Sub: Economics Topic: Micro Economics
Question:
Examples of game theory.
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Consider the following normal-form game.
Player B
Strategy Left Right
Player A Top $100, $200 –$10, $100
Bottom $500, –$50 –$100, –$100
a. What is player B’s best strategy in a simultaneous-move play of this game?
b. What is player A’s best strategy in a simultaneous-move play of this game?
c. What are player A and B’s equilibrium payoff in a simultaneous-move play of this game?
d. Use an extensive form representation to show that player B can earn higher payoffs by
exercising a first-mover advantage. (Note: Player B’s payoffs will appear first in this extensive
form game since it is the first mover.)
e. List two things player B must do in order to be able to achieve these payoffs.
Solution:
(a) Player B’s best strategy is to move leftward. Player B’s payoff is more for leftward
irrespective of the Player A’s strategy. If player A goes for Top or bottom strategy, player B will
choose left strategy.
(b) Player A’s best strategy is to move bottom when the player A moves to the left and, to move
to top when the player moves rightward.
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Sub: Economics Topic: Micro Economics
(c) Player B’s equilibrium payoff is $500 when the player B moves towards left side and if player
B moves towards right side. Player A’s payoff would be negative -10 $.
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ClassOf1 provides exert guidance for College, Graduate and High school homework and live online tutoring on subjects like
Finance, Marketing, Statistics, Economics and others. Check out more solved problems in our Solution Library.
www.classof1.com
*The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not for submitting the same in
lieu of your academic submissions for grades.