Homework #9, Econ 306, Prof. Hanson, Spring 2001.

1. The following table describes a normal form game.

a. What is a pure strategy equilibrium of this game?

b. Is there another possible outcome that Pareto dominates this equilibrium? If so, what is it?

(0,0)	(-1,2)	(3,1)
(-1,2)	(-3,5)	(0,0)
(-2,0)	(1,1)	(-1,0)

2. Make up a plausible signaling story to explain each of the following behaviors. For each story, say if it is a separating or pooling equilibrium, what hidden characteristic is signaled, what cost assumption is required, and what we might expect to get too much of:

a. In the 1800s, a custom evolved of a man giving an expensive engagement ring to someone who had agreed to marry him.

b. Banks have traditionally been housed in larger more expensive buildings than they really need to do their business.