Solutions to Chapter 11 Exercises

SOLVED EXERCISES

S1. (a) The number choosing X should decrease to move the population division between X and
Y away from the unstable center equilibrium.
(b) Because the line for action X is above the line for action Y when 100 people choose X,
and because we expect the number choosing X to decrease from this point—see part (a)—it must be the
case that the lines in the diagram represent costs associated with each action. Thus, when 100 people are
choosing X, the cost of X exceeds the cost of Y, so people will want to switch from X to Y.

S2. (a) This game is a prisoners’ dilemma since s(n) is greater than p(n + 1) for all n. Any single
player can always raise his payoff by switching from participating to shirking.
(b) T(n) = n * p(n) + (100 – n) * s(n) = n2 + (100 – n)(4 + 3n)
(c) Plugging the appropriate values into the text’s Equation (12.1) yields
T(n + 1) – T(n) = n + 1 – 4 – 3n + n(n + 1 – n) + (100 – n – 1)(4 + 3n + 3 – 4 – 3n)
= –3 – 2n + n + 3(100 – n – 1)
= 294 – 4n.
This formula is positive for all n up to n = 73, but turns negative for n = 74 and higher. Thus, the
last time the change in total social payoff expression is positive is for T(74) – T(73). Thus T is maximized
at n = 74.
Using calculus, you can find the same answer by differentiating T(n) from part (b). Tʹ(n) = 2n +
3(100 – n) – (4 + 3n) = 296 – 4n. Set this derivative equal to zero to find that T(n) is maximized at n = 74.
Or you can find the same answer using a graph of T(n):

Games of Strategy, Fourth Edition Copyright © 2015 W. W. Norton & Company

 (d) When n = 74, each participant receives a benefit p(74) = 74. If one participant were to
switch to shirking, he would receive a benefit of s(73) = 4 + 3(73) = 223. Each participant thus has a
private incentive to become a shirker (as is always the case in a prisoners’ dilemma).
(e) If the game is repeated, the players can take turns playing the role of shirker (and
receiving the higher private benefit). Social norms of the threat of future punishment might keep each
player in his assigned role for that game. A similar procedure might work even if the players’ future
interaction were in a different game.

S3. (a) Let x be the proportion of the population in Alphaville. Then the payoffs to living in the
towns are, for Alphaville, A(x) = x if x < 0.4 and 0.6 – 0.5x if 0.4 < x < 1. For Betaville, the payoffs are
B(x) = 0.1 + 0.5x if x < 0.6 and 1 – x if 0.6 < x < 1.
(b) The graph below shows that there are five equilibria. Three exist where A(x) and B(x)
cross: at x = 0.2[A(x) = B(x) = 0.2], at x = 0.5[A(x) = B(x) = 0.35], and at x = 0.8[A(x) = B(x) = 0.2]. There
are also two equilibria at the end points. At x = 0 (when nobody lives in Alphaville), B(x) = 0.1 > A(x) =
0, so nobody will move into Alphaville. Similarly, at x = 1, A(x) = 0.1 > B(x) = 0, so nobody will move
into Betaville:

Games of Strategy, Fourth Edition Copyright © 2015 W. W. Norton & Company

 (c) For 0 < x < 0.2, B(x) > A(x); for 0.2 < x < 0.5, A(x) > B(x); for 0.5 < x < 0.8, B(x) > A(x);
and for 0.8 < x < 1, A(x) > B(x). Given these relationships, if x is just below 0.2, people will move to
Betaville, and x will fall. If x is just above 0.2, people will move to Alphaville, and x will rise. Thus, the x
= 0.2 equilibrium is unstable. Similar analysis shows that the x = 0.8 equilibrium is also unstable. The
equilibria at x = 0, x = 0.5, and x = 1 are stable, because x moves toward those values.

S4. (a) A person will voluntarily contribute if his benefit from so doing exceeds the $100 cost.
Assuming that n other people are already contributing, a person’s benefit from beginning to contribute is
the difference between his benefit when there are n + 1 contributors and when there are n contributors: (n
+ 1)2 – n2. Once there are 50 other contributors, this benefit is 512 – 502 = 101 > 100. So once the mayor
convinces 50 people to contribute, the rest will join in voluntarily.
(b) There are two stable Nash equilibria in this game. When n = 0, no one is contributing,
and no one wants to. When n = 100, everybody is contributing, and each person receives a private gain
from so doing. (With 100 discrete individuals, there is no unstable equilibrium in the middle. When 50
other people are contributing, everybody wants to contribute; when 49 others are contributing, nobody
gains from becoming contributor number 50. There is no division at which the next possible contributor is
indifferent about his choice.)

S5. Here is one possible account. The diagram below shows a possible configuration of industry-level
supply and demand. Demand has the normal downward-sloping shape. For supply, over the range from
point a to point b there are industry-level scale economies, so quantity rises more than one for one as
demand shifts to the right. Beyond point c capacity constraints bite and supply rises rapidly:

Games of Strategy, Fourth Edition Copyright © 2015 W. W. Norton & Company

 On the macroeconomic level, we see a function relating national product to national income
(demand) with the shape shown below:

Games of Strategy, Fourth Edition Copyright © 2015 W. W. Norton & Company

 Equilibria occur at the points where this curve crosses the 45% line (the line where national
product = national income). Here, point O represents a stable collapse equilibrium, point H represents a
stable good equilibrium, and point M represents an unstable middle equilibrium.

S6. Answers should include careful descriptions of the (usually two) strategies available to the group
of players and of the benefits derived from the two different choices. Good descriptions of benefits should
allow you to sketch a simple graph. From the graph, you should go on to analyze the various possible
equilibria in the game and predictions regarding which of the potentially multiple equilibria might be
obtained in actual play. You should include comparisons of the predicted outcome to the optimal outcome
(that which maximizes the total group benefit).

Games of Strategy, Fourth Edition Copyright © 2015 W. W. Norton & Company