Seminar 10 - problem 5

Hi.
As promised to the monday seminar participants here is the solution for problem 5 d).

As mentioned in class there are two similar pooling equlibria where both type 1 players choose UU since the choice of player 2 off equlibrium path is not important to keep player 1 from deviating.

Thus we have 1 equlibrium: {UU', AA', p=1/2, q>=1/3} and one {UU',AF', p=1/2, q<=1/3}.

This because there is no constraint on the beliefs off equilibrium path, neither because of the players strategies, nor ensure that player 1 does not want to deviate as he is better off at UA or U'A regardless of what player 2 does if prepared is observed.

I wish you all good luck at the exam.

Siv-Elisabeth