Econ Class Test 2 Flashcards
When does a firm exit the market in Perfect Competition?
Market Price is below Average Cost, with the least efficient firm leaving first
What happens in the Prisoner’s Dilemma Game?
Both players mutually defect, causing for lower utility than mutual cooperation
What happens in the Stag Hunt Game?
Two equilibria are found when players either mutually cooperate (Higher payoff) and mutually defect (Lower payoff)
Draw the Prisoner’s Dilemma Game
20, 20 5,22
22,5 8,8
Draw the Stag Hunt Game
20, 20 5,18
18,5 8,8
What do the Stag Game and Prisoner’s Game suggest when applied to advertising?
They suggest that high spending on advertising could cause for less profits if it is cancelled out by another firm.
10,10 2,16
16,2 8,8
10,10 2,9
9,2 8,8
What happens in a Market Exit situation with Oligopolies?
In an Oligopoly Market Exit scenario, one firm will exit and another will stay. Whichever firm leaves first, the opposing firm will take its market share.
0,0 0,5
10,0 -3,-6
What occurs in the Chicken Game?
Both firms attempt not to agree with each other
0,0 -1,+1
+1,-1 -10, -10
What occurs in the game of Adapting to a High Quality Regime?
No firm will move from the lower payoff equilibrium as they have no incentive to, despite there being a higher payoff at the second equilibrium.
2,2 0,0
0,0 10,10
Describe the Chain Store Paradox
In a situation where a firm owns multiple stores in different cities, the firm would like to deter other firms from entering the market. Game theory determines that a firm will never build this reputation as it will always acquiesce to the entering firm.
Describe the Matching Pennies Game
In this game there is no equilibrium. In normal form players can only randomise, while in extensive form player 2 will always have a better payoff.
-1,1 1,-1
1,-1 -1,1
What are the central premises for cooperative Game Theory?
There must be real gains made from playing the game
Pareto Optimality, a player cannot be made better off without making another worse off
How do you find the expected payoff for a player?
Find the average payoff for the player
What is the Security Level?
This is what a player can get by not involving themselves in the game or from an agreement failing, also known as the maxmin result
