Econ 101: Chapter 18

Question 1

Game theory

Answer 1

the science of making good decisions in situations involving strategic interactions.

Question 2

Strategic interactions

Answer 2

when your best choice may depend on what others choose, and their best choice may depend on what you choose.

Question 3

4 steps to make good strategic decisions

Answer 3

Consider all possible outcomes, think about the “what ifs” separately, play your best response, put yourself in someone else’s shoes.

Question 4

Pay off table

Answer 4

a table that lists your choices in rows, and the other player’s choices in columns, listing the payoffs in each cell.

Question 5

Best response

Answer 5

the choice that yields the highest payoff for you, given the other player’s choice.

Question 6

Prisoner’s Dilemma

Answer 6

both rational agents can cooperate for mutual benefit, or betray their partner for individual benefit.

Question 7

Nash equilibrium

Answer 7

an equilibrium in which the choice that each player makes is a best response to the choices that other players are making.

Question 8

Check mark method

Answer 8

the outcome with a checkmark from each player is a Nash equilibrium

Question 9

in the Prisoner’s Dilemma, the equilibrium is where…

Answer 9

both players fail to cooperate (both defect).

Question 10

in the Prisoner’s Dilemma, each player’s expectation about what the other player will choose is…

Answer 10

correct.

Question 11

Agreements to cooperate are not… (Prisoner’s Dilemma)

Answer 11

credible.

Question 12

In the Prisoner’s Dilemma, the equilibrium is not…

Answer 12

the best outcome (market does not yield good outcome).

Question 13

Prisoner’s Dilemma: the temptation to…

Answer 13

take advantage undermines cooperation.

Question 14

Strategic interactions lead people to make strategic choices that…

Answer 14

lead to inefficient outcomes.

Question 15

Multiple Equilibria

Answer 15

when there is more than one equilibrium

Question 16

Coordination game

Answer 16

when both players have a common interest in coordinating their choices (make complementary choice to the other player).

Question 17

Anti-coordination game

Answer 17

when your best response is to take a different (but complementary) action to the other player.

Question 18

there can be situations where there is a

Answer 18

good and bad equilibrium.

Question 19

Solutions to coordination problems

Answer 19

communication, focal points, culture, norms, and laws + regulations

Question 20

Communication

Answer 20

works when you both want the same thing, to coordinate on the same equilibrium.

Does not work when players have opposing incentives (Prisoner’s Dilemma).

Question 21

Focal point

Answer 21

a cue from outside the game that helps you coordinate on a specific equilibrium.

(e.g. social conventions).

Question 22

Laws and regulations

Answer 22

the law will decide where the equilibrium is.

Question 23

sequential games

Answer 23

games where you can see your rival’s action before choosing yours, or they can see your action before choosing theirs.

Question 24

first mover advantage

Answer 24

the strategic gain from an anticipatory action that can force a rival to respond less aggressively.

Question 25

the gain the first mover advantage, you must…

Answer 25

credibly commit to your move.

Question 26

Game tree

Answer 26

shows how a game (all possible outcomes) plays out over time.

Question 27

figuring out your best outcome requires you to:

Answer 27

look forward and reason backward.

Question 28

look forward

Answer 28

anticipate the likely consequences of your decisions.

Question 29

reason backward

Answer 29

start by analyzing the last period of the game.

Question 30

Prune the tree method

Answer 30

a method for solving game trees.

Question 31

the first movers advantage is about…

Answer 31

the benefits of commitment (you commit to an aggressive position, forcing your rival to be less aggressive).

Question 32

second mover advantage

Answer 32

the strategic advantage that can follow from taking an action that adapts to your rival’s choice.

Question 33

the second mover advantage is about…

Answer 33

flexibility (can adapt your strategy to the choices made by the first mover).

Question 34

Collusion

Answer 34

an agreement to limit competition; rivals agree to all charge high prices.

Question 35

One shot game

Answer 35

a strategic interaction that occurs only once (don’t need to worry about how others will treat you in the future).

Question 36

repeated game

Answer 36

when you face the same strategic interaction with the same rivals and the same payoffs in successive periods.

Question 37

finitely repeated game

Answer 37

when you face the same strategic interaction a fixed number of times.

Question 38

The Prisoner’s Dilemma yields ____ in a finitely repeated game.

Answer 38

uncooperative outcomes.

Question 39

indefinitely repeated game

Answer 39

when you face the same strategic interaction an unknown number of times.

Question 40

strategic plan

Answer 40

a list of instructions that describes exactly how to respond in any possible situation.

Question 41

Grim trigger strategy

Answer 41

• if the other players have cooperated in all previous rounds, you will cooperate.
• But if any player has defected in the past, you will defect.

Question 42

In a indefinitely repeated game, the Prisoner’s Dilemma can yield a…

Answer 42

cooperative outcome/equilibrium

Question 43

____ drives cooperation in indefinitely repeated games as ____

Answer 43

punishment, your rival can refuse to cooperate with you again in the future.