Game theory

Question 1

What is a ‘game’

Answer 1

• Interactions between ‘players’ (such as individuals or firms)
• Players take actions which influences the game

Question 2

What are payoffs

Answer 2

• Payoffs are the benefits received by players from a game’s outcome
• A payoff function specifies each player’s payoff as a function of the actions chosen by all players
• Profits for firms or incomes or utilities for individuals (players want to maximise payoffs)

Question 3

What is the Nash equilibrium

Answer 3

• A set of strategies such that, when all players use their strategies, no player can obtain a higher payout.
• If a game has a dominant strategy then this is Nash equilibrium