EC2200

UNIVERSITY OF WARWICK

Summer Examinations 2023/24

Mathematical Economics 1A

Time Allowed: 2 Hours

Read all instructions carefully - and read through the entire paper at least once before you start
entering your answers.

Answer TWO questions only (50 marks each).

Answer each whole question in a separate booklet.

Approved pocket calculators are allowed.

You should not submit answers to more than the required number of questions. If you do, we will
mark the questions in the order that they appear, up to the required number of questions in each
section.

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1. Technology Transfer
Alcorp can benefit from a new technology developed by Betech. Alcorp makes an offer to
Betech for the technology, and Betech then decides to accept or reject the offer. Alcorp can
offer any price x ∈ [0, ∞). If Betech refuses the offer, it gets q > 0, and Alcorp gets 0. If
Betech accepts an offer of x to transfer the technology, it gets x, and Alcorp gets kq − x,
where k > 3/2 is a commonly known parameter. In other words, the technology is worth q to
Betech, and kq to Alcorp, and if Alcorp buys it then Betech gets the amount offered but
relinquishes rights to the technology.

(a) Suppose q is a commonly known parameter. What offer does Alcorp make in the unique
SPNE? (12 marks)

Suppose now that q is known to Betech, but not to Alcorp.

(b) Assume q is equal to either q1 or q2 , with 0 < q1 < q2 . Suppose the common prior
assigns probability α to q = q1 and 1 − α to q = q2 . Find for each value of α, what offer
Alcorp makes in PBE. (15 marks)

(c) Suppose instead that the common prior posits that q is distributed on [0, 1] according to
the CDF F , given by F (q) = 0 for q ≤ 0, F (q) = 3q 2 − 2q 3 for 0 < q < 1, and
F (q) = 1 for q > 1. What offer does Alcorp make in PBE? (13 marks)

(d) Now, keeping the setup otherwise as in part (c), suppose that Betech has the option to
pay c > 0 to put on a demonstration of the techonolgy that truthfuly reveals q to
Alcorp. This takes place before Alcorp makes an offer. Which types (q’s) will pay to
reveal themselves in the PBE? (10 marks)

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EC2200

2. A Question with a Couple of Games

Xueying
Left Mid Right
Top 10, 0 0, 6 0, 10

Bruno
Mid 6, 0 1, 1 6, 0
Bot 0, 10 0, 6 10, 0

(a) Find all pure Nash Equilibria, and show whether they are Iterated Elimination Equilibria.
(15 marks)

(b) Find all mixed Nash Equilibria (that aren’t pure), or show there are none. (15 marks)

Now consider the following game, given in extensive form, instead:

A C
B

2 2
3, 2
Lef t Right Lef t Right

4, 4 0, 1 1, 1 1, 3

(c) Find all pure SPNEs (10 marks)

(d) Are all reasonable? Why or why not? (Assigning beliefs may be of use). (10 marks)

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3. Another Question
Take the following game.

Hyungmin
Left Right

Youngji
Top 3, 2 −1, 1
Bot 4, 0 0, 1

(a) Find all Strictly Dominant Strategy Equilibria, Iterated Elimination Equilibria, and Nash
Equilibria (15 marks)

(b) Suppose now that the game is played 3 times, with the same players. A player’s utility is
the sum of their payoffs from each period, without discounting. Find all SPNEs of this
finitely-repeated game. (15 marks)

(c) Suppose the game above is infinitely repeated with a common discount factor δ. Can
the payoff vector (2, 1/2) be attained if the players are patient enough? Can it be
attained in Nash-Reversion strategies? (10 marks)

(d) Suppose that the game is infinitely repeated, however with Youngji facing a new
short-lived Hyungmin every period. Youngji still discounts the future at a rate δ, but
each Hyungmin only cares about the period he is active, though he observes the full
history of past play. Suppose, furthermore, that Youngji might be rational, having the
payoffs above, a behavioral type that only ever plays T , or a behavioral type that only
ever plays B, with a common prior putting positive probability on all three types. What
is the least Youngji’s payoff can be in a PBE in the limit as δ goes to 1? (10 marks)

4 (End)