Econ 171 Fall 2008
Practice Questions & Solutions
Part II: Extensive Form Games and Subgame Perfection
Practice questions with solutions below:
Watson 3.1 - 3.4, 15.1, 15.3 - 15.5
3.1 Exercise 1: SL={A, B}.SM={Rr, Rg, Gr, Gg}.SJ={Aa, Ab, Ba, B b}. Exercise 4:
Si={R, P, S }for i= 1,2.
3.2 No, “not hire” is not a strategy for the manager. A strategy must specify an action for
every contingency, but “not hire” does not specify what the manager does contingent
upon the worker being hired and exerting a particular level of effort.
3.3 See the next page.
3.4 Player 2 has four strategies: {(c, f ),(c, g),(d, f ),(d, g)}.
15.1 (a) (AF, C )
(b) (BH JK N, CE )
(c) (I, C , X)
15.3 (a) (AHI LN, C E)
(b) 6
15.4 For any given x,y∗
1(x) = y∗
2(x) = x; and x∗= 2.
15.5 (a) Not shown.
(b) We proceed by backwards induction. In the last round (5), player 1 will choose S.
Continuing in this fashion, we find that, in equilibrium, each player will choose S
any time it is her turn. Thus the BI solution is (SS S, SS).
(c) For any finite k, the backwards induction outcome is that player 1 chooses Sin
the first round and each player receives $1.
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