NASH Equilibrium

1. [10 points] Provide an intuitive description of a NASH equilibrium and compute

the NASH equilibrium of the following game with simultaneous moves

2. [20 Points] The Principal-Agent Problem

i. Provide an intuitive explanation of the Principle-Agent problem and discuss

any mechanisms used to mitigate the problem. Initially, you should use the

business owner-manager problem as an illustration.

ii. Then, discuss the Principle-Agent problem (and the related concept of “moral

hazard”), and any mechanisms used to mitigate the problem, in the context

of the healthcare industry (the interaction of consumers, hospitals/doctors,

and health insurance companies).

3. [20 Points] The Adverse-Selection Problem

i. Provide and intuitive explanation of the Adverse Selection problem and

discuss its implications and any mechanisms used to mitigate the problem.

You should use the healthcare industry as an illustration.

ii. A key elements of Obama Care is the “individual mandate” (everyone is

required to have health insurance). Is this likely to increase or decrease

health insurance premiums? How is this likely to affect the consumption of

healthcare? Provide an intuitive explanation for your answers.

3 , 5 0 , 3

1 , 0 2 , 2

5 , 1

3 , 0

5 , 3 0 , 1 1 , 5

X Y Z

A

B

C

Player 2

Player 1