Game Theory

Question 1

Define game theory

Answer 1

Method of studying strategic situations

Question 2

What is a strategic situation?

Answer 2

Strategic situation: Setting where the outcomes that affect you depend not only on your actions but also on the actions of other people.

Example: Firms in a perfect competitive market are not in a strategic situation as they are pricetakers and thus do not have to worry about competitors activities

Everything between Monopoly and firms in a perfect competitve market, ie. imperfect competition are in a strategic position.

Question 3

Define strictly dominant strategy

Answer 3

Strategy A strictly dominates strategy B if the payoff from A is strictly greater than that of B regardless of what others do

Question 4

What should you never play?

Answer 4

A strictly dominated strategy

Question 5

Rational choice can lead to what?

Answer 5

Bad outcomes (Prisoner’s Dilemma)

Example:
Pricing by firms:
-One firm is better off by decreasing prices
-This leads to a continuous drop in price
-If both firms charged high prices they would both make a higher profit

Question 6

Put yourself in others shoes…

Answer 6

To try to figure out what they will do: Which is easy when you know the payoffs of the opponents and if he has one strictly dominant strategy

Question 7

Define weakly dominant strategy

Answer 7

Strategy A weakly dominates strategy B if the payoff from A is always at least as big or greater than that of B regardless of what others do

The payoff of A has to be bigger than that of B at least once

Question 8

Define Nash Equilibrium

Answer 8

No individual can do strictly better by deviating, holding everyone else fixed