Consider the Game Depicted Below

question 7

Essay

Consider the game depicted below.Player 1 decides between going L or R in stage 1 and 3 of the game.Player 2 decides between going l and r in stage 2 of the game.
a.List the possible pure strategies for each player in this game and illustrate the payoffs from each pair of strategies in a matrix.
b.Is there a dominant strategy for either player?
c.Identify the subgame perfect equilibrium strategies and outcome.
d.Identify the Nash Equilibria that are not subgame perfect.
e.For each Nash Equilibrium that is not subgame perfect, explain which parts of the Nash Equilibrium strategies are non-credible.f.Suppose you have developed a drug that can be administered without the victim being aware of it.The effect of the drug is that the victim suddenly becomes gullible and believes anything he is told.You only have 1 dose of the drug and decide to auction it off to the two players right before they play each other in the game you have analyzed so far.Each player is asked to submit a sealed bid, and the highest bidder will be sold the drug at a price equal to the highest bid.In case of a tie in bids, a coin is flipped to determine who wins and pays the price that was bid.Suppose in this part that payoffs are in terms of dollars and that bids can be made in one cent increments.Suppose further that players do not consider bidding above the maximum they are willing to pay.Given that the players know each other's payoffs in the above game, what is the equilibrium price that you will be able to sell the drug for? (Hint: There are two possible answers.)
g.In part (f), we said "Suppose further that players do not consider bidding above the maximum they are willing to pay." Can you think of a Nash equilibrium to the auction that would end in a price of $8 if we had not made that statement in (f)?

---

Definitions:

Statement of Income

A financial document that shows a company's revenues, expenses, and profits or losses over a specific period of time.

Cash Equivalents

Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Reconciliation

The process of ensuring two sets of records, such as bank statements and company ledgers, are in agreement, identifying discrepancies, and making adjustments if necessary.