Subject: Economics / General Economics
Assignment 4Question 1
Iran recently made an agreement with the US and others that they will not take steps that will
advance their military nuclear program. One of the threats the US made is that if Iran will continue
the nuclear program the US will reinstate the sanctions.
Model the situation as a game, in which if Iran doesn’t continue the program the US and Iran get 0.
If Iran decides to continue, the US has two options – reinstate the sanctions and then Iran will get
-100 and US -10, or, overlook and then the US gets ? and Iran gets 20.
i) Draw the game tree. ii) For which values of ? the threat is credible? iii) Find all the NEs of the game for different values of ?. Question 2
Consider the following game between player 1 and player 2: 1
U D 2 2 L ()
3 R L R () () ( )
0 (the payoff in the top is for player 1, the payoff at the bottom is for player 2)
a) Describe the strategy space of each player.
b) Use backward induction to solve the game. Were you able to give a deterministic answer? Explain. Question 3. Oil Company and Community Game
Consider a situation where an oil company wants to dig in a particular area, and the
community living there opposes the digging. The oil company can either Fight the
community and dig without their permission, or pay the community for digging rights, or
abandon the project and leave. The community can fight the oil company, attempt to
negotiate for a settlement, or move to another location. The payoff matrix is as follows:
Community Oil company 1.
1, -2 Negotiate
5, 0 Does the Oil company have a strictly dominated strategy?
Does the Community have a strictly dominated strategy?
What are the pure strategy equilibria?
What are the mixed strategy equilibria?
What is the set of all possible mixed strategies? Move