Chapter 1 Reading Notes

Question 1

define nash equilibrium

Answer 1

mutual best response

a mutual strategy for both players that is satisfactory

a law that no one would want to break even in the absence of law or an external police force

Question 2

define tragedy of the commons

Answer 2

a coordination problem in which self-interested individuals act independently and deplete a resource, lowering payoffs for all

Question 3

who came up with ‘tragedy of the commons’ and when was this?

Answer 3

Garret Hardin in 1968

he called this a rebuttal to ‘the invisible hand’

Question 4

what is ‘the invisible hand’?

Answer 4

competitive exchange of good to coordinate the actions of people resulting in people being guided subconsciously via incentives

Question 5

what are examples of coordination problems?

Answer 5

‘how do we sustain the global environment?’

‘how do we move around the city without overcrowding the streets and causing congestion?’

Question 6

how could coordination problems be solved?

Answer 6

through people internalising their actions and its externalities

through changing institutions

Question 7

define ‘external effects’

Answer 7

occurs when someone’s independent action results in suboptimal payoffs for others

externalities

Question 8

define institutions

Answer 8

laws, rules & conventions which regulate how others interact with one another

Question 9

what are examples of institutions?

Answer 9

laws enforced
mutual expectations
social pressures

Question 10

does game theory focus on strategic interactions?

Answer 10

yes

Question 11

define strategic interactions

Answer 11

when participants’ outcomes depend on each others’ actions

mutual dependence, recognised

Question 12

what is a ‘set’?

Answer 12

a collection of things

Question 13

what are the components of a game

Answer 13

players
strategy sets
strategy profiles
order of play
information
payoffs

Question 14

define players in a game

Answer 14

individuals or organisations represented as a single actor choosing a course of action

Question 15

define strategy sets

Answer 15

a list of every possible course of action for each individual

Question 16

define strategy profile

Answer 16

the course of action and its outcome for an individual is their strategy profile

Question 17

define order of play

Answer 17

a game can be simultaneous or sequential

a player may or may not know what their opponent has done

Question 18

define information in a game

Answer 18

a game specifies who knows what, when they know it, do others know what they know etc.

Question 19

define payoffs in a game

Answer 19

numbers are assigned to each possible outcome for each player

a player chooses a course of action with the highest number

Question 20

define cooperative game

Answer 20

a strategic interaction in which the players’ choice of strategy is subject to a binding agreement

Question 21

define solution concept

Answer 21

a rule for predicting the outcome of a game

how a game will be played

Question 22

define dominant strategy

Answer 22

a strategy is dominant if it yields the highest payoff for a player regardless of others’ actions

Question 23

define dominant strategy equilibrium

Answer 23

a strategy profile in which all players play a dominant strategy

Question 24

define equilibrium

Answer 24

a situation that is stationary in the absence of external change

a predicted outcome

Question 25

define best response

Answer 25

a strategy is a player’s best response to the strategies adopted
by others if no other strategy available would result in higher payoffs

Question 26

pareto efficiency = ?

Answer 26

when an economy has its resources and goods allocated to the maximum level of efficiency

no changes can be made without making someone worse off

Question 27

pareto inefficiency = ?

Answer 27

an outcome that leaves at least one person better off without making anyone worse off

Question 28

pareto superior = ?

Answer 28

when at least one player is better off without anyone being worse off

Question 29

prisoner’s dilemma = ?

Answer 29

an interaction that in which there is a unique nash equilibrium, but there’s another outcome that gives a higher payoff to both players

therefore the nash equilibrium isn’t pareto efficient

Question 30

rational agent = ?

Answer 30

someone who will choose their best option

Question 31

economic rent = ?

Answer 31

the difference between the payoff they’d get if they cooperated and the next best alternative

Question 32

fallback position = ?

Answer 32

the payoff a player receives in their next best alternative

(if they don’t cooperate)

Question 33

assymetric information = ?

Answer 33

when one person knows information but the other person doesn’t

Question 34

verifiable information = ?

Answer 34

information that can be used to enforce a legal contract or other agreement

credible information

Question 35

invisible hand game = ?

Answer 35

invisible hand game has a single nash equilibrium that is pareto efficient

Question 36

strategic complementarity = ?

Answer 36

when the payoff to playing a particular strategy increases as more people adopt/copy that strategy

incentive to get more people on board

Question 37

assurance game = ?

Answer 37

pareto inefficient interaction

a two-player symmetric, strategic interaction with 2 strict nash equilibria, one of which is pareto superior to the other

Question 38

disagreement game = ?

Answer 38

a game in which there are two or more pareto-efficient nash equilibria that are ranked differently by the players

this results in two players preferring two different equilibria

Question 39

path dependence = ?

Answer 39

a process is path dependent if the most likely state of something depends on its state in recent periods

Question 40

poverty trap = ?

Answer 40

when identical people may experience either an adequate living standard or poverty depending on circumstances, not their attributes

Question 41

group inequality = ?

Answer 41

economic differences between sets of people distinguished by a common attribute (e.g., gender, age, race)