solution). Please, upload a scanned copy of your answer as PDF file on Moodle. The deadline for
this homework is October 21, 11:59 PM.

Problem 1. Expected Utility Maximization.

A risk averse individual has utility function u(w) = ln(w) where w denotes wealth. Her current wealth
is $1,000. She may incur a loss of $400 with probability 0.2 and with probability 0.8 she will not incur any
loss. Insurance is available at a rate 0.25, i.e., if she buys g dollars worth of insurance it will cost her 0.25 × g
in premium. The premium has to be paid irrespective of whether the loss occurs or not. If the loss occurs,
the insurance company reimburses the individual g dollars and if the loss does not occur then the insurance
company does not pay anything.
(a) What is the expected utility when the individual buys g dollars of insurance?
(b) How much insurance will she buy to maximize expected utility?
[Hint: For part (a), figure out how much wealth the individual will end up with what probability is she buys
g dollars of insurance. Use the utility function and the probabilities to get the expression for expected utility.
For part (b), differentiate (with respect to g) the expression you got in (a). Note that ∂ ln(x)/∂x = 1/x.
Do not bother to check the second order condition. It will be automatically satisfied because u(·) is concave.]

Problem 2. Games in Strategic Form.

For the following 6 games find all equilibria.

Problem 3. War or No War.

Two countries are engaged in a dispute over a piece of land. Each country is now deciding whether to
fight or to concede in this dispute. For each country, the value of having the piece of land is v > 0.
− If one country fights and the other concedes, no war takes place
and the country that fights gets the land.
− If neither fights, a war will not occur and there is a 50–50 chance that
either of them will have the land as a result of diplomatic negotiation.
− Finally, if they both fight, a war will occur and, again, there is a 50–50

1
 chance that either of them will have the land, but each country also incurs
(surely) a cost of war equal to 12.
(a) Present the normal/strategic form of this game.
(b) Assume that v < 24. Solve for all the pure strategy Nash equilibria of this game. Does there exist a
pure strategy Nash equilibrium in which a war will occur?
(c) Given that v < 24, find a mixed strategy Nash equilibrium. What is the probability that a war will
occur in this mixed strategy equilibrium? What is the payoff of a country at the mixed strategy equilibrium?

Problem 4. Three Player Game.

For the following game find all equilibria.

Problem 5. Stop or Go.

Each of three players is deciding between the pure strategies Go and Stop. The payoff to Go is 120/m,
where m is the number of players that choose Go. The payoff to Stop is 55 (regardless of what others do).
The payoff to Stop is 55 (which is received regardless of what the other players do).
(a) Find all the pure strategy Nash equilibria.
(b) Find a mixed strategy Nash equilibrium where one player chooses the pure strategy Go and the other
two symmetrically randomize, choosing Go with probability p and Stop with probability 1 − p.
(c) Find the symmetric mixed strategy Nash equilibrium where each player is randomizing with the same
probability.

Problem 6. Public Good Game.

Suppose we have an economy with N people. There is a public good which is only provided if at least
one person gives up c ∈ (0, 1) dollars to pay for it. Consider the following game. Each person simultaneously
decides whether or not to contribute c. If at least one person contributes c, each contributor gets 1 − c and
each non-contributor gets 1. If no one contributes, everyone gets a payoff of zero.

• Question 1 What are the pure strategy equilibria of this game?

• Question 2 Find the unique symmetric mixed strategy equilibrium of this game (By symmetric I
mean an equilibrium in which everyone uses the same mixed strategy). What is the probability that at
least one person contributes in this equilibrium? Show that as N → ∞, the probability that someone
contributes converges to something strictly between zero and one (That is, we have uncertainty about
the outcome even in the limit).