Game Theory

Running head: GAME THEORY
GAME THEORY
Name of Student
Name of University
Author Note

1
GAME THEORY
Table of Contents
Question 1..................................................................................................................................2
Question 3..................................................................................................................................3
Reference....................................................................................................................................4

2
GAME THEORY
Question 1
i. The current scenario involves the player being fully aware of his or her abilities
however the firm on the other hand has no initial knowledge about the abilities of the two
workers and relies on the assumption that it is equally likely for a worker to be either low
ability (L) or high ability (H). Now when the workers adopt the strategy, “get the degree if
her type is H, and don’t get the degree if her type is L”, and the firm is well aware of this,
then no matter what the worker does, the firm will be more inclined towards believing that
the worker is of L category when provided with a degree than when it is not. This can thus be
considered as a classic example of a dominated strategy.
ii. The firm has an initial belief of a high quality employee with probability p and low
quality with probability 1-p. If the workers strategy is to produce the degree then the firms
conditional believe is that the worker is high quality.
With degree P=2/3×20=13.33, without degree 1-p=1/3 ×20=6.67
iii. The workers separating strategy is best response if the firm will raise the wage bill. If
the wages offered remain as before the degree certificated, then there will be no use of getting
it. The best cost condition for the worker is cH.
iv. Under cost condition cH the signalling device will not always benefit the high ability
worker since her wages are still higher before employing the strategy.