Name:........................................................................

ECO 5341 (Section 1)

Spring 2016
Homework 2
Due February 9th Tuesday
Total Points: 100

This homework assignment will only be accepted if the answers are provided on the
space following each question. Treat this assignment like an exam. Write your
answers only on the space provided following each question. Do not use separate
sheets. Do not write your answers on other sheets of paper. For full credit, please be
concise and tidy. If your answer is illegible and not well organized, you will lose
points!

Question 1 (20 points): Each of two people has one unit of resource. Each person
chooses how much of the resource to use in fighting the other individual and how
much to use productively. If each person i devotes yi to fighting, then the total amount
produced is 2 − y1 − y2 , and person i obtains the fraction pi (y1 , y2 ) of the output where
 
 1
 if yi > y j , 

p i ( y1 , y2 ) = 1/2 if yi = y j ,
 
 0 if yi < y j . 

In words, if a player devotes more resources to fighting than the other one, she secures all
the output. If both players devote the same amount of resources to fighting, they share
the output equally. Each player cares only about the amount of output she receives and
prefers to receive as much as possible.

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 a) (5 points) Is there any Nash Equilibria with y1 6= y2 , that is, an equilibrium in
which one player allocates less resources to fighting than the other player? Explain.

Answer: No, there does not exist such a Nash Equilibrium. Suppose, without loss of
generality, there is a Nash Equilibrium in which

1 > y1 = a > y2 = b

In this proposed equilibrium, Player 1 devotes more resources to fighting. Then player 1
gets 2 − a − b > 0 and player 2 gets zero.

However, note that player 2 can devote more resources to fighting and simply set

y2 = y1 = a

instead of setting y2 = b < y1 = a. By doing so, Player 2 can now share the output and
receive a payoff of
1
(2 − a − a ) = 1 − a > 0
2
instead of getting 0. Hence given y1 , any y2 with y2 < y1 is not a best response for Player
2.

Therefore, y1 > y2 cannot happen in a Nash Equilibrium. There is no Nash Equilibria

with y1 6= y2 .

2
 b) (5 points) Is there any Nash Equilibria with y1 = y2 < 1, that is, an equilibrium in
which the two players do not use all their resources to fight each other? Explain

Answer: No, there does not exist such a Nash Equilibrium.

Suppose we have a NE in which

y1 = y2 = a < 1

In this proposed equilibrium, both players’ payoffs are

1
(2 − a − a ) = 1 − a > 0
2

Now note that each player has an incentive to devote slightly more resources to fighting
given her opponent’s strategy. To see this, suppose player 1 devotes e > 0 more resources
to fighting and sets
y1 = a + e

Then she will have y1 > y2 and she will secure all the output. Her payoff is now going
to be
2 − ( a + e) − a = 2 − 2a − e

For this to be a profitable deviation for Player 1, we need

2 − 2a − e > 1 − a ⇐⇒ e < 1 − a

So compared to y1 = a, player 1 is better-off by choosing y1 = a + e, with any e ∈

(0, 1 − a). Hence Player 1 has an incentive to deviate, so there is no Nash Equilibrium
with y1 = y2 < 1.

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 c) (10 points) Is y1 = y2 = 1 a Nash Equilibrium? Explain.

Answer: Yes, y1 = y2 = 1 is a Nash Equilibrium.

Given y1 = 1, player 2’s payoff is zero for any y2 , so y2 = 1 is player 2’s best response
to y1 = 1. If she devotes less resources than 1, she will still receive zero and she cannot
fight more than y2 = 1. Similarly, y1 = 1 is also player 1’s best response to y2 = 1.

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 Question 2 (25 points) Two neighbors are planning to clean their street on a Sunday.
We denote the amount of time contributed by person i by ci and assume that the payoff
function of each individual is given by

u1 (c1 , c2 ) = 100c1 − 10c1 c2 − 10c21

u2 (c1 , c2 ) = 50c2 − 10c1 c2 − 20c22

a) (10 points) Find the best response function of each player. How does the best
response of each player depend on the amount of time contributed by the other player
to clean the street?

Answer: To find player 1’s best response function, given any c2 player 1 chooses c1
to maximizes her utility:

u1 (c1 , c2 ) = 100c1 − 10c1 c2 − 10c21

First order condition:

100 − 10c2 − 20c1 = 0

Hence,
1
c1∗ (c2 ) = 5 − c2
2
Similarly, to find player 2’s best response function, given any c1 player 2 chooses c2 to
maximizes her utility:
u2 (c1 , c2 ) = 50c2 − 10c1 c2 − 20c22

First order condition:

50 − 10c1 − 40c2 = 0

Hence,
5 1
c2∗ (c1 ) = − c1
4 4
c1∗ (c2 ) is decreasing in c2 and c2∗ (c1 ) is decreasing in c1 , so each player will spend less
time to clean the street if the other player spends more time.

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 (b) (15 points) Find Nash Equilibrium pair of contributions (c1∗ , c2∗ ) of this game.

Answer: The Nash Equilibrium (c1∗ , c2∗ ) solves the above two best response functions:

1
c1∗ = 5 − c2∗
2

5 1 ∗
c2∗ = − c
4 4 1
Hence,

1
c1∗ = 5 − c2∗
2  
1 5 1 ∗
⇒ c1∗
= 5− − c
2 4 4 1
5 1
⇒ c1∗ = 5 − + c1∗
8 8
7 ∗ 35
c1 = ⇒ c1∗ = 5
8 8
and therefore

5 1 ∗ 5 5
c2∗ = − c1 = −
4 4 4 4
∗
⇒ c2 = 0

Hence
c1∗ = 5 and c2∗ = 0

is the unique Nash equilibrium.

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 Question 3 (30 points). Two people can perform a task if, and only if, they both
work. The cost of effort is 0 < c < 1; and if the task is performed their payoff is 1 each.
This results in the following bimatrix representation, where W stands for working, and
S stands for shirking.
S W
S 0, 0 0, −c
W −c, 0 1 − c, 1 − c
a) (15 points) Find all the pure strategy Nash equilibria of this game.

Answer: Since 0 < c < 1, we have:

BR1 (S) = S
BR1 (W ) = W

and

BR2 (S) = S
BR2 (W ) = W

So there are two pure strategy Nash Equilibria: (S, S) and (W, W).

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 (b) (15 points) Find all the mixed strategy Nash equilibria of this game. How does
the mixed strategy equilibrium change as c increases?

Answer: Suppose in the mixed strategy NE, player 1 chooses S and W with probabil-
ity p and 1 − p, respectively; and player 2 chooses S and W with probability q and 1 − q,
respectively. By the best responses in part (a), if one player chooses a pure strategy in
the NE, then the other player’s best response is also a pure strategy. So in the mixed
strategy NE we must have p ∈ (0, 1) and q ∈ (0, 1). In other words, both players must
be indifferent between S and W.
Given player 2’s mixed strategy (q, 1 − q), we have for player 1:

u1 (S, (q, 1 − q)) = 0

u1 (W, (q, 1 − q)) = q(−c) + (1 − q)(1 − c)

Since player 1 is indifferent between S and W in equilibrium, so we must have

u1 (S, (q, 1 − q)) = u1 (W, (q, 1 − q))

⇒ 0 = q(−c) + (1 − q)(1 − c)
⇒ q = 1−c

Similarly, given player 1’s mixed strategy ( p, 1 − p), we have for player 2:

u2 (( p, 1 − p) , S) = 0

u2 (( p, 1 − p) , W ) = p(−c) + (1 − p)(1 − c)

Since player 2 is indifferent between S and W in the equilibrium, we must have

u2 (( p, 1 − p) , S) = u2 (( p, 1 − p) , W )
⇒ 0 = p(−c) + (1 − p)(1 − c)
⇒ p = 1−c

Hence in the (unique) mixed strategy Nash Equilibrium, both players choose S with
probability 1 − c and W with probability c. As the cost of effort c increases, the players
choose "working" with higher probability. The reason is that in the mixed strategy equi-
librium each player has to randomize in a way to make her opponent indifferent between
working and shirking. As c increases, working becomes less attractive for the opponent.

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To compensate for that, a player has to choose working with higher probability such
that her opponent is more willing to work since the cooperation outcome (W,W) is more
likely to happen.

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 Question 4 (25 points)
Find all the pure and mixed strategy equilibria of the following Hawk and Dove
game by constructing the best response correspondences of the players:

H D
H 0, 0 6, 1
D 1, 6 3, 3

Answer: First let us consider best responses to pure strategies

BR1 ( H ) = D BR2 ( H ) = D
BR1 ( D ) = H BR2 ( D ) = H

So there are two pure strategy Nash Equilibria: (H, D) and (D, H).
Mixed Strategies: Suppose in the mixed strategy NE, player 1 chooses H and D with
probability p and 1 − p, respectively; and player 2 chooses H and D with probability q
and 1 − q, respectively.
Given player 2’s mixed strategy (q, 1 − q), we have for player 1:

u1 ( H, (q, 1 − q)) = q(0) + (1 − q)6 = 6 − 6q

u1 ( D, (q, 1 − q)) = q + (1 − q)3 = 3 − 2q

For player 1 to be indifferent between H and D in equilibrium, we must have

3
u1 ( H, (q, 1 − q)) = u1 ( D, (q, 1 − q)) ⇒ 6 − 6q = 3 − 2q ⇒ q =
4
 
3
 H
 if q < 4


BR1 ((q, 1 − q)) = 3
D if q > 4

 indifferent between H and D if q = 3 

4

Similarly, given player 1’s mixed strategy ( p, 1 − p), we have for player 2:

u2 (( p, 1 − p) , H ) = (1 − p)6 = 6 − 6p

u2 (( p, 1 − p) , D ) = p + (1 − p)3 = 3 − 2p

For player 2 to be indifferent between H and D, we must have

3
u2 (( p, 1 − p) , H ) = u2 (( p, 1 − p) , D ) ⇒ 6 − 6p = 3 − 2p ⇒ p =
4

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  
3
 H
 if p < 4


BR2 (( p, 1 − p)) = 3
D if p > 4

 indifferent between H and D if p = 3 

4
3
Hence in the (unique) mixed strategy NE, both players choose H with probability 4
and D with probability 14 .

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