Consider the following stage game: Suppose that this stage game is infinitely re
ID: 3123200 • Letter: C
Question
Consider the following stage game:
Suppose that this stage game is infinitely repeated in the following way. Player 1 is infinitely lived with discount factor sigma (0 1), and in each period a new player 2 arrives, plays the game once and then leaves. (Thus, in each period, player 2 is concerned only with his payoff in that period and not future payoffs.) In each period, both player 1 and player 2 observe the actions of all previous periods. Describe a subgame equilibrium strategy profile in which player 1 chooses H in every period on the equilibrium path, and derive the lower bound on sigma needed.
h l H 4,3 0,2 L 5,0 3,1Explanation / Answer
Consider the following stage game:
delta's lower bound is 0.5 i.e delta should more than 0.5 and subgame perfect equilibrium is (H,h)
player 2 will play h aslong as player 1 plays H..once player 1 plays L afterwards player 2 will always play l..this is the subgame perfect equilibrium
h l H 4,3 0,2 L 5,0 3,1